I don’t know about you but I breathed a sigh of relief when the cash-like asset rules for stocks and shares ISAs were announced. They were nowhere near as bad as I feared.

Money market funds (MMFs) are the only investment HMRC has defined as a cash-like asset.

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What caught Frugalist’s eye this week.

Weekend Reading – featuring the week’s best money and investing articles from around the web – can be read by any logged-in Monevator member. Alternatively please subscribe to our free email newsletter to get future editions direct to your inbox.

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Congratulations! You’ve just inherited £100,000 from Great Uncle Bertie.

Good old Bertie. Always liked him.

Naturally, you’re going to invest this for your future financial well-being. The pleasantly unexciting Vanguard LifeStrategy 60 will do nicely.

Your tax allowances are already spoken for. So, at least for now, you’ll need to resign yourself to paying tax on your gains in a General Investment Account (GIA).

You also know that investing everything ASAP is statistically the best approach.

However, (our hypothetical) today is the 31 March and the fund goes XD tomorrow.

Should you invest today or wait until tomorrow? What is XD? Does any of this even matter?

If you don’t want the detail, then the short answer is it matters a bit in terms of tax but for the most part you can ignore it.

But if you don’t want the detail then why are you reading Monevator?

Let’s get into it.

DividendsMost funds generate regular dividends. They could be paid annually, bi-annually, quarterly or monthly.

The dividends are either paid out to you in cash if you hold the income (inc) unit class or are rolled up in the fund if you hold the accumulation (acc) class.

Dividend datesThere are two key dates associated with a dividend payment:

The XD (ex-dividend) date
The payment date

If you buy before the XD date, you are entitled to the dividend payment. Whereas if you buy on or after the XD date, you must wait for the next cycle to receive your first dividend.

The payment date, when the cash is paid out, is usually a month or so after the XD date.

The unit price of the inc class will usually drop on XD date to compensate for the cash payout. Thus, the inc and acc unit prices will gradually diverge over time – even though the total return is the same.

Vanguard’s LifeStrategy 60% fund pays a dividend just once a year, currently of around 2%. The last XD date was 1 April and the payment date was 29 May.

TaxI’ve been liberally using the term dividends, but the specific tax classification of income distributions depends on the type of fund:

Distributions from funds investing predominantly in equities are taxed as dividends.
Funds holding more than 60% of their assets in interest-bearing investments, such as bonds or cash, instead pay interest distributions, which are taxed as savings income.

Your LifeStrategy 60 distributions will therefore be taxed as dividends.

The tax treatment of inc and acc classes is the same. You still pay the same amount of dividend tax – regardless of whether you get paid the dividend in cash or it gets rolled up in the fund.

Many investors choose to hold the inc class in a GIA. It’s easier to see what’s going on and, if you must pay tax, it’s nice to have some cash hitting your bank account.

Of course, if you have all your investments in ISAs and pensions then you don’t need to worry about dividend tax.

EqualisationNow, those fair-minded fellows at HMRC recognise that if you only bought the fund just before the XD date then it would be a bit mean to charge you tax on the whole dividend payment.

In effect, you are just getting some of your own money back with the dividend – a return of capital as it’s known.

So your first dividend payment on a fund holding is part ‘equalisation’ (on which you don’t pay dividend tax) and part dividend (on which you do).

You will see this distinction in the annual consolidated tax certificate from your platform.

But you’ll need to take the equalisation amount off your purchase price when you come to calculate capital gains on any disposals.

In other words, equalisation just means you pay a bit less dividend tax but a bit more capital gains tax. The tax man will get you one way or another.

Note that equalisation applies to UK authorised funds – for example, OEICS and unit trusts – but not generally to ETFs.

Group 1 and Group 2You may occasionally see reference to Group 1 and Group 2 units.

Group 1 units are those you bought before the current dividend period began. (The dividend period runs from one XD date to the next.)

Group 2 units are any bought inside this period.

Once the XD date is reached, your Group 2 units become Group 1 units.

The equalisation rate per unit is calculated by the fund manager based on what they reckon Group 2 holders on average paid for the accrued income versus Group 1 holders.

But this is just an average. Every Group 2 holder gets the same equalisation rate regardless of when they bought the units.

So the equalisation for investor A who bought on the last XD date is the same as the equalisation for investor B who bought the day before the current XD date.

Back to Bertie’s moneyFinally, back to the original question. Does it matter if you invest pre-XD or post-XD?

The table below compares the two scenarios: buying pre-XD and buying post-XD.

We’ll assume an investment of £100,000, a distribution yield of 2%, an equalisation for Group 1 units of half the total distribution, an initial price of 100p, and a final price of 103p:

| Pre-XD | Post-XD | | Purchase date | 31/03/2026 | 01/04/2026 | | Purchase price | 100p | 98p | | Units | 100,000 | 102,040 | | Dividend | £1,000 | £0 | | Equalisation | £1,000 | £0 | | Sale date | 31/03/2027 | 31/03/2027 | | Sale price | 103p | 103p | | Sale proceeds | £103,000 | £105,100 |

You end up with roughly the same returns in both cases: Pre-XD gets some income, but post-XD gets more capital gain.

The extra £100 gain for the post-XD case is offset in the pre-XD case by the early £2,000 distribution in dividend and equalisation, which can be reinvested elsewhere for most of the following year.

In tax terms, the difference between the scenarios looks like this:

| Pre-XD | Post-XD | | Taxable dividends | £1,000 | £0 | | Taxable capital gains | £4,000 | £5,100 |

The pre-XD taxable capital gain is £4,000 because the £1,000 equalisation must be deducted from the purchase price.

In summary then, there is negligible difference in the returns you get, but when investing pre-XD you are swapping some capital gains tax for dividend tax.

Does that make much difference? Depends on your tax situation.

Tax impact of going ex-dividendThe table below shows the approximate difference in the tax you pay for various tax situations. (There is no case for 0% capital gains tax as the £3,000 capital gains allowance is more than used up by the gains in either scenario):

I’m using the new 26/27 dividend tax rates as dividends are taxed in the tax year in which the payment falls and not necessarily the XD date.

(As an aside, who decided we needed tax rates specified to two decimal places?)

If you’d held on to the investment for longer, then there would also be a difference in when you pay the tax.

The initial dividend tax must be paid for this tax year whereas the capital gain tax could be deferred until later tax years by not selling.

Price fluctuationsThere’s a lot of detail I’ve glossed over.

Most notably, I’ve assumed that, on the XD date, the unit price of the fund drops by the same amount as the dividend paid.

In reality, it will not be the same, as it will also be affected by fluctuations in the prices of the assets in the fund.

In scenario two you are buying a day later. Might the price change on that day have a bigger effect than the different tax rates? Who knows.

Or maybe the price goes down over the year, so the bigger capital gain becomes a smaller capital loss.

So what?Some of you may enjoy the thought of saving a few quid in tax with some judicious ex-dividend timing.

I suspect that most, though, will be thinking that this is all just noise when considered against investment returns – and you’re probably right.

So whilst it’s worth knowing exactly how you’ll be taxed on dividends if you have assets outside of a tax wrapper, it’s probably not a good idea to spend time trying to game the tax system at the risk of losing investment gains.

But, looking on the bright side, I think we can all agree that stuffing all the investment fun stuff – dividends, tax, and equalisation – into just one short article is a joy to behold.

You’re welcome!

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I‘ve read many personal finance articles that claim you can save big by ditching your car and jet-packing, hover-boarding, or shudder walking everywhere instead.

Monevator published a good one recently, which prompted car-swerving frugalista The Investor to claim he could have spun his savings into £300,000 to £450,000, just by ploughing them into a global equities tracker these past 30 years.

If that’s right, then hopefully he’s gonna cut us in because The Accumulators regularly ferried TI and his glow-sticks around sundry West Country amenities during the 1990s. If you’re thinking the bear-baiting and badger hassling, well, I can neither confirm nor deny.

So how big a payout did I forgo by keeping my pedal to the metal instead? Can you really rake in nearly half a mil in exchange for 30 years of hanging about for buses?

Put another way: can you buy yourself a nice house by investing your car money instead?

Real numbersLet’s do the sums. Except this time, let’s use some proper hardcore FIRE numbers. We’ll skip the silly money that most finance bloggers claim Joe Average throws at their transport problems.

Monty Mercedes or whoever does not read FIRE blogs. Only aspiring money mavens are into FIRE, and they’re unlikely to be subsidising the car industry in the first place.

Instead, those pursuing financial independence on wheels will do savvier stuff:

Buy used motors with a reputation for reliability and a global surfeit of spare parts.
Avoid dick extensions that command a premium just for the badge.
Drive ‘boring’ cars if needs-be. We’re on a mission here!
Profit from other people’s depreciation.
Drive the thing for as long as possible so you don’t keep resetting the depreciation curve (but getting rid once bits start falling off.)
Don’t buy more car than they need. No armoured vehicles, no automated parking, no lane assist, no heated seat subscriptions. Just own a car you can actually drive, and stay on the right side of tax and insurance costs.
Reduce their car habit by turning to alternative remedies like walking, cycling, and catching the bus, where possible.

All of which keeps costs down to a degree that can surprise hand-waving automobile avoidants.

So with the stage set, what can you really save if you don’t own a car when two budget ninjas 1 enter the ring?

In the red corner Introducing the West Country Wonga Worrier: The Accumulator-tor-tor!

…Weighing in with annual car costs of 3,312 pounds.

Vital statistics:

Mileage: 6,000 p.a.
Next car cost: £1,000 p.a.
Taxes, fines, breakdown cover: on request

In the blue corner It’s the lift-cadging, thrift-meister himself: The Invest-oooooor!

…Weighing in at 1000 to 1500 pounds per annum.

Vital statistics:

London Transport: A mystery
National Rail: A mystery
Global city home ownership premium: Let’s not worry about that
Shoe leather: Sunk costs!

Judge’s ruling The Accumulator’s annual poundage is a fully itemised, all-in figure. It’s the average of the last three years of car-related expenses, rebased to 2026 prices.

The Investor’s costs, meanwhile, are as impenetrable as the mask he wears.

A fully-qualified member of the finger-in-the-air school of expenses-tracking, we’ll just have to rely on TI‘s best recollections. He assures me he has an excellent memory.

Sounds reasonable. Ahem.

What I’ll do then is calculate the match-up as a range of outcomes and leave it to the reader to decide which is closest to the truth.

Fight!

Round One TI’s car-free costs are deducted from TA’s motoring bill:

£3,312 – £1,500 = £1,812 annual savings go to our Shanks’ Pony jockey at 2026 prices.

(I’ll do the top-end of TI’s range first, then come back.)

Round twoCalculate the saving in 1996 prices. Or rather outsource the task to the Bank of England via its excellent inflation calculator.

£1,812 in May 2026 = £877.46 in 1996.

Okay, so horseless carriage hater TI would have trousered £877.46 some 30 years ago with his strap-hanging ways.

Round threeHow much then would TI be sitting on now if he’d committed the inflation-adjusted equivalent of £877.46 per year for 30 years into a global tracker fund?

£74,298.77 at 1996 prices

That number comes from dividing the annual saving by 12 to get a monthly contribution of £73.12.

Compound that by 6.06% for 30 years.

6.06% is the 30-year real annualised return of the MSCI World GBP. 2

The final roundNow we have to pump up £74,298.77 to 2026 prices to goggle at the size of TI’s treasure chest in today’s money. 3

£74,298.77 in 1996 is worth £153,429.98 in May 2026.

Or, if TI’s low-ball £1,000 annual costs are accurate: £195,774.30.

Post-match analysisIt’s not quite the jackpot The Investor imagined. On the other hand, who would say no to an extra £150,000 to £200,000 in their account?

Driving is the norm in the UK so few people are likely to consider designing a lifestyle that squeezes it out.

But what if a wizened savings sensei told your younger self that a tidy six-figure sum was at stake?

Maybe they could make it work?

Take it steady,

The Accumulator

Bonus caveats The Accumulators’ costs are shared between two. In theory that means TI’s savings are only worth half as much per person in a two-person, single-car household.

Then again, if TI diverted the dosh into his pension pot he’d earn tax relief unavailable to the rubber-burning Accumulators.

TI’s commuting costs were low to minimal for most of his life but so were The Accumulator’s. Let’s say that balances out.

There surely is a premium to pay for living in an area well served by public transport. (On the other hand, if you own your home then TI would argue it’s an investment.)

But you may be able to offset that outlay some other way. Perhaps you can dispense with having a garden, or living near great schools, or some other ‘must-have’ lifestyle choice that, for you, just isn’t.

TI would also likely claim a health benefit over most drivers – because his favoured mode of transport is his own fine pins.

FIRE in the wholeThe compounded number is much less impressive if you’re dashing for FIRE in ten years. However, the money will continue to compound for so long as you’re saving.

One way to look at it in those circumstances is to divide the saving by your sustainable withdrawal rate, then subtract that amount from your target figure.

For example, car savings of £1,500 per year enable you to reduce your FIRE number by:

£1,500 / 0.04 = £37,500 (Assuming a 4% withdrawal rate.)

How dependable is the investing route?Inflation-adjusted equity returns can vary a great deal – even over 30 years.

The current 30-year real annualised range is 2.4% to 9.9% (1900-2025). The mean average is 5.7%.

For the recordFinally, my full list of car-related expenses includes:

Maintenance (repairs, service, MOT)
Insurance (including breakdown cover)
Taxes (car tax, drivers’ licence renewal, registration fees)
Petrol
Parking
Fines (2023 was a bad year)
Cost of the next car (£1,000 per year)

Right to reply by TIThe Investor here…

Okay, I hope we’ve all had our fun, but I’m commandeering the reins – perks of the publishing button – to add a final bit.

When we discussed this piece, I asked gas-guzzling petrolhead The Accumulator to include a nod to typical car ownership costs in his attempt to ~~ridicule~~ substantiate my six-figure savings claims.

Looking back, it was a poor sign that he shouted something back down the line about not being able to hear me as Mrs TA had the hairdryer on and by the way he was “off on a mini-break, starting now, bon voyage!” before terminating the call.

So for the record, the latest Pension Living Standard’s report puts ‘motoring’ costs in the range of £4,000 to £5,000 a year.

That’s for typical retirees, remember, not for wannabe Jeremy Clarksons.

Moreover it’s easy to find estimates – such as this one from breakdown cover specialist AutoHome – that put the annual cost of a car in the £5,000 to £8,000 ballpark, all-in.

Now I’m not going to second-guess TA’s figures, nor gainsay his frugality.

I’ve waited too many times in vain at the bar for that – coughing and waving an empty pint glass around while TA has taken an unusually deep interest in his shoes / WhatsApp messages / something in the distance a few centimetres above my head.

So yes, as a globally recognised titan of the FIRE movement, TA’s numbers should look good! And no doubt those following in his footsteps can keep their costs down, too.

But I still stand by my benchmarking against the average car owner, not a savings ninja. That’s what we do when we’re weighing up other FIRE lifestyle choices, after all.

Not owning a car saved me a fortune. Albeit at the cost of some friends’ patience, surely.

Bonus bonus BONUS bit by TASomebody forgot they gave me access to the publishing button for “emergencies”, eh?

Fortunately I’m the bigger man around here.

Plus I’m right and TI smells yahboosucks!

THE END.

In every sense.
May 1996-May 2026.
Because we compounded in real-terms, that £74,298.77 does not include the inflation froth that your investing returns actually include. We want to know how much bigger a non-car owner’s investment account would look after 30 years, so we need to add inflation back in.

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The first Weekend Reading every month can be read by anyone on the Monevator website. Subscribe for free to our email newsletter or become a member to ensure you see the rest.

What caught my eye this week.

Would you be happy handing over the reins of your portfolio to a robot? Given most of you will be regular Monevator readers and email subscribers, I can guess the answer – if not the specific gentle expletive added for colour…

Of course, the typical Monevator reader (rightly) invests passively in index tracker funds. And those funds are managed by software – albeit usually with some kind of human oversight to determine which companies go in and come out of a given index, as we saw with the recent controversy over SpaceX.

However it’s one thing to use software to follow a well-established and diversified benchmark via what’s now very mainstream index fund investing. It’s another to toss the keys to a novel AI agent with a cheery, “have it it, call me if you blow the kids’ inheritance!”

Okay, in practice any self-driving portfolio is going to have guardrails. But even so, you can easily imagine countless robot investing edge cases that are the financial equivalent of a self-driving car facing a hotdog cart trundling into the road, or the driver in front falling asleep at the wheel.

Or consider the market madness proxy of gridlock and traffic jams, when movement (liquidity) evaporates.

Think back to the crazy ride that was the Covid crash. How would a cheapo trading robot cope?

Investing under the AI influenceNaturally, just because we don’t need self-driving portfolios, that doesn’t mean we won’t get them.

Innovation in financial services is driven by what sells, not what is good for us.

Only this week CNBC reported that:

Larger brokerages are moving in [this] direction. Robinhood in May introduced tools allowing third-party AI agents to connect with customer accounts. Brokerage firm Public, meanwhile, is developing AI agents in-house that can automate investing workflows within its platform.

“What this era of agentic is doing … it goes away from just being able to research something by yourself and then make up your own ideas and then trade the way you’ve traded where it’s now becoming automated and where AI agents can actually execute investment strategies on your behalf,” said Leif Abraham, Public’s co-founder and co-CEO.

The article paints a breathless future of AI agents turning private investors into DIY hedge fund managers. There’s nary a mention of fees and costs, though – although to be fair the piece does conclude with caveats about the risks of letting Clippy 2026 trade stocks.

That latter sentiment is echoed by a blog from the CFA Institute, which reviewed the cough mixed results from research into trading via LLMs.

It concluded:

The evidence for multi-agent and LLM-augmented portfolio construction is promising. The failure literature does not invalidate this, but it does suggest that the gap between a research prototype and a production-grade institutional system is larger than the paper acknowledges.

The human overseer […] cannot yet take a purely passive safeguard role.

But who am I kidding? The reality is tens of thousands of retail investors are already experimenting with AI trading, whether through financial service scaffolding such as RobinHood or via the – hopefully judicious – interrogation of their nearest chatbot.

Top gearAs far as I can tell, this era’s Warren Buffett – part-man, part-machine, all alpha – has yet to reveal himself.

But if enough people do it then we’ll probably get an AI-enabled self-made trader billionaire someday, just thanks to the law of averages.

Famously, a few quant shops like Renaissance have smashed the market for years by force feeding gargantuan amounts of data into supercomputers. However that’s very different from Joe Day Trader setting a few rules in an AI-enabled investing account.

Yet even a few traditional stock picking active managers do beat the market, at least for a while, and no doubt so will some AI agents.

The odds have always been against it however – active investing is a zero-sum game – and AI cannot change that.

Have a great weekend.

From MonevatorThe Slow & Steady Passive Portfolio update: Q2 2026 – Monevator

A deep dive into FX hedging – Monevator [Moguls]

From the archive-ator: Compound interest can save our pensions – Monevator

NewsChancellor announces his first Budget will be on 28 October [Sigh] – BBC

Bank of England holds rates at 3.75% as inflation fears mount – Guardian

One million more Britons set to pay income tax – Which

Ban foreign stocks from Isa wrapper, says top pensions boss – City AM

BP puts its North Sea business up for sale – This Is Money

London only English region to see population fall – BBC

It now takes 216 days to move home – This Is Money

UK millionaires fall to 442,000, lowest since 2008 – Business Matters

House prices up just 0.1% in July, says Nationwide – Mortgage Strategy

Jim Leaviss, Bond Vigilante, 1971-2026 – FT

We’ve moved from income world to wealth world [Paywall] – FT

Kospi’s boom-bust-boom mini-specialSouth Korean bubble bursts, erasing $2.2trillion in value – Mugglehead

Minister apologises as leveraged ETF investors suffer deep losses… – CNBC

…while AI fund Situational Awareness dumps holdings to Citadel… – CNBC

…and then the Kospi closed up a record 18% in a day on Friday – Korea Times

It’s all because the AI boom creates a lot of uncertainty – Noahpinion

Products and servicesDisclosure: Links to platforms may be affiliate links, where we may earn a commission. This article is not personal financial advice. When investing, your capital is at risk and you may get back less than invested. With commission-free brokers other fees may apply. See terms and fees. Past performance doesn’t guarantee future results.

Is your annual travel insurance still worth it? – Which

The fake Spotify emails that put you at risk of fraud – Guardian

Paragon Bank cuts five-year buy-to-let mortgage rates – Mortgage Strategy

Get £100 to £3,000 cashback when you open an Interactive Investor SIPP. Minimum £20,000 deposit. Terms and fees apply, affiliate link – Interactive Investor

Does Saga’s best buy interest rate for over-50s live up to the hype? – Which

A sea view could cost you up to £220,000 more – This Is Money

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

European wildfires and travel insurance – Which

Save up to 47% on your home by doing the postcode switch – What Mortgage

Charming homes for sale with family gardens, in pictures – Guardian

Comment and opinionScotland’s 48p tax rate may be losing money – Tax Policy Associates

Britain has tried War Bonds before, and savers paid the price – CNBC

How to think about the ‘full price’ – Best Interest

What 125 years of data tells us about investing – Behind the Balance Sheet

The wickedness of wealth management – The Net Worthwhile Weekly

Market indicators – Humble Dollar

Now show Japan – A Wealth of Common Sense

The problem with optionality – Of Dollars and Data

Retirement income security and more [Podcast] – Morningstar

Naughty corner: Active anticsIPOs have been a losing bet since 2019 – Apollo

SpaceX, PE, VC, and quacking ducks – The Falling Knife

Investment wisdom culled from old clip outs – Cove Street Capital

Cashing in on Japan’s cross-shareholdings – Verdad

Copart: from scrap to scale – Fiscal.AI

Picking stocks in a bloodbath – A Wealth of Common Sense

When size falls short – Novel Investor

Kindle book bargainsWhat They Don’t Teach You About Money by Claer Barrett – £0.99 on Kindle

Taxtopia by The Rebel Accountant – £0.99 on Kindle

The Savvy Spender by Megan Mickelwright – £0.99 on Kindle

The World for Sale by Javier Blas and Jack Farchy – £0.99 on Kindle

Or read one of the all-time great investing classics – Monevator shop

Environmental factorsNew solar panels in Great Britain at 15-year high as fuel costs soar – Guardian

French climate lawsuit a window into next global legal fight – The Conversation

AI, authors, and writing mini-specialHow AI books sneak their way into stores – New York Times

ChatGPT is blocking requests to copy an author’s style – Ars Technica

AI has made the ‘dead Internet’ theory come true – Futurism

Robot overlord roundupAnthropic’s soaring AI revenues compared to some famous other brands – Axios

What will more intelligence actually do for us? – Noahpinion

How to lose AI in ten days – Spyglass

Not at the dinner tableThe US economy is just a VIP list now – Your Brain on Money

In defence of gerontocracy – The Argument

The masculinity scam – The Atlantic [h/t Abnormal Returns]

Donald Trump keeps losing the Iran War – Drezner’s World

The Putinization of the American military – Paul Krugman

Off our beatCould a single pathogen bring down civilisation? – Next Big Idea Club

How a near-death experience led to finding sea dragons in Wales – Guardian

Sell the company for $400m? He’s giving it away instead – N.Y.T.

Why America’s super rich have embraced British football clubs – CNBC

The light narrows – Aeon

Poor countries are aging fast but can’t keep up with the cost – W.S.J.

Scientists rethink sun exposure risks and benefits – Scientific American

An uncomplicated man [On The Odyssey movie] – London Review of Books

How to exist – Raptitude

Who dares ridicule Gianni Infantino? – Guardian

And finally…“Stop thinking about what your money can buy. Start thinking about what your money can earn. And then think about what the money it earns can earn.”
– J.L. Collins, The Simple Path to Wealth

Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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All investors with holdings in foreign assets are doing macro investing – but very few have decided which macro trade they are actually running. So argues long-time Monevator reader and commenter Ho Simpson in this special guest Moguls post on FX hedging for retail investors.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post A deep dive into FX hedging [Members] appeared first on Monevator.

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I forgot to update the portfolio! I’ve been leaning so hard into my passive investing persona that I fell asleep at my spreadsheet and didn’t twig when the 1 July Q2 deadline sailed by.

The markets are a distant background rumble to me right now. Oil price up, oil price down. Another day, another prophecy of AI doom.

It’s not that I don’t care. It’s just that the question being asked, it cannot be answered.

The question? Always being some variant of, “What’s the next big thing?”

Answers on a postcardHere’s the story of the year so far, told in straight lines:

Data from justETF. The chosen ETFs are proxies for the Slow & Steady portfolio’s holdings, plus gold and commodities.

Gold is the loser year-to-date, commodities the winner.

Meanwhile, previously unloved emerging markets and property are the cream of the equities crop.

Who had that marked on their card for 2026?

Here’s the story again, told in wobbly lines of uncertainty:

Gold (red line) hit a new high in early March before dropping 23%.

Buying opportunity or time to get out?

Commodities (grey line) looks like it’s commanded by the Grand Old Duke of York. The changeable duffer perpetually marching his hard assets up and down hills. You want some?

Emerging markets (blue line) have now beaten the MSCI World over the last three years. That’s a comeback worthy of the WWE, given how the new challengers had been roundly pummelled by the developed market champs for 15 years following the Credit Crunch.

Me? I’m happy to own it all and let the chips fall where they may.

Portfolio-o-visionHere’s the portfolio holdings and long-term annualised returns since kick-off in 2011.

The Slow & Steady is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,360 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts in the Monevator vaults. Last quarter’s instalment can be found here.

All returns in this post are nominal GBP total returns unless otherwise stated. Subtract about 3% from the portfolio’s annualised performance figure to estimate the real return after inflation.

The full growth picture looks like this:

In real-terms, the portfolio is still 2.6% below its December 2021 peak. Another quarter or two of progress could push it to higher ground once more.

It has to be said though that we’re coming up for five years underwater since inflation spiralled. By contrast, recovery from the Global Financial Crisis took less than three years for a 60/40-type portfolio.

Unfortunately, trad 60/40 portfolios have a history of suffering like this during severe bouts of inflation. Consider adding some additional protection to yours.

New transactionsEvery quarter we plough another £1,360 into the market’s black earth and hope we’ll harvest plenty of corn later. Our stake is split between our seven funds, according to our predetermined asset allocation.

We rebalance using Larry Swedroe’s 5/25 rule. That hasn’t been activated this quarter, so the trades play out as follows:

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.18%

Fund identifier: GB00B84DY642

New purchase: £108.80

Buy 40.8946 units @ £2.66

Global property

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User manualTake a look at our broker comparison table for your best investment account options.

Or learn more about choosing the cheapest stocks and shares ISA for your situation.

You might also enjoy a refresher on why we think most people are best choosing passive vs active investing.

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What caught my eye this week.

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I often wax lyrical about bargain hunting among investment trusts trading at a discount – that is, trusts whose shares trade for less than Net Asset Value (NAV).

Think buying £1 coins for 90p.

We’ve also written reams over the years on investment trusts as a potential source of steady income.

Former Monevator contributor The Greybeard had a lot to say about it – although he grew frustrated by the relentless pushback from hardcore passivistas.

More recently I’ve launched an investment trust income model portfolio for Moguls members.

I won’t rehash the whole active/passive debate with respect to income today. If you’re a passive investor but you have an open mind, I’ve written a Mavens post on using ETFs to do much the same.

But if you’re a global equities tracker and drawdown diehard, probably best to wait for the next article!

Give peace a chanceJust briefly for those on the fence – or simply confused – I’m not saying the average person would do better stock picking investment trusts to grow their capital.

I’m not even saying they would do better – certainly not that they’d see higher total returns – living off the natural yield from income investment trusts in retirement.

Rather, I see advantages to an actively managed income approach (less stress and income volatility, no planned capital depletion, lower infirmity risk) that make it worth considering. To the extent that I’ll probably go down this route myself when I do throw my portfolio into decumulation mode.

Okay, enough said. Let’s now consider where my hobby of investment trust dumpster diving could dovetail with an investor’s income goals.

Discounts and income from investment trustsFirstly, a quick reminder about how discounts work:

It’s often the case that the share price of an investment trust trades at less than its NAV per share.

Remember, the NAV is – in theory – the best estimate of what the trust owns, minus any debts.

Clearly, buying shares for less than they are worth may present an opportunity. Price is what you pay but value is what you get, to quote Warren Buffett.

For instance, the fictitious Monevator Investments plc may trade for £1.20 a share, despite its NAV per share being £1.60.

In this case, a buyer is getting £1.60 of underlying assets for just £1.20.

Bargain! The share is trading at a discount to NAV:

The discount is (£1.60-£1.20)/£1.60 = 25%

In principle, you get more for your money when you invest at a discount. Hopefully in time the discount will narrow, pulling the share price back up towards the NAV and amplifying your returns.

So much for – fingers crossed – capital gains from discounts.

But what about income?

Yielding to the discountThe crucial thing to grasp is that any cash paid out by a trust is unaffected by the discount. 1

Let’s say Monevator Investments has a NAV of £1.60 per share, as above, and that it pays an annual 8p per share dividend.

If you were to calculate the yield based off the NAV, this represents a yield of 5%:

Dividend/NAV = 8/160 = 5%

However this trust is trading at a 25% discount. We can buy the shares for £1.20.

Yet the dividend payout is still 8p per share. So for someone buying the shares today in the market, the yield they’ll get on their investment is:

8/120 = 6.7%

All things being equal, this higher yield is locked in. Provided the cash payout remains at least 8p, then this investor’s annual yield on cost of their Monevator Investments shareholding will be 6.7% – regardless of whether the share price rises or falls, or whether the discount closes.

Of course, dividends from decent income investment trusts tend to rise over time, as do their NAVs. Though sometimes dividends can be cut, too.

That’s a discussion for another day. The point is the chunky discount here has boosted the purchasers’ starting income yield, compared to if they were buying the shares at NAV – let alone a premium.

Note that in both cases – whether the shares are priced at NAV or at a 25% discount – the underlying assets (represented by the NAV) generate enough income for the trust to pay an 8p dividend per share.

When you buy for only £1.20 due to the 25% discount to NAV, you are getting the same 8p at a cheaper price. But because each share costs only £1.20 instead of £1.60, the same lump sum investment would buy more shares – and therefore more of those 8p dividends.

For example:

No discount (£1.60): £10,000 buys 6,250 shares × 8p = £500 income
25% discount (£1.20): £10,000 buys 8,333 shares × 8p = £667 income

Happy days.

A striking hypothetical example of higher income returnsGenerally investment trusts trading on discounts don’t draw attention to the fact. Their annual reports will wave their hands about what they’re doing to close the gap, and direct your attention to graphs of rising NAVs over time, or photos of employees from portfolio companies curing cancer or drilling for oil.

So the following illustration in a recent presentation from an investment trust I hold – Canadian General Investments Trust (LON:CGI) stood out:

Source: Canadian General Investments

For a cluster of reasons we don’t need to get into, Canadian General’s whopping 40% discount to NAV is pretty much out of its control. 2

While CGI has sometimes traded at NAV – usually during commodity booms – a big discount is typical.

Hence management has a reason to turn this bug into a feature with this table. And what it’s illustrating is exactly what I’ve explained above.

The table simplistically assumes a 10% annual return – high but less than CGI’s long-term track record – split between 7% capital gains and a 3% dividend. All the income is presumed to be paid out.

If you were to buy $100,000 of Canadian General as a hypothetical open-ended / mutual fund – that is, with no discount – then for your hundred grand you’d get $3,000 paid out as a dividend income.

That is, 3% of $100,000 = $3,000

However at a 40% discount to NAV, your $100,000 is buying you $166,667 of Canadian General’s assets:

3% of $166,667 = $5,000

Your income is higher from day one, just as we’ve already seen in my example above.

From there, the company compounds NAV at 7% and holds the 3% payout (of NAV) steady. The discount stays at 40%:

By year 20:

3% of $602,775 = $18,083

We can also work out the ongoing yield on cost of your initial $100,000 investment:

$18,083/100,000 = 18% on your original purchase price.

A very nice income if you can get it.

Discounts are a bonus for income investorsThere’s plenty of slips betwixt cup and lip and all that. Dividends can be cut. Canada is an odd place to put a lot of your money. Canadian General’s exposure to US assets muddies the picture.

But that’s all for another discussion. Here I’m just focused on the mechanics of discounts and income.

You see, readers often ask me why I should expect a discount to close.

The simplest answer is that most usually do, eventually, at least for a time and in the absence of structural impediments such as those at Canadian General.

But the point here is that if you’re an income investor after natural yield, then it doesn’t matter. You can simply aim to buy and lock-in a high starting yield and then let the income roll in. (Touchwood!)

Buy in the salesUnfortunately, the top flight of dedicated UK equity income trusts rarely if ever trade for anywhere near 25% discounts. Their income underpinnings, steadier investments, and decent long-term records tend to curb such extreme dislocations.

However they can reach discounts of 10% or so when out of favour, or in wider times of distress.

Still, the same income-enhancing argument holds for more specialist trusts, too, where we have seen much chunkier discounts.

For years even income seekers bought infrastructure trusts on a premium, for reasons I never understood. However as I covered on Moguls, in early 2025 they were trading on 25-30% discounts. That meant income yields of 8% or more for new money buying the likes of HICL (LON: HICL).

Such super-wide discounts have now closed, though you can still bag HICL at a 15% discount. (Disclosure: I hold.)

Property trusts and many REITs are still on big discounts to NAV, for what that’s worth.

And there remain a few – troubled – renewable trusts on big discounts touting very high yields for the brave.

Despite misgivings, I’ve dipped a little toe in with Greencoat UK Wind (LON: UKW), currently on a 22% discount and yielding 10%.

Looking to the long-termInfrastructure, property, and even renewable investment trusts have all traded at premiums to NAV in the past. I’m not saying they will again (especially not renewables). But as we’ve seen, for braver income seekers that might not matter, just so long as the dividends keep flowing.

Still, I’m more confident about the very long-term with Ye Olde UK equity income trusts – those of the much-vaunted (and debated) Dividend Hero variety.

Anything else is a bit of a special situation when it comes to long-term income.

And yes, to belabour the point: this is active investing. Nobody needs to pipe up that a global tracker will outperform in the long run or that discounts might be flagging bigger risks or mention Neil Woodford.

I get it and I mostly agree. So should anyone who goes down this path. Do your own research!

But personally, I’m starting to think I might smooth the transition from accumulation to decumulation by opportunistically buying – and then looking to hold – these income trusts as I head towards drawdown.

That would probably be much less stressful than switching overnight from an accumulation to decumulation portfolio – albeit likely at some cost to my returns.

Indeed as I get closer to the end than the beginning, I have started making tentative stabs at building up a natural yield again. Ironically this takes me back – philosophically – to where I started as an investor.

True, I’m still finding it hard not to trade when the discounts close, or some other shiny object pops up…

But as I transition at least a chunk of my portfolio towards income, maybe that illustration from Canadian General will help me stay my hand.

As a rule. A board might raise or cut dividends for reasons related to a persistent discount, but those are second-order effects.
Think: Canadian taxes limiting buybacks, huge insider ownership, small free float.

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What caught my eye this week.

I noticed UK commercial property giant Landsec posted decent first-half results this week.

CEO Mark Allan reckons:

“…property values have stabilised, with growth in rental values driving a modest increase in capital values, resulting in a positive total return on equity.

We expect these trends to persist, as customer demand for our best-in-class space remains robust and investment market activity has started to pick up.”

After four miserable years, things might be looking up for the owners of offices and retail parks.

Is this because fewer people are still working from home, new office supply has cratered, interest rates have stopped going up, or enough of the weaker players have thrown in the towel?

All of the above, I imagine.

But Landsec (ticker: LAND) shares still trade at a 30% discount to net assets, even as those asset values have stabilised. In other words it’s early days and the market is yet to be convinced.

What normally happens next is economic growth reaccelerates, office space tightens, increasingly marginal offices are built, discounts narrow and eventually maybe even turn to a premium, chubby guys in hard hats appear in the Sunday papers touted as ‘the new builders of Britain’, bank lending gets sloppy as the good years roll on, euphoria is misidentified as robust business confidence, and only when a shock finally hits us do we learn who borrowed too much when the music stops.

But it could be different this time. Maybe because of WFH. Maybe because of AI. Perhaps self-driving cars will rewrite geography.

It usually feels like something special is going on that could change the game.

Mostly though – big picture – it doesn’t.

The political big dipperYou see the same thing playing out in the wider economy – and more viscerally in this year’s politics.

In the Financial Times John Burn-Murdoch notes how voters globally have punished whoever is in power:

Like everyone and his dog I have my theories about why Trump won the presidency and the Tories lost. There’s a bull market in competing explanations.

The US result is especially perplexing – even terrifying – given how confused voters seem to have been.

In an excellent review of how Trump triumphed, Kyla Scanlon reminds us:

People think that violent crime rates are at all-time highs, that inflation has still skyrocketed, that the market is at all-time lows, and that unauthorised border crossings are at all-time highs.

None of those are true – it’s all the opposite. But those misinformed views informed how people voted.

In blind polling Republicans actually preferred the policies of Kamala Harris! Yet one narrative gaining traction among a certain ilk of terminally online ‘bros’ is that this election saw voters ‘liberated’ from the ‘gatekeepers’ of ‘mainstream media’.

That’s true in as much as many believed – and voted on the back of – unrealities that fitted their priors.

Bring back the media gatekeepers, I say.

Tracing the sourceGiven the universal slap in the face of incumbent parties though, we might do better to look for the global driver of voter unrest, rather than gaze too closely at the minutia of America’s psychodrama.

Inflation must be the culprit. People hate it, and they felt it everywhere. Partly because global supply chain disruption is – doh – global. But also because everyone suffered through the same pandemic.

For various reasons – natural and mandated – economies cratered in 2020 due to Covid. Many businesses were at risk of going bust, and households of going bankrupt.

People seem to have already forgotten this graph:

Mass unemployment faced the authorities that grim spring. In response they deployed vast support packages and/or stimulus and paid citizens to stay at home. Easier money kept firms on life support.

It worked to prevent a slump. But one way or another – and aided on by Russia’s invasion of Ukraine – it eventually gave us inflation a couple of years later. And then higher interest rates to knock inflation back.

It’s perplexed onlookers that despite a peerlessly strong US economy with record low unemployment and a soaring stock market, voters complained of living through economically awful times.

Few of them now seem to recall those job losses – far less think about the counterfactual of a depression if nothing had been done.

They just much higher prices, feel poor (despite higher wages in most cases), and rage.

What have you done for me latelyWould they have preferred high unemployment to high inflation?

The trade-off would never have been so simple. But yes, I think many secretly would have.

For most people, unemployment happens to the other guy. In contrast we all feel the pain of inflation.

For now at least the cycle has turned again, and inflation is subdued.

True, swingeing tariffs in the US might upset that soon. But until then, every day people get a little more used to prices at these levels, and they begin to forget what they were so cross about.

Why are interest rates so high, anyway, they ask.

Inflation is low. Don’t these central bankers know ANYTHING?

Master marketFor those of us who breath the markets, these cycles turn at double-speed. Wheels within wheels.

The markets are like a nervous cabin boy, dashing about a ship that’s steadily forging through the surf.

The ship makes its stately way, over time passing through fine waters, choppy seas, storms, and worse.

But the cabin boy lives out all of those scenarios many times over every day in his imagination.

He sees cyclones from every mast, yelps at the slightest swell, and yet he also wants to break out the rum for a party the moment the sun comes out.

Every day is an adventure ride of ups and downs! With enough time however even the stock market’s scatterbrained progress looks inevitable.

Take a moment to remember all the drama of the past five years. Then look at this graph:

Golden yearsThe funny thing is I didn’t start this ramble to reinforce that equities eventually go up: so don’t worry, be happy.

In fact I was going to highlight the latest data on how US equity valuations are getting into rarified air – truly Dot Com Bubble-type multiples.

But like everyone else we’ve been saying similar all year. The US market has climbed onwards anyway.

Even the Trump Bump seems nothing special on that graph above.

I know it’s hard to imagine US stocks not being the only game in town. So it might be an instructive to read this Sherwood article about how gold has actually beaten US equities since the late 1990s.

According to Deutsche Bank data:

The asset of the new millennium has been gold, delivering a real return of 6.8% per year since the end of 1999 despite being a shiny rock that generates no earnings and pays no dividends.

So far, the S&P 500 has averaged total [real] returns of 4.9% over this stretch.

Incredible, no?

So bad were returns from US stocks between 2000 and 2010 that the almighty bull market that began in the rubble of the financial crisis has still barely lifted returns back into ‘adequate’ range.

And US tech in 2010? You could hardly give it away.

Life beyond AITo return to where I started (thematically on-point, eh) Landsec shares actually fell on its reasonable results.

Because of course they did. Landsec is a forgotten share in a discarded sector that trades on the still mostly-unloved UK stock market.

But it probably won’t always be this way.

Okay – perhaps AI really is ‘all that’, as an ex of mine from the North used to say.

If ChatGPT 2030 can do all our jobs, then presumably we won’t need Landsec’s offices. Nor will most people have money to buy drinks from Diageo (ticker: DGE) or even to buy the houses they browse on Rightmove (ticker: RMV).

Sometimes things really do change. I started including an AI section in the links years ago – before most people had heard of LLMs and all the rest – because of this potential. AI is important because there’s a small chance of something truly seismic, existential even, for humanity.

But there’s no certainty.

Indeed it’s surely more likely that AI is overhyped, that the biggest US tech firms will invest hundreds of billions just to destroy their margins, the US market will accordingly falter, and something else will get a turn on the merry-go-round.

Maybe even boring British shares. After all they’re mostly cheap, pumping out cash, buying back their own stock – and yeah, many could hardly grow more slowly, so the only way is up…

Who knows? Perhaps they’ll be helped along by a global economy that finally forgets the pandemic and frets less about inflation, gets used to interest rates of 4-5% again, and at last goes back to normal.

For a while, at least. Until we go through the wringer again…

Have a great weekend!

From MonevatorWhy a global ETF is delisting from the LSE – Monevator

Are building societies still a good place for your money? – Monevator

From the archive-ator: Family investment companies – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Reeves touts pension shake-up to boost economic growth… – BBC

…and as the economy stalls, something better had… – BBC

…but will scale solve the UK’s pension investment problem? [Search result] – FT

Squeeze on rental supply set to push up costs for tenants – RICS

Number of ISA millionaires soars; top 25 hold £8.9m on average – T.I.M.

Retirees may need to pay tax on their state pension from 2027 – Which

Homebase enters administration with 2,000 jobs at risk – BBC

Klarna chooses New York over London for much-anticipated IPO – Guardian

Court: mini-bond firm London & Capital was a Ponzi scheme – This Is Money

Republican voters suddenly feel good about the US economy – Axios

2022 was weird: why 60/40 portfolios are working again [US but relevant] – Morningstar

Products and servicesMortgage rates below 4% disappear as rate cut expectations ease – This Is Money

Why ‘sustainable’ is being dropped from investment fund names – Which

Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley. Terms apply – Charles Stanley

Do you need inheritance tax insurance? [Search result] – FT

Amazon Haul is an attempt to take on Shein and Temu – CNBC

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Are premium cashback and reward cards worth the annual fee? – Which

New cheapest energy deal from EDF could save households £109 – This is Money

Homes for sale in converted buildings, in pictures – Guardian

Comment and opinionJohn Reckenthaler: So long, and thanks for all the gains – Morningstar

Don’t worry about what the market is telling you – Behavioural Investment

The US stock market gains 30% in a year more often than you’d think – A.W.O.C.S.

Advice for the kids – Humble Dollar

How to find genuinely good Black Friday deals – Guardian

Time isn’t an asset class – A Teachable Moment

Redefining the terms – Money with Katie

A rant about (a lack of) evidence-based investing – Klement on Investing

Beyond your career – Humans vs Retirement

Naughty corner: Active anticsThe disappearing ‘index effect’ – Alpha Architect

Private market pitfalls: IRR does not equal rate of return – CFA Institute

Crypt-o-cryptoWhat Trump 2.0 really means for the crypto industry – Sherwood

HMRC and crypto capital gains – This Is Money

MicroStrategy acquires another 27,200 bitcoin for $2bn… – The Block

…and it plans to issue $21bn in stock to buy more – FT

Kindle book bargainsI Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle

Eat That Frog! Get More of the Important Things Done by Brian Tracy – £0.99 on Kindle

Growth: A Reckoning by Daniel Susskind – £0.99 on Kindle

A Confederacy of Dunces by John Kennedy Tool [A fav, not about money] – £0.99 on Kindle

Environmental factorsRegime of Unreason dawns in the US – Cold Eye Earth

What you can do – Humble Dollar

Quite parched: global demand for desalination is soaring… – Sherwood

…and what a difference cheap water could make – Unchartered Territories

He’ll try, but Trump can’t stop the clean energy revolution – The Grist

What backlash, anyway? Few ESG investors are divesting – Klement on Investing

Scientists just discovered a coral the size of two basketball courts – Vox

Robot overlord roundupLessons from 130 hours in self-driving Waymos – Matt Bell

The deep learning boom caught almost everyone by surprise – Understanding AI

Practical AI: Magic draft style [A few weeks old] – Echo Beach

Ex-ing X etc mini-specialThe Guardian has quit X, citing ‘disturbing content’… – Guardian

…but does traditional media just hate what the Internet represents? – Hot Takes

BlueSky got one million sign-ups in a week – Engadget

How to migrate to BlueSky – Fast Company [Here’s us. Nothing doing yet]

Satire site The Onion buys Infowars out of bankruptcy – NBC

“How I escaped the alt-right pipeline” [Video] – YouTube

Off our beatAre love songs over? [Interactive thingie] – The Pudding

Why some coffee shops are charging remote workers on laptops – Sherwood

China’s monster espionage campaigns – Freethink [h/t Abnormal Returns]

Favourite remote spots in Europe – Guardian

The rise of Nicole Kidman, pop culture folk hero – Stat Significant

‘Middlebrow’ doesn’t mean bad – Vox

Don’t dumb down – Seth Godin

And finally…“As G. K. Chesterton put it: ‘To be clever enough to get all that money, one must be stupid enough to want it.’”
– Andrew Wilkinson, Never Enough: From Barista to Billionaire

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If you’re anything like me (and if you are, I’m sorry, and have you tried therapy?) then you’re well-acquainted with those online tables of the top savings accounts. But have you considered smaller building societies that might not make these lists?

We all know the drill in 2024. You need somewhere to park your cash. An account with an interest rate that sees your stash nibbled at rather than swallowed up by the Inflation Monster.

My personal go-to are the tables updated by the Money Saving Expert team. But there are lots of others. Search for ‘top savings rates’, and you’ll get up-to-date results.

The top scorers are usually online challenger banks. Mostly they’re absolutely fine. Just check any potential candidate has the full FSCS protection of £85,000 – especially if it sounds like something Del Boy threw together in a get-rich-quick scheme.

(“Rodders, what’ll we call our bank? Monzo? Nah – how about Pockit?”)

However I’m going to make the case that you should consider your local building society.

Rate expectationsNational building societies (BS) are included in those Best Buy tables, alongside banks new and old.

For instance, top BS picks as I write include…

Leeds BS (paying 4.67%)
Yorkshire BS (paying 4.35%)

…which are respectable enough, though they can’t compete with the likes of Trading 212 and Moneybox, which both tout 5.17% right now. (T&Cs apply with all these accounts, and that Trading 212 link is monetised so The Investor may be able to buy an M&S Meal Deal this weekend if you sign-up!)

What the tables might not show you is the best rate offered by your local building society.

And you could be surprised at just how competitive these can be.

What are building societies?I think of building societies as slightly more cuddly banks.

Rather than being run for the benefit of shareholders, as banks are, building societies are accountable to their members. And the members are their customers.

The first society was formed in 1775 in Birmingham, with recognition of the nascent industry coming with The Regulation of Benefit Building Societies Act in 1836. The next 200-odd years saw more legislation and regulation, with the sector hitting its high-water mark in 1986. That year The New Building Societies Act gave them the option to become banks. Over the next few years many did just that.

So don’t be fooled by a local-sounding name from yesteryear – like a fancy surname retained since the Norman conquest – because you may be looking at a bank in sheep’s clothing.

For example, when I was a kid in North East England we had accounts with the Halifax Building Society. But while I was a teenager and wasn’t paying attention, Halifax went to the dark side. It ‘demutualised’ and turned into a bank. Others followed suit.

However not all building societies did the (mis) deed and there are plenty left today.

Surviving building societies tend to have a local focus. They usually have a town or city in their name.

Again though, not always. Nationwide Building Society is, as its name suggests, a nationwide mega-building society. And the Teachers Building Society is specifically for teachers – and also, slightly confusingly, for anyone in Dorset, Wiltshire and Hampshire, with its local hat on.

Beware the bankersI’m not saying all banks are sharks nor that all building societies are cuddly teddy bears. That’s not true.

In fact I tend to err on the side of believing that every big organisation is out to get me.

I’m just saying that these days my local Halifax branch won’t let you go to a counter unless you’ve first run the gauntlet of three different iPad-wielding staff members – each time announcing your financial business to every curious onlooker perched nearby on the soft-play sofas.

My mother’s been trying to make it to the counter of Halifax for two years.

Kafka would be taking notes.

What are the advantages of building societies?Sometimes building societies have savings rates that equal the top online banks, and mortgage offerings that are just as good or better than other brokers. Other times they come close.

My point is they are definitely worth checking out. Yet they don’t often show up in comparison sites or tables. You have to do the leg-work yourself.

The good news is that you don’t always have to live nearby. These days most building societies have useful websites. Some – like Yorkshire BS and Leeds BS – enable you to open accounts online even if you don’t live in the area.

And yet… there’s also a case for getting up from your sofa (did I hear you actually gasp there?) and wandering along to your local high street to have a chat with the building society folks.

Assuming you a) have a local high street that isn’t derelict and b) have a building society with a building.

Field reportThe last time I went out exploring – to open a cash ISA at my local building society – I was armed with info from its website, only to be told: “Oh, those were yesterday’s figures. This morning’s issue of the account has a higher interest rate”.

So I came out happier than I expected. A rare situation in dealing with banks, I’ve found.

They sometimes chat to you, too. You can go in, sit in the warm for a bit, and talk to someone about money. There’s a coffee machine in the corner. They’ll occasionally offer you a cup while you wait.

People really seem happier in my local building society. It’s like a weird banking utopia.

Do building societies have any disadvantages compared to banks?Building societies don’t have as much to offer as banks. They’ll do savings accounts (including ISAs) and mortgages, but many don’t do more than that.

If you want a current account and lots of additional features, you’ll probably have to look elsewhere.

Building societies aren’t usually a one-stop-shop then. They’re more targeted at a particular strand of your financial management.

Also, their online offerings can be pretty limited. You might be able to check your account online, for instance, but not actually move your money around much without going into a branch. For some people that’s a huge disadvantage.

However I find that the relative simplicity of building societies works well for me in some situations.

For instance, last month I gave my 12-year-old son his first prepaid card. He was off on a school trip abroad – don’t even get me started on how much that cost – to a country that doesn’t use cash very much. The kids were advised to take a card for buying snacks and souvenirs.

Naturally getting my son equipped wasn’t a smooth process. I had to get a card for myself too, so that I had a parent account for the child account. (And ever since I did, it’s been spamming me with ads for ‘easy investing’ and ‘want to buy gold?’).

But eventually both cards were set up. My son now has a card loaded with donations from his grandparents to take on his trip.

Slower and steadier saving and spendingThe worrying thing is that my son loves his card. He carries it everywhere he goes. I think he’d sleep with it if I let him.

Sometimes he stops by McDonalds on his way home from school to buy a drink just because, he says, “It’s fun to use the card”.

Okay, I can see why. You select something on the big shiny ordering machine, tap your card, and like magic somebody brings you a large Sprite Zero. That was science fiction when I was twelve.

But the money doesn’t seem real to him. The can of Sprite does, but the cash that paid for it is just a number that changes on a phone screen. For those of us who are old and grey (just a bit grey in my case, honest), it’s easy to make the connection. But for kids growing up in an increasingly virtual world, it’s different.

The building society approach counters that. It slows things down.

If his grandmother gives my son a £20 note, I’ll take him to the building society with his passbook. He hands in the £20, his book gets stamped, and he can see the physical money transferred to a number on the page. If he wants to do anything with that money, he has to go into the building society and ask.

There are levels of checks that slow down the immediacy of spending. As a parent I like that a lot.

Why I like to support my building societyThere are other benefits to using your local building society

As already mentioned, in my neighbourhood the benefit is physical branches. My local BS – Newcastle Building Society, if you’re interested – hasn’t just hung on to a high street presence where banks have fled. It’s actually expanding its operations, opening new physical branches around the region.

Then there’s the community side.

Building societies can offer some interesting services. My local branch, for instance, provides a meeting room that you can book free of charge. I was so impressed by the offer that I immediately started trying to think of people I could assemble for an official meeting of some kind. (It didn’t work, of course – there’s nobody in my town who wants to meet with me except my cousins. And I’ve been crossing the street to avoid them for years.)

Now, I don’t know anything about high-level finance. I’m just a regular person in a regular town, doing regular shopping in a run-down high street that has more nail bars than banks.

But it seems to me that building societies are becoming increasingly attractive to people because they’re looking at what their customers want, rather than trying to tell their customers what they should want.

BSs: no BSThere’s no denying I’m a dinosaur about a lot of things.

I don’t have the new Vanguard app. (Why would I want to check my investments on the bus?)

I resent the ubiquity of QR codes. (If I have to scan a QR code for your information, then I don’t want your information).

My approach to change can be best described as ‘grumpy’.

So maybe I’m missing the advantages of our kids being born digital. Perhaps my views will change in a few years, when newer and more terrifying forms of progress make tappable cards look like Victorian slates. Maybe I’m alone in liking a passbook that can be stamped.

But in this age of online everything, in which you need two-factor authentication to change your socks, I find it strangely comforting to have an account that tucks my money away without any online tinkering.

I don’t think that I am alone. My building society has big posters advertising their use of passbooks, and apparently they attract a lot of new customers. My parents moved their savings from the bank to a building society when their bank phased out passbooks.

Lots of regular people resent it when the relentless march of progress whisks away a system that worked for them.

Anybody else still miss video tapes? Nobody?

Alright, I’m a dinosaur. But there are other dinosaurs out there too.

And in the dinosaur community, building societies are our happy place.

The post Are building societies still a good place for your money? appeared first on Monevator.

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The Amundi Prime Global ETF (PRWU / PR1W) is delisting from the London Stock Exchange (LSE).

Though the ETF will continue life on Germany’s Xetra exchange, you can’t own that version in an ISA.

You can own it in a taxable account. But that will have serious tax implications if Amundi does not gain UK reporting fund status for the Xetra incarnation of the ETF.

Moreover, affected investors are being given just a few weeks’ notice to make consequential decisions, and with scant and confusing information.

Potential issues raised by PRWU owners include:

Triggering a capital gains tax event if you decide to sell the ETF from a General Investment Account (GIA).
Not having time to sell PRWU held within an ISA should you miss the relevant communications from your broker, or if you’re acting as the executor of a will.
Confusion about whether the transfer of the ETF from a Lifetime ISA causes a withdrawal penalty on the government bonus.
Potentially not being able to sell their ETF for months afterwards if they miss the deadline to sell prior to the delisting event, judging by reports from investors caught up in a previous delisting.

Delisting dramaSo why is this happening and what are the rules if it happens to you?

Before continuing, I’d like to thank Monevator readers Peter Rabbit and J. They raised the alarm with helpful comments on Monevator’s low-cost trackers page and via email.

Also, let’s be clear that neither an ETF delisting nor closure means you’ll lose your money, in case you’re worried about that.

The main consequences are:

Potentially making a loss if you’re sold to cash and end up being out of the market for a time.
Not being able to access your money for a while if your broker handles the situation badly.
Being forced into a capital gains event. (Though I think there’s reason to believe that Amundi will reacquire UK reporting tax status for the ETF. I’ll explain why below.)
Loss of some ISA benefits if sale or redemption isn’t made in time.

Why is the Amundi Prime Global ETF delisting?In brief, Amundi is moving the ETF’s domicile from Luxembourg to Ireland.

That’s good news for most investors because they’ll pay less withholding tax on the fund’s US securities due to Ireland’s superior tax treaty with the States.

But it’s bad news for UK investors, thanks to our old friend Brexit.

Prior to Brexit, fund firms could distribute their products across European Economic Area (EEA) borders using common passporting rules.

It was easy. No need to delist your ETF from the LSE.

Then, as Brexit approached like a small moon, the FCA invented the Temporary Marketing Permissions Regime (TMPR) to enable business to carry on.

However, TMPR does not cover new financial products registered with the FCA since 30 December 2020.

Want to promote your new EEA domiciled fund in the UK today? Then recognition is yours via the alternative Overseas Fund Regime (OFR).

But alas, the OFR only began accepting applications from 30 September 2024.

In between times, fund providers had to resort to the UK’s ‘Section 272’ recognition process. This choice piece of bureaucracy has been described variously as ‘cost intensive’, ‘time consuming’, and ‘legally expensive’.

Numerous articles quote industry insiders referring to Section 272’s bad reputation and its deterrent effect upon companies wishing to launch new funds in the UK.

Nice work Global Britain!

The OFR is supposed to be a much easier and less expensive route to market. Though still not as cheap and effective as the old passporting regime.

Amundi-ng its own businessAmundi Prime Global’s OFR application is apparently underway. But not in time to enable the Irish version of the ETF to be LSE-listed before the Luxembourg sub-fund disappears.

And apparently Amundi wasn’t minded to hang around on behalf of its UK investors.

Assuming the ETF regains UK recognition, then this ETF will be back on the LSE at some point. But Amundi pushed ahead with the nuclear option anyway, announcing the delisting on 16 October 2024 and giving investors until 15 November to decide if they wish to redeem their shares via the fund manager.

And this timeline was shortened for those investors who report first hearing about the delisting from their brokers some days later.

The impact of delisting on investorsI personally think ISA owners are best off selling the ETF while they’re still in full control of the situation.

The rules on non-qualifying investments1 in a stocks and shares ISA say:

Where the new investments are not qualifying investments, managers must, within 30 calendar days of the date on which they became non-qualifying investments, either:

– sell them (in which case the proceeds can remain in the stocks and shares ISA)

– transfer them to the investor to be held outside the ISA.

LISA qualifying investment rules are the same as for stocks and shares ISAs.

I can’t find out if a broker transferring non-qualifying investments from a LISA would incur a withdrawal charge designed to negate the government bonus.

But that seems probable, otherwise news of the “AWESOME LISA hack you MUST TRY” would probably have gone viral by now.

Meanwhile, there’s quite a bit of guidance out there advising that if delisted shares (remember: ETFs count as shares) are transferred outside of your ISA, then you can’t replace that money without reducing your annual allowance.

In other words, you should sell the ETF while it still resides within your tax shelter.

The consensus view is that your holding’s market value on the date of transfer is your base cost for future capital gains calculations. So you can’t carry over a capital loss from your ISA, but neither should you be stuck with an immediate capital gain.

However, HMRC’s ISA pages are silent on the issue. Or at least I haven’t been able to find the answer within.

And I’d rather not rely on whatever a random broker’s agent or HMRC forum denizen claims that day.

De-list of To DosAll of which leads me to conclude that the safest course of action is to sell while you can. All other priorities are rescinded.

Once you sell you can then immediately reinvest the proceeds into another LSE-listed ETF that replaces Amundi Prime Global in your line-up. There are plenty to choose from.

I wouldn’t worry about other retail investors doing the same thing. It won’t move the price and is unlikely to nudge the needle much on the spread either. Amundi Prime Global’s spread was around 100th of a percent on 8 November. A non-issue.

In theory, you have until 21 November to sell (that’s the ETF’s last day of LSE trading). But InvestEngine for one told its ISA owners to sell by 31 October or else it’d take action unilaterally around 7 November.

‘Unilateral’ here means your broker sells for you if haven’t opened a (taxable) GIA with them.

If you do have such a taxable account and you don’t sell beforehand, then your broker will instead transfer the new-style Prime Global ETF into your GIA upon completion of the merger. The merger is slated for 22 November but that’s subject to change.

However, it’s a bad idea to let an ETF without UK reporting fund status hang around outside your tax shelters. (See the ‘Taxable account’ section below).

I don’t think you can depend on the extra 30 days the stocks and shares ISA rules imply you get either.

That’s because the communications received by affected investors suggest that brokers will either sell or transfer on their own timeline if you don’t act yourself.

Does delisting affect SIPPs?Amundi’s notice to shareholders says:

The Receiving Sub-Fund is eligible for self-invested personal pension (SIPP) purposes under UK tax law. Nevertheless, each SIPP provider may impose its own restrictions.

(The ‘receiving sub-fund’ referred to is the Xetra-listed version of Prime Global.)

I haven’t found any reports of SIPP owners being affected. Still, you may need to take action if your broker doesn’t allow you to trade European-listed ETFs.

One broker advises (with reference to shares generally) that you’ll have to call its telephone trading desk to offload delisted stock if you miss the deadlines. A bit tedious and likely more expensive.

Still, if you fancy holding the new ETF and your current platform doesn’t do Europe then you could transfer it to a different broker who does. There are enough decent options, though it does mean incurring charges on another platform.

My own brokers don’t support European-listed ETFs. So personally I’d sell and replace Amundi Prime Global before the last day of trading.

Taxable accounts and capital gains eventsWithout UK reporting fund status, capital gains are taxed at your marginal income tax rate. Even worse, the CGT exemption allowance does not apply.

Bad, bad, bad.

However, being an unrecognised overseas fund needn’t stop Amundi Prime Global from achieving UK reporting fund status.

Other LSE delisted Amundi ETFs found this happy place in good time.

For example:

EPRE was delisted on 5 July 2023. The LSE sub-fund merged with versions trading on multiple European exchanges. HMRC states reporting fund status came into effect for those back on 31 January 2018.
WGES was delisted on 1 February 2024. It merged with its Xetra counterpart which had gained reporting fund status from 17 January 2024.
RUSG was delisted on 8 July 2024. It merged with its Xetra equivalent, MWOT. Reporting fund status was granted from 8 July 2024.

So anyone who doesn’t want to trigger a capital gains event by selling PWRU / PR1W may not have to worry about UK reporting fund status if they can wait for the Irish incarnation to appear.

In fact, I haven’t yet found an example of an Amundi ETF delisting from the LSE and only leaving behind a non-reporting fund version.

That said, I can’t claim to have searched every instance. And this time might be different.

Obviously this is a tricky decision that could backfire either way. Ideally, Amundi can give you a straight answer about its plans if you need it. You can call customer service on 0207 074 9598 or email Retail-UK-ETF@amundi.com

You can also check which overseas funds have UK reporting fund status by downloading an Excel document from the dedicated gov.uk page. Search the spreadsheet using the fund’s ISIN code.

The Irish version of Amundi Prime Global is not present in the latest update dated 9 October 2024.

Why do Amundi ETFs keep delisting?Amundi isn’t the only ETF provider to have delisted ETFs from the LSE over the past several years. But it has been hyperactively pruning its range in the wake of its 2022 takeover of the Lyxor ETF brand.

Normally, delistings eliminate niche products that are struggling to make a profit.

However Prime Global has $1.5 billion under management, according to Amundi.

So Amundi is not delisting the ETF because it failed to gain traction in the market. In fact, it’s protecting the fund’s competitiveness by moving it to Ireland.

Amundi has obviously decided that move can’t wait for the outcome of its OFR application. So it’s seemingly not too bothered about losing any UK investors caught in the regulatory cross-fire.

Indeed the company has done little more than provide the 30-calendar-day notice period required. Meanwhile affected owners are struggling with ineffectual communication from their brokers.

All of which makes me think customer service still has a long way to go in the investment industry.

Are other large ETFs at risk?I’d be surprised if this proves to be a problem that gets notably worse in the future.

The UK is the second biggest European market for UCITS funds (ETFs fall into that category).

Moreover ETF Stream recently quoted BNP Paribas Asset Management’s global head of business development ETF and index solutions, Lorraine Sereyjol-Garros, as saying:

Some clients, such as in the Nordics, Middle East, Latin America, and Asia prefer LSE listings over mainland Europe, so it enables us to target the domestic market and international clients

Thankfully then, we’ve still got market power as a country. It seems likely to me that fund managers who haven’t launched new products in the UK over the past few years were waiting for OFR to go live.

Unsurprisingly implementation kept being delayed, though it seems we’re finally off to the races now.

Be that as it may, delistings are a natural part of the ETF ecosystem. And yet retail investors aren’t always being given enough time – nor adequate information – to confidently respond.

Brokers are on point for this as they hold the direct relationship with the customer.

It wouldn’t be that hard to write a comprehensive guide to delisting. They’re welcome to start with the points raised above.

Take it steady,

The Accumulator

Scroll to the Changes to investments held in a stocks and shares ISA section.

The post Why a global ETF is delisting from the LSE (and what happens next) appeared first on Monevator.

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What caught my eye this week.

There is an interesting article in the Financial Times this week that explains that new build properties aren’t as small as we’ve all been led to believe:

It turns out that, rather than shrinking, new homes have become larger.

The frequently used 76 sq m figure is simply wrong and does not reflect the reality of the recent housing market. A housing market analyst tracked the source of this figure to a report published in 1996 that was based on new builds in the 1980s and early 1990s […] the smallest on average of any period.

Unfortunately, the 76 sq m continues to appear in new articles and reports — a true zombie statistic.

Instead, new homes have actually been getting larger and are now slightly bigger, on average, than existing homes.

Apparently Help to Buy – or Help to Buy Bigger, as wags dubbed it – drove the building of more suburban four- and five-bedroom homes, at the expense of fewer city centre flats.

This doesn’t match what I’ve seen in London, of course.

But hey! It’s a big country out there…

Neal Hudson’s article is full of interesting facts. Give it a read if you’re interested in property (and please consider subscribing to the FT if you read a lot of these search links. I do and it’s a treat!)

Breathing spaceWith Labour aiming to see 1.5m new homes being built – um, someday – I presume this apparent trend for roomier living space will need to be reversed.

Especially as the listed housebuilders’ focus on making bigger ‘executive homes’ targeting DINKYs to rattle around in might be yet another reason why young people find nice no-frills starter flats so hard to snag.

I’m all for higher-density development. Provided the model is classy areas like London’s Maida Vale or Paris’ famously beautiful mid-rise boulevards. Not the high-rise horrors of yesteryear, obviously.

But I suppose that the desirable urban apartment model might face an uphill battle while lockdown – and the near-universal desire for a bit of outdoor space it inspired – is still fresh-ish in our memories?

Have a great weekend.

From MonevatorReduce tax on savings by parking cash in gilts [Members] – Monevator

UK and Europe dumps on Trump – Monevator

From the archive-ator: How I got mixed up in this FIRE business – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Bank of England cuts rate to 4.75% but hints at fewer to come – BBC

House prices have hit a new record, says Halifax – This Is Money

Mortgage rates to stay higher thanks to Reeves and Trump – iNews

Iceland’s four-day work week seems to be working out – CNN

Foreign buyers eye Japan’s empty houses, but experts warn of risks – CNBC

The ten fastest-growing scams of 2024 – This Is Money

Is Germany’s business model broken? [Search result] – FT

The US market is top-heavy and expensive – Apollo Academy

Trump 2.0 mini-specialPeople really hate inflation – The Belle Curve

Francis Fukuyama: what Trump unleashed means for America [Search result] – FT

Presidential terms, recessions, and bear markets – A Wealth of Common Sense

Trump 2.0 and the effect on UK investors – FT

VWRL salutes the new king – Simple Living in Somerset

The psychology of America’s divided politics – The Next Big Idea

Breaking down the election results – Slow Boring

Lessons from the post-Civil War era – Politico

Here’s hoping Trump’s VC supporters have his number – Newcomer

Identity politics isn’t working – Noahpinion

Has the US presidency become a dictatorship? [Podcast] – Freakonomics

Products and servicesThe trend for ‘copycat’ ETF tickers – Bloomberg via Yahoo

Student loan overpayments reach £80m this year. Are you due a refund? – Which

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Why are university tuition fees going up in England, and who’s affected? – Guardian

“I lost £15,500 to a Revolut bank transfer scam” – Which

Is Amex Platinum’s £400 dining credit card worth a look? – Be Clever With Your Cash

Beautifully renovated homes, in pictures – Guardian

Comment and opinionSlaying some of the biggest passive investment bogeymen – FT

Big inheritances can be a sign of underspending and poor planning – Morningstar

When did this bull market start? – Of Dollars and Data

Mohamed El-Erian: Budget puts Labour on the right track – Guardian

14 money lessons from 40 years of living – Mr Stingy

The great post-Budget pensions rethink [Search result] – FT

Retire without regrets – Harvard Business Review

The ‘happiness plateau’ doesn’t exist – Bloomberg via Advisor Perspectives

Remember, remember – Klement on Investing

Breaking down the magic of portfolio diversification [Nerdy] – CAIA

Naughty corner: Active anticsWas the Polymarket Trump whale smart or lucky? – FT

Bloated balance sheets in Japan – Verdad

Cash! – The Brooklyn Investor

Headlam isn’t right for a UK dividend portfolio – UK Dividend Stocks

No, higher corporate tax rates do not reduce profits – Klement on Investing

Kindle book bargainsI Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle

Eat That Frog! Get More of the Important Things Done by Brian Tracy – £0.99 on Kindle

Growth: A Reckoning by Daniel Susskind – £0.99 on Kindle

A Confederacy of Dunces by John Kennedy Tool [Not financial, just a fav] – £0.99 on Kindle

Environmental factorsUK sales of used EVs hit a record – This Is Money

Many of the big indoor farming startups have shut down – PitchBook

Robot overlord roundupWhat AI knows about you – Axios

Writes and write-nots – Paul Graham

AI search could break the web – MIT Technology Review

Off our beatRead more books – Not Boring

What’s behind Big Tech’s return-to-office mandates? [Podcast] – The Verge

How China is like 19th Century America – Construction Physics

How startups stopped being fun – Crunchbase [h/t Abnormal Returns]

What if America keeps getting better? – Drezner’s World

1,100 emails, a 90% open rate, and why people still ghost you – Nerd Processor

Can Starbucks make a comeback? – The Eater

And finally…“There is no reason to sell a rising stock.”
– Nicolas Darvas, How I Made $2,000,000 in the Stock Market

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The post Weekend reading: home truths appeared first on Monevator.

How I Made $2,000,000 in the Stock Market: Now Revised & Updated for the 21st Century

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When it came, Donald Trump’s reelection to the White House as anarchist in chief wasn’t unexpected.

But the scale of his victory – and just how quickly the result was declared – was a surprise.

No wonder markets scrambled to recalibrate in the hours that followed.

The morning in London after the night before saw nearly all risk assets open higher. (Gold was one notable exception).

But as the day wore on, American stocks overwhelmingly prevailed.

US equities ended Wednesday broadly 2% up – and nearly 6% higher for the US small cap index.

But UK and European shares floundered. Indeed the German market closed down for the day.

Tariff-ickTo some extent the market was clearly trying to price in the now-certainty of President Trump – and hence the imminent possibility of some incarnation of his much-touted protectionism and trade tariffs.

For instance, here’s how high-end spirit makers traded over the past few days:

Source: Google Finance

You can see shares in all these companies fell 3-7% the day after the election. If Trump applies tariffs of 20-40% to French cognac, say, then Remy will sell less of it in the crucial US market. So that’s rational.

But note I’ve also included Brown-Forman – the US maker of Jack Daniel’s – alongside the European brands. And it fell too – more than 7% – the day after the election.

That’s equally rational. If the US imposes tariffs then so will its trading partners.

David Ricardo explained 200 years ago why countries do best following free trade principles.

But we live in an era where many people prefer tweets to textbooks, and protectionism and nationalism are back in fashion.

Musky smellImposing high tariffs will hurt global trade and make the US a little poorer than it would otherwise have been (although I’d concede the rest of the world will probably come off worse).

One reason the US will suffer is because the dollar will likely strengthen in a more fractious world. This will make US exports less competitive on the global stage, even excluding the tariff tit-for-tat.

Again, any student of economics knows this.

But Trump’s tariffs aren’t really designed to increase wealth. They are for winning votes, and for supporting his favoured industries and companies.

Here’s a striking example of the latter, pitching Tesla against the iShares Global Clean Energy ETF:

Source: Google Finance

Trump says he will roll back environmental initiatives and cut government programmes aimed at driving renewable energy take-up. This should benefit fossil fuel companies. Especially coal miners.

True, it didn’t work out that way last time, for various reasons.

But that’s the ‘Trump Trade’ view.

And here we can see iShares’ global clean energy ETF did modestly puke on Trump’s victory on Tuesday.

Yet at the same time shares of Tesla – a dominant manufacturer of electric vehicles and solar energy products – saw its largest one-day share price gain since the pandemic.

Of course Tesla’s CEO and major shareholder, Elon Musk, pretty much ran Trump’s re-election ‘ground game’ and turned his social media platform X (formerly Twitter) into an electioneering machine. Musk himself many times repeated false election fraud claims.

Given the relative performance of the iShares Clean Energy ETF and Musk’s clean energy and transport company following the result, it seems probable the market is putting more weight on Musk’s political proximity to Donald Trump than on the fundamentals for Tesla versus other similar stocks.

Now, we could debate all day how America ‘won’ the 20th Century.

However I’d contend that a largely meritocratic and competitive capitalist system wedded to a genuine shareholder democracy played an outsized role in pulling it and its citizens ahead.

By contrast, a return to crony capitalism and the robber baron era won’t be in the interests of most Americans.

Trump 2.0: sequel fatigueAll that said, as I write – two days on from election – there are signs the initial post-Trump moves in the markets are waning.

Those drink makers rose today. Gains in Germany are about twice those logged in New York so far.

This suggests the knee-jerk post-election market move was as much a symptom of some traders being out of position and/or hedges being unwound – plus a bit of emotional tumult – than a completely sober repricing of risk and reward.

After all, the only thing we know for sure about a Trump presidency is that it will be unpredictable.

Tariffs, for example, could be implemented at a high level. Or they could just be a negotiating tactic.

The same will be true across the barrage of uncertainty we can look forward to. Whether it be the future of international relations and bodies such as NATO and the UN, to an immigrant wondering if they’ll be deported.

The possible, probable, and unthinkable will only coalesce in the months and years ahead.

Zero sum gamesIf we are to take Trump and his followers at their word, the election result is a mandate to pursue an America First policy of bilateral agreements, tariffs, and regulatory rollback aimed, they would say, at making America Great Again.

That America is already the richest country in the world and by far its strongest-performing economy – with leadership in most of the key industries including AI, and with the strongest military and nuclear stockpiles – appears not to matter to the electorate.

Maybe after the huge inflation shock of the past couple of years and the hollowing out of American hard industry over the past 30, that’s fair enough, in so far as it goes.

America is an unequal society, and while the average American is much richer and earns a lot more than the average Brit, that hardly matters to Joe Sixpack enviously eying millionaires on Instagram while he struggles to afford a home.

However Trump can’t reverse the technological progress behind so much societal change.

And even in as much as his tariffs might superficially favour certain US groups, they’ll ultimately do more harm than good. Just like last time.

As per the Brookings Institute’s assessment of Trump 1.0:

American firms and consumers paid the vast majority of the cost of Trump’s tariffs.
While tariffs benefited some workers in import-competing industries, they hurt workers in sectors that rely on imported inputs and those in exporting industries facing retaliation from trade partners.
Trump’s tariffs did not help the U.S. negotiate better trade agreements or significantly improve national security.

None of this would have surprised Ricardo.

But what might have raised his eyebrows is that the country with the most globally dominant firms – the biggest winner of the global order that its grandparents and great-grandparent’s forged with their sweat and blood – would now vote against its own economic interest.

A world of painIf the US does go down the protectionist path, then the forces of Hubris and Irony will one day have their revenge.

Little comfort for those of us caught up in the consequences, admittedly.

Indeed where Trump is correct is that the UK, Europe, and the rest of the free world has benefited enormously from US economic and military leadership over the past 80 years.

If the US retreats, we’ll feel it economically and in our politics and national security. Needless to say Britain looks particularly exposed following our own quixotic decisions of the past few years.

The US can probably coast for a couple of decades however on the momentum of its enormously successful economy.

And if this political movement endures then its leaders can find other scapegoats by the time the costs are clear.

Identity theftOf course this election wasn’t just about economics. In part Trump’s popularity must be a backlash against the extremes of the progressive agenda over the past couple of decades.

On that note, it might surprise my usual half-a-dozen critics to hear I was noting to friends last week how the Democrats’ website flagged it was fighting for 16 groups – from African Americans to Latinos to Women – but it apparently didn’t see the white male majority among its constituents:

At a time when more American women go to college then men – including for professions such as law and medicine – while the relative earnings of men without a college degree have declined for decades, you can see this could stick in the craw, regardless of your views about the bigger societal picture.

In fact early post-vote analysis suggests many minorities voted for their candidate of choice, rather than the one supposedly prescribed to some identikit community. Lots of Latinos voted for Trump, for example.

I’m all for it. Personally I’m no fan of the extremes of identity politics. We’re all equal individuals as I see it, and while structural inequalities do still exist, an enlightened government can seek to improve things without pitting groups as victims and oppressors, and putting people into boxes along the way.

Some Monevator readers think I lean very left. However as I’ve noted many times before, my own friends think I’m the semi-acceptable face of the right.

In reality I’m that unfashionable 1990s’ middleman – economically a capitalist, but socially a liberal.

That’s because when it comes to both trade and society, I believe the same thing…

…we’re all in it together.

Born in the USATo conclude, the political shift in the US hardly has me jumping for joy. But there’s not much I can do about it.

For at least the next four years, political risk is back on the table. Especially if you’re an investor in individual companies with any exposure to foreign markets or foreign competition.

We’ll all feel the knock-on effects. From our mortgage rates – Trump’s plans seem inflationary, which will keep US rates higher than otherwise, with consequences for our own interest rate in the UK – to our taxes. For instance we’ll probably have to spend more on defence.

I’ll leave issues such as sleeping at night with an aggressive Russia on the borders of Europe as an exercise for the reader.

Finally, comments welcome, but please focus on the economy and markets.

I know I mentioned identity politics above, but that was because leaving it unsaid would clearly only present half the story.

There’s a vast Internet out there for those who want to go down that rabbit hole.

Botty mouths On that note, since the election, Monevator comments have been inundated with spam-like postings such as this (identity redacted):

The spam filter identifies them as such. The posters have no prior history of posting on Monevator. They are not on our mailing list. I presume Russian or Chinese bot farms are the source.

But honestly it’s sometimes hard to tell the difference between bot-spam and the bold and radical views of our one or two Blimpian readers. So I’ll delete anything not about global trade, markets, or investing with extreme prejudice for the sake of an on-topic discussion. Save your fingers!

Finally I wish America – a country I’m very fond of – and all her citizens the best of luck.

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Are you paying tax on your savings interest? Would you like to pay less tax? Well, it turns out you can, by stashing your cash in gilts1. It’s a legal and safe option that I’ve personally overlooked until now.

The trick is to move your money out of savings accounts and into certain individual gilts:

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post Reduce tax on savings by parking cash in gilts [Members] appeared first on Monevator.

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Feel free to skip one more pundit’s view of the Budget if you’ve had enough. I’m not claiming to be John Maynard Keynes. This is just how I see things.

When asked why he robbed banks, the US heist wiz Willie Sutton said: “Because that’s where the money is.”

Those hit by what passes for wealth taxes in Labour’s October Budget should sigh and say the same.

Yes, capital gains taxes have gone up a little. But entrepreneurs and investors with money to spare outside of tax shelters – or the gumption to start a business – don’t do it for a few percentage points of tax arbitrage versus income tax. We do it because the £760,000 you’re left with after a now-24% levy on every £1m you make in gains is still life-changing, compared to the average UK salary of £36,000 a year.

No, you soon won’t be able to pass along a multi-million pension pot to the next-generation tax-free.

But the state doesn’t provide tax reliefs for pension savings so that your kids need never work again. It does so to encourage you to save for a time when you can’t or won’t yourself. Scrapping the Lifetime Allowance for pensions doomed the IHT ruse, and the trade-off is a sensible one.

Higher stamp duty when you buy a second-home or investment property?

Well I don’t like transaction taxes on principle. But if we’re going to have them, then at least this targets the pointy-end of the property market.

Reversing the 20-year advance that landlords made versus first-time buyers continues. With house price to income ratios still off the charts and buying in the South impoverishing-to-impossible for most young people without a suitcase of cash from mum and dad, I’m at peace with that direction of travel, too.

We tried the rest, now here’s what’s leftReal wage growth in the UK has been flat since the early 2000s. Near-zero interest rates for more than a decade after the financial crisis only inflated the wealth of those with assets – even as the bottom half that relied on lowly wages or state benefits saw their standard of living go nowhere, before the post-Covid inflation shock squeezed them for what was left.

If you’re really upset by Rachel Reeves’ Budget then you’ve probably either done very well – relatively-speaking – for the past 15-20 years or else you’ve been in denial about the state the UK is in. Count your blessings.

I’m fully aware that Monevator has wealthy readers and we’re generally pro-capitalism and getting ahead around here. So this isn’t a sermon that’s likely to have our parishioners throwing their hats into the air.

But a reckoning was overdue and here it is.

We need to manage the UK as the middle-ranking mostly pretty poor country (judged per capita) that it now is. Not pander further to the fantasies of post-2016 populism.

Some friends of mine bemoan a return of ‘the politics of envy’.

But I just see a return to the politics of reality.

A B- BudgetThis was not a perfect Budget. Not even judged by my standards, which is akin to judging how well an ambulance crew performs when it arrives to find the patient already blue on the floor and gasping.

The biggest tax-raising measure – the hike in employer’s national insurance – can only hurt growth in itself, even if spending money had to be raised somewhere to stave off worse. At the margin it will make the young and low-skilled less employable.

Hospitality and retail will suffer. And personally I wouldn’t be taxing jobs harder with a potential AI revolution at the door.

But income needed to be found. This country couldn’t take another round of austerity, even if it had voted for it – which it didn’t do in voting for Labour, or for Johnson years beforehand. To get itself past an electorate either unwilling or unable to face facts, Labour had sadly boxed itself in with red lines around the other big revenue raisers. So here we are.

Even with the tax hikes, Reeves’ additional borrowing has slightly rattled the gilt market – although I judge much of the fairly modest rise in bond yields we’ve seen is ongoing recession risk being taken off the table in the US, with knock-ons around the world. I see the Budget as only adding a kicker.

So it’s far from another Disastrous Mini-Budget.

However it is a bit of Show Me The Money concern.

Paying for that protest voteEveryone sensible knows the UK needs growth. The State needs it, and we need it in our pay packets.

Neither I nor the OBR thinks this Budget will do much for growth over the long-term. The latter forecasts a little boost upfront and then if anything a gentle decline in the long-term.

That’s not good enough.

But again, what’s the alternative?

The UK electorate voted to make itself poorer in 2016, rightly or wrongly. That bill – plus the same for preventing a potential depression during Covid – has come due. Decisions have consequences.

Even if you don’t agree with Goldman Sachs, the OBR, and other mainstream economists that leaving the EU is indeed on its way to costing us the 4-5% hit to GDP that was predicted and is playing out, not even the lunatic fringe can divine any Brexit dividend. Ironically the only reason things aren’t worse economically is because immigration has gone through the roof.

Going it alone could only have boosted the UK’s economic prospects with the deregulated ultra-capitalist ‘Singapore on Thames’ model. Boris Johnson rejected that years before Reeves took charge.

So we’re back to tax and spend – except it’s as much to keep the lights on as to invest in infrastructure.

Still, that’s better than austerity at this moment in time.

Labour’s political opponents have understandably focused on taxes going up after Labour’s election pledges in spirit implied no such thing.

Fine, but firstly their manifesto didn’t add up either. Both sides have seen this country prove for a decade that it will only vote en masse for pretty lies.

Secondly, what would the Budget haters do differently?

Cut services further? Everyone can see they’re falling apart.

Cut taxes to stimulate growth? We couldn’t even afford the last unfunded bung.

Fudge the books by not being frank about spending commitments and promising investment and ‘levelling up’ that was just rhetoric plastered on top of a crumbling national fabric? Oh yeah, we tried that.

I say be careful what you wish for.

You too can be a millionaireAs for our own wallets, well I can still put £80,000 a year into tax shelters – via ISAs and pensions – and I can invest my way to a comfortable retirement without some silly lifetime cap on my gains. The tax-free lump sum was left intact too.

None of the nightmare scenarios came true. Not even flat-rate tax relief.

If you’re a high-earner you can easily make yourself a multi-millionaire helped by those reliefs, without starting so much as a lemonade stand in terms of real risk-taking.

Can any of us – hand on heart – say that isn’t still plenty of room to do well for ourselves?

There was even the rabbit in a hat of the freeze on income tax thresholds being lifted in 2028. A half-boiled bunny for sure, but if I was Reeves I’d have extended them further and not hiked employer’s NI.

As for being clobbered by the supposedly crushing fist of the leftwing unleashed, according to the Budget calculators I’m about £1.36 a year worse off from Reeves’ measures.

So let’s have some perspective.

The actual ultra-left – Jeremy Corbyn and his fellow travellers – have penned an open letter condemning this Budget as ‘austerity by another name’.

First, do no harmReeves has not solved anything with her Budget but it shouldn’t make things worse.

Given the rubbish place we’re starting from, that’s no mean achievement.

With luck she’s bought time for a few good years and a fortunate break or two to get the UK economy going again. That might give us a bit more room to be bolder. We’re overdue a bounce.

But I know many of you will disagree, one way or another.

Before we kick things about in the comments, let’s remember Labour hasn’t been in charge for 14 years. Let’s not pretend the UK was humming along before somebody let the long-haired students in to seize the levers of state.

And if Liz Truss is reading, I got some stick for not totally sticking it to your Budget, because you did sort of address the elephant in the room – the lack of economic growth. Unfortunately that message was wrapped in a package as convincing as a man with a billboard crying the end of the world is nigh. Which ultimately only made the markets and the electorate less tolerant of radical action.

No, Britain signed up for gentle decline years ago. The spirt of the 52% is like an old person blustering around a care home talking about the good old days and complaining he can’t understand the nurses’ accents.

Now Barry Blimp is moaning that he has to take his medicine. I’m shocked.

Sorry, but the grown-ups are back in charge. They’re doing what they can, but that’s only so much.

As for the alternative, I’d love to hear a well-argued and costed counter-narrative spelling out a lower tax, higher growth future with a respectable welfare state left intact – as judged by the electorate, not the rich flying by to their private stand-ins. And that’s certainly not coming from the Tory leaders in waiting.

So tax, spend, and muddling on it is.

You’ve read one Budget roundup, you’ve read them all: How the Budget will affect you and your money – BBC * The key changes announced – Which * Same, but with some political response in the mix – Guardian * A long link list to articles on every Budget measure – Money Saving Expert * Same, but more politicised [scroll down past the big pictures]* – This Is Money * The Employer National Insurance hike explained – This Is Money

More Budget opinion: Paul Johnson: There are big risks lurking in this Budget – IFS * Response to the Autumn Budget – NIESR * Faisal Islam: Where is the growth in Reeves’ ‘Budget for Growth’? – BBC * Aditya Chakrabortty: At last a government willing to spend, but… – Guardian * Robert Shrimsley: Goodbye to low-tax Britain [Search result] – FT * ‘Fixing the foundations’ Budget has done nothing of the kind – This Is Money * Analysing Rachel Reeves’ Budget [Podcast]* – The Rest is Politics * Delivering a Budget for National Renewal – The 99% Percent * Ian Dunt: Take stock, catch a breath – Striking 13 * Bart Van Ark: This was not the ‘productivity’ Budget – The Productivity Institute * Dan Neidle: Agricultural property inheritance relief changes not all that – Via X * Tim Leunig: There are good reasons for Reeves to raise taxes – Politics Home

Have a great weekend!

From MonevatorHow to work out which platform is cheapest for you – Monevator

Capital gains tax in the UK – Monevator

From the archive-ator: Stress management – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK house price growth slows, but stamp duty hike could ‘spark buyer’s rush’ – Guardian

Floored by fees: “My £250 child trust fund is now only worth £12” – BBC

The N.Y.S.E. is getting ever close to 24-hour trading – Sherwood

FCA fines Wise co-founder over tax disclosure failure… – Morningstar

…while Russia fines Google $20 DECILLION, more than global GDP – NBC

Rents are up and down in global ‘bubble cities’ [Infographic] – Visual Capitalist

It’s rare for gold and US stocks to rise in tandem – A Wealth of Common Sense

Products and servicesOwning a home in the UK now cheaper than renting – This Is Money

Regulated rail fares in England to rise by inflation-busting 4.6% – Guardian

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Three expert tips for paying for care – Which

Divorcing couples battling over who pays VAT hike on private school fees – This Is Money

How to earn up to £55 by sharing banking data with YouGov Connections – Be Clever With Your Cash

Village homes for commuters near a station, in pictures – Guardian

Comment and opinionSmall wins can add up to long-term investing success – Morningstar

Meet ‘Generation Windfall’, coming to an estate agent near you [Search result] – FT

Overweighting perspective and context in your portfolio – A Teachable Moment

When it’s time to rethink your asset allocation – Morningstar

Before you quit work – Humble Dollar

How demographics can distort economic narratives – Financial Times

Retirement – We’re Gonna Get Those Bastards

How the new anti-obesity drugs could boost economic growth – Faster, Please

Naughty corner: Active anticsUS credit spreads are looking ominously compressed – Topdown Charts

The hidden risks of social media to investors – Enterprising Investor

Boeing just raised a whopping $21bn to shore up its broken balance sheet – Bloomberg via Yahoo

The history of Meta [Podcast] – Acquired

Kindle book bargainsI Will Teach You To Be Rich by Ramit Sethi – £0.99 on Kindle

Eat That Frog! Get More of the Important Things Done by Brian Tracy – £0.99 on Kindle

Growth: A Reckoning by Daniel Susskind – £0.99 on Kindle

A Confederacy of Dunces by John Kennedy Tool [Not financial, just a fav] – £0.99 on Kindle

Environmental factorsBudget doubles down on support for EVs… – This Is Money

…but 15th fuel duty freeze ‘utterly nonsensical’, say campaigners – Sky

Nationwide offers 0% loans to improve home energy efficiency – This Is Money

Scientists say climate change made the Valencia floods worse – BBC

This yellow powder captures the same amount of CO2 as a tree – Fast Company

The slow-motion destruction of tortoises’ slow-motion migration – Hakai

Robot overlord roundupGen AI can reproduce an image when trained on as few as 200 copies – Fast Company

US election mini-specialWhy The Economist is endorsing Kamala Harris – Semafor

A vote for Donald Trump is a vote for school shootings and measles – The Verge

Caving to Trump before he’s even elected – Daring Fireball

Off our beatIYKYK: when a novel speaks a language only part of the Internet gets – The Walrus

How close were the UK’s hospitals to collapse in Covid? – BBC

Why some nations are built for economic success while others flounder – Humble Dollar

How Las Vegas became – for good and ill – the most futuristic city in America – GQ

And finally…“The essence of risk management lies in maximising the areas where we have some control over the outcome while minimising the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us.”
– Peter Bernstein, Against the Gods: The Remarkable Story of Risk

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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Against the Gods: The Remarkable Story of Risk

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Until the government starts taxing sex, capital gains tax (CGT) is probably the most annoying tax to pay.1

Capital gains tax is levied on the profits you make when you sell or transfer most assets. These assets include shares, investment properties – even a stake in your own company.

Like a maggot in your birthday cake, capital gains tax can really spoil the fun of making money.

Inheritance tax is a tax on your good fortune. Income tax is the cost of having a job.

But CGT is a tax on investing success.

Take cover from CGT! Always try to use ISAs and pensions to shelter your investments from taxes. No tax is payable on gains realised within these wrappers.

Of course, you won’t always make a profit when you sell an investment.

Sometimes you’ll lose money. That’s called a capital gains loss.

Unfortunately you don’t get money back from the government when you lose money.

However you can offset your capital losses against your gains to reduce your total taxable gain. You can also defuse unsheltered gains using your annual CGT allowance.

How UK capital gains tax worksLike income tax, CGT is calculated on the basis of the tax year. This runs from 6 April to 5 April the following year.

You pay tax on the total taxable gains you make selling assets in the tax year, after taking into account:

Your annual CGT allowance. (See below).
Other reliefs or costs that can reduce or defer the gains.
Allowable losses you made by selling assets that would normally be liable for CGT. (The opposite of a capital gain, in other words).

Everyone has an annual capital gains tax allowance, or ‘annual exempt amount’ in HMRC-speak. This allowance was halved to £3,000 on 6 April 2024. It is now frozen at this level.

If your total taxable gains, minus any deductions, come to more than your annual tax-free allowance, then you pay CGT on everything over that allowance.

Capital gains tax ratesThe capital gains tax regime was simplified in Labour’s October 2024 Budget.

Unfortunately the same Budget increased CGT rates, too.

The specific rate you’ll pay on your gains depends on your total taxable income.

Higher CGT rates from 30 October 2024:

Basic-rate taxpayers now pay 18% on their capital gains.
Higher-rate taxpayers pay 24%.

These rates were increased in the Budget from the previous levels of 10% and 20% respectively.

CGT: We’re all in it together

Before the October 2024 Budget, second homes and buy-to-let properties2 were taxed at higher rates than other assets such as shares.

However CGT rates on non-property assets were increased in the Budget to the same level as those levied on property gains.

Meanwhile the rates levied on property were left unchanged.

Hence all chargeable assets are now taxed at those same 18% and 24% rates.

Your main home is nearly always exempt from capital gains tax under what’s called Private Residence Relief. This is automatically applied unless you’ve let your home out to more than a single lodger, used it for business, or if you’ve substantial acreage. In those cases, CGT might be payable.

Note that you might normally be a basic-rate taxpayer, but pay a higher rate on your capital gains. This could happen if the money made via your gains moves you into the higher-rate tax bracket.

To work out what rate you’ll pay, your capital gain is added to your taxable income from other sources (salary, dividends, savings interest, and so on).

It can get a bit complicated. See HMRC’s notes on working out your capital gains tax rate band.

What is CGT charged on?Historically-speaking, CGT has been a fairly avoidable tax for most everyday investors in the UK.

(Remember, you’re allowed to mitigate your taxes. Tax evasion is illegal.)

However the big decline in the annual CGT allowance – from over £12,000 a few years ago to just £3,000 from 6 April 2024 – has made it much harder to mitigate a potential capital gains tax bill.

Putting assets into tax shelters before they make any gains has thus become even more important.

Most capital gains on asset sales are taxable, but in the UK capital gains tax is NOT charged on:

Your main home (in 99% of cases)
UK Government bonds (gilts)
ISA and SIPP holdings
Personal belongings worth less than £6,000 when you sell them
Your car, unless used for business
Other possessions with a limited lifespan
Betting, lottery, or pools winnings (including spreadbets)
Money which forms part of your income for Income Tax purposes
Venture Capital Trusts
Certain business holdings that qualify for entrepreneur’s relief

That still leaves many key assets liable for UK capital gains tax:

Shares
Corporate bonds
Funds
Antiques
Buy-to-let property
Land
Gold (unless UK coins)

Remember if you can hold these assets inside a tax shelter (ISA or pension) you’ll escape the sting of capital gains tax.

Also remember that you have that annual capital gains tax allowance. So you won’t necessarily be liable for CGT just because you’ve sold some taxable assets and made a profit. It depends on your total capital gains for the year.

You might also be able to postpone paying your CGT bill by claiming deferral relief on certain government-sanctioned investment schemes (EIS and SEIS). However these investments can be very risky.

Do your research. Don’t risk big losses just to cut your tax bill.

When to report capital gains taxYou need to report your taxable gains via your self-assessment tax return if:

Your total taxable gain in the tax year exceeds your CGT allowance, and/or
Your sales of taxable assets are in excess of £50,000 and you’re registered for self-assessment.

Under the current regime, if you sold £20,000 worth of shares in the year for a total gain of £2,000, there’s no need to report any of it. Your £2,000 in gains is below the annual CGT allowance. And your total sales were less than £50,000.3

In contrast, if you’d sold £52,000 of shares, say, and you are registered for self-assessment, then you would have to report the details to HMRC, regardless of the size of your total gain. That’s because you’ve sold taxable assets in the year in excess of the £50,000 threshold.

Capital gains are pooled togetherAll capital gains and losses go into the same ‘pot’ from the Inland Revenue’s point of view.

For example, if you made a gain (i.e. profit) of £15,000 selling shares and £8,000 from selling an antique wardrobe, then your total capital gain is £23,000.

Here losses might help you out.

For example, let’s imagine you make a taxable gain on your shares but a loss on selling your buy-to-let property. Your property loss can be offset against your capital gains on shares to reduce or even wipe out the tax bill that might otherwise be due.

See my article on mitigating capital gains tax for other strategies.

Who pays Capital Gains Tax in the UK?Very few people pay capital gains tax.

A recent study of anonymised personal tax returns found that 97% of people never make any chargeable capital gains. Those who did were generally drawn from the ranks of the wealthy.

According to the Guardian:

Just 0.3% of people with income under £50,000 had taxable gains in an average year, compared with almost 40% of taxpayers with incomes over £5m receiving some gains.

Almost half of those who made a capital gain lived in the south-east. A quarter lived in London.

So paying capital gains tax puts you into a fairly exclusive club.

For investors, however, capital gains is an occupational hazard. If you are not able to do all of your investing inside ISAs and pensions, then you will probably pay CGT sooner or later.

Especially given how the annual CGT allowance has been slashed in recent years.

How do the UK’s CGT rates compare with other countries?Even at the new higher rates, the UK regime is fairly competitive. Here are some example headline rates from our peers as of September 2024:

Source: Financial Times

It’s tricky comparing rates between different countries, as there can be lots of quirks, extra levies, and special allowances. Some countries may impose a wealth tax, or seek to generate revenues via higher transaction taxes.

The UK isn’t the only nation with a complicated tax code!

Certain jurisdictions do not charge CGT at all. These include the Bahamas, Belgium, Bermuda, the Cayman Islands, Gibraltar, Hong Kong, Jersey, Guernsey, the Isle of Man, the Netherlands, New Zealand, Qatar, Saudi Arabia, and Singapore.

Capital gains tax and meI’ve paid CGT. I wasn’t even very wealthy at the time. Certainly my annual income was no great shakes.

I began investing 20-odd years ago with a biggish lump sum that I’d originally saved up as a house deposit.

I should have steadily put this cash into ISAs over the ten years or so it took me to save it. But I was silly and I didn’t. And so when I began investing, I had to build up my ISA tax shelter capacity from scratch. One year’s allowance at a time.

Eventually this landed me with a five-figure CGT bill when I sold the last of my unsheltered investments – and this despite years of diligently defusing my gains along the way.

You make your own luckThat investment had gone up more than ten-fold since I bought it outside of an ISA, a decade or so earlier.

Lucky me, you say?

Perhaps, but remember I wasn’t super-rich. I began as just a determined saver trying to keep up with the runaway London housing market. My initial deposit comprised of several tens of thousands of pounds of hard-won savings that I could have spent instead on holidays, clothes, or simply having more fun in my 20s and 30s, like most of my friends.

That is why I usually write that you ‘make’ a capital gain, or even that you ‘earn’ a gain.

Whereas The Guardian with its own biases says you ‘receive’ it. As if the capital gain just falls from the sky – like windfall!

That is true of an inherited gain, say – at least for the recipient

But capital gains nearly always only come after you’ve risked your own money.

So do what you can to keep hold of that reward in full by shielding your investments from capital gains tax.

Update: since I first wrote this article I bought my own home and paid Stamp Duty Land Tax at 5%. Turns out that’s just as annoying.
Held personally. Properties held via a limited company are on a different regime.
Remember, these are sales outside of an ISA or SIPP. Sales within shelters are not liable for CGT and not counted at all.

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The Slow & Steady portfolio has hit an new all-time high! Yes, our model passive portfolio has finally surpassed its previous peak, reached on New Year’s Eve 2021. Almost two years later we’ve put 2022’s bond crash behind us – in nominal terms anyway – as the portfolio grew for the fourth quarter in succession.

And for once that growth wasn’t driven by our US-dominated Developed world fund. Here are the numbers, in Allswell-o-vision:

The Slow & Steady is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,264 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts in the Monevator vaults. Last quarter’s instalment can be found here.

The big winner this quarter was global property. It soared over 10% in the three months – having spent much of the year sinking into the mud like a cheap tower block.

In fact even after its recent spurt, global property has managed less than 5% growth year-to-date. That lags the double-digit returns from Emerging Markets, UK equities, and the Developed World.

I need to do a deeper dive into the diversification potential of a REITs index tracker (which is what any passive property fund is) because I am far from convinced that owning this type of real estate makes much difference at the portfolio level.

Bond of bothersWhat news of the irradiated bond asset classes?

The recovery looks healthy on the longer one-year view – in terms of what you can hope for from bonds, anyway – but 2024 itself has been a poor year so far.

Here’s how this year’s bond weakness pings out in red in the fund view in Morningstar’s Portfolio Manager:

I’ve circled the two bond funds’ one-year performances in green, and their year-to-date returns in red.

Note the table shows nominal returns. Both funds are actually down in real terms this year, once you factor in August’s 3.1% CPIH inflation figure.

I’ve also circled the 10-year annualised returns in cyan – because we’re all about the long-term here at Monevator!

You can see the long-term growth engine of our portfolio has been its Developed World fund. Indeed if we unpack the Matryoshka dolls of causation, then really it’s the US S&P 500 – and inside that a handful of tech firms.

See our last update for a chart showing how well we could have done if we’d gone all-in on tech when we launched our model portfolio in 2011.

Which we might have done if we could predict the future. Which we can’t.

(And incidentally neither can you).

Choose wiselyA portfolio choice can only be meaningfully compared with an alternative you might have reasonably made ex-ante.1

The Slow & Steady was conceived as a DIY passive portfolio. Our choices were aligned with best practice on managing your own investments.

The model portfolio’s ‘competitor’ then is not a wise-after-the-fact YOLO punt on a tech ETF, but rather something like a Vanguard’s LifeStrategy multi-asset fund. An off-the-peg investing ready meal that enables you to invest in a nutritious portfolio with minimal work. (Sounds awful, I know.)

So has all my DIY dosey-doe added one scintilla of value compared to picking this magi-mix investing alternative?

I think you can see where this is going…

Chart attackFirstly, because I’ve taken the trouble to painstakingly unitise the portfolio for this comparison, I’ll treat you to the exclusive unveiling of the Slow & Steady’s performance chart. (A happy byproduct of the exercise):

Our model portfolio was launched to ~~world acclaim~~ global indifference on 31 December 2010.

From there, the little portfolio that sorta could has grown 161%. You can see that its value has just reached a new high as it hits the wall on the right.

This 161% gain amounts to a time-weighted return of 7.24% annualised since purchase. (A time-weighted return strips out the impact of cashflows upon a portfolio, and is how comparisons between investments are usually made.)

Meanwhile, the portfolio’s money-weighted annualised return is 6.97%. (The money-weighted return is more realistic in my view. That’s because the periods when you have more invested make a greater contribution than if, say, your portfolio doubled when you put in your first fifty quid.)

Oh really? Note you can subtract approximately 3% to reflect average inflation to get the real return. A 4% annualised real return is what you might expect a 60/40 portfolio to deliver, based on long-term historical datasets.

More ups and downsAs average as all that sounds, the numbers show the Slow & Steady hasn’t so much as taken a bear market beating during its adventures to-date.

That’s encouraging!

Our worst slide was -15% during 2022’s bond crash. Covid amounted to a -11% plunge before we were rescued by the authorities’ big bazookas.

In comparison to the worst investing can throw at us, the portfolio’s performance looks more like riding a vintage merry-go-round horse than a rollercoaster.

I’ve even made the journey look choppier by using a linear chart above. A linear investing chart exaggerates the scale of later events relative to earlier ones.

Here’s a more realistic logarithmic view:

Essentially, the portfolio has gently wafted higher over the course of its 14-years, with just the occasional stomach-tickling lurch due to turbulence.

I think my first chart feels like the voice of anxiety in our heads yelling: “AAAARGH! Everything is incredibly important and sometimes quite scary because it’s happening to me right NOW!”

While the second chart is closer to objective investing reality, as experienced by a 60/40 passive investor in recent times.

Multi-asset face-offNow, about that Slow & Steady vs LifeStrategy Thrilla in Vanilla I’ve been dawdling towards.

Here’s Morningstar’s chart for the LifeStrategy 80 and LifeStrategy 60 funds. It’s set to the longest comparison period I can make with my Slow & Steady returns:

LifeStrategy funds only launched in the UK on 23 June 2011.

My nearest Slow & Steady datapoint dates from 1 July 2011, so that’s the starting line for this foot race.

But why is this a three-cornered contest, with two Vanguard funds in the chart?

Because the Slow & Steady portfolio was originally an 80/20 portfolio.

To reflect its fictitious owner aging, we rebalanced into a 60/40 over the course of its first ten years. This saw 2% of the equity allocation transmuted into bonds every year for a decade.

Hence we’d expect the Slow & Steady to perform somewhere between the LifeStrategy 80 and 60, which stick rigidly to their asset allocation lanes.

Out-take – I know, if I had any gumption, I’d gather 14-years’ worth of price data for the Vanguard twosome, combine them into a portfolio, and plot an equivalent declining glidepath. Perhaps one wet weekend I will. If I really want to drive Mrs Accumulator into serving those divorce papers.

Show me the moneyThis is the best comparison I can do for now. And I think it’s very telling:

| Portfolio | Cumulative (%) | Annualised (%) | | Vanguard LifeStrategy 80 | 191.47 | 8.41 | | Slow & Steady | 158.97 | 7.45 | | Vanguard LifeStrategy 60 | 143.07 | 6.93 |

Nominal returns, 1 July 2011 to 27 Sep 2024.

Over this timeframe, the LifeStrategy 80/20 portfolio has grown 20% larger than the Slow & Steady, which in turn is 11% larger than the LifeStrategy 60/40 portfolio.

Our plucky DIY champ has split the two Vanguard funds down the middle! Which is as it should be because its asset allocation lay somewhere between the two.

And while I don’t know how this match-up looks on a risk-adjusted basis, I’m doubtful of snaffling too many crumbs of comfort given the Slow & Steady was (by design) maxed out on UK government bonds just as that asset class suffered its worst year in history.

Ultimately – as much as I had fun ensuring the Slow & Steady portfolio was better diversified than its fund-of-funds equivalent – if I’d really had that crystal ball in 2011, I’d have recommended picking the LifeStrategy option unless you really enjoyed being hands on.

In fact that’s exactly what I suggested to friends and family.

For some peculiar reason they don’t give two-hoots about investing. But they needed to save for retirement all the same.

So much for taking the scenic routeThe main lesson I draw from this investing smackdown is simplicity is under-rated and optimisation over-rated.

Monevator’s model portfolio is souped-up with small cap equities, global real estate, and inflation-linked bonds that LifeStrategy lacks.

And the Slow & Steady’s OCF of 0.16% compares well with the LifeStrategy’s 0.22% charge.

But despite all that, the two load-outs are very similar at a broad equity/bond asset allocation level.

And that’s proved decisive in this score draw.

New transactionsEvery quarter we throw £1,264 like autumn leaves into the market winds. Our stake is split between our portfolio’s seven funds, according to our predetermined asset allocation.

We rebalance using Larry Swedroe’s 5/25 rule. That hasn’t been activated this quarter, so the trades play out as follows:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

New purchase: £63.20

Buy 0.225 units @ £281.34

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%

Fund identifier: GB00B59G4Q73

New purchase: £467.68

Buy 0.703 units @ £665.56

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

New purchase: £63.20

Buy 0.147 units @ £431.23

Target allocation: 5%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.19%

Fund identifier: GB00B84DY642

New purchase: £101.12

Buy 49.095 units @ £2.06

Target allocation: 8%

Global property

iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.18%

Fund identifier: GB00B5BFJG71

New purchase: £63.20

Buy 26.057 units @ £2.43

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £316

Buy 2.326 units @ £135.86

Target allocation: 25%

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £189.60

Buy 174.908 units @ £1.08

Target allocation: 15%

New investment contribution = £1,264

Trading cost = £0

Average portfolio OCF = 0.16%

User manualTake a look at our broker comparison table for your best investment account options.

InvestEngine is currently cheapest if you’re happy to invest only in ETFs. Or learn more about choosing the cheapest stocks and shares ISA for your circumstances.

If this seems too complicated, check out our best multi-asset fund picks. These include all-in-one diversified portfolios, such as the Vanguard LifeStrategy funds.

Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? Our piece on portfolio tracking shows you how.

You might also enjoy a refresher on why we think most people are best choosing passive vs active investing.

Take it steady,

The Accumulator

i.e. Back at the time you made the decision.

The post The Slow and Steady passive portfolio update: Q3 2024 appeared first on Monevator.

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What caught my eye this week.

How filthy rich would you be if you could see tomorrow’s newspapers today – and then trade on the back of your unfair insight?

Actually, many of you could end up poorer.

At least that’s the takeaway of new research by Victor Haghani and James White of Elm Partners Management.

They decided to investigate conjecture by Black Swan author Nassim Nicholas Taleb that knowing news in advance wouldn’t help most people make money.

The Financial Times explains:

Haghani and White devised a clever experiment to test out Taleb’s hunch: 118 ‘young adults trained in finance’ were given $50 and a copy of the front page of something called the Wall Street Journal, minus stock and bond prices, one day in advance.

The lab monkeys’ task was simple — to use their knowledge of the future to make as much money as possible by trading in the S&P 500 and a 30-year Treasury bond futures contract.

Participants were free to use as much leverage as they liked and asked to place bets on 15 different high-volatility days over the past 15 years, five of which coincided with big employment reports, five of which coincided with Fed announcements, and the other five of which were picked purely at random.

Now, if you’re a naughty active investor like me you’re probably licking your lips in anticipation.

Seeing the future? Talk about edge!

And yet the FT tells us:

The average payout was just $51.62 per player, representing a weighted average return of 3.2%
Just under half of players lost money
16% of players went bust
Players guessed the direction of stocks and bonds correctly on 51.5% of the roughly 2,000 trades they made

Bloomberg adds (via Yahoo Finance):

“It’s very humbling,” said Victor Haghani, who was a founding partner of Long-Term Capital Management.

“Even if you have the news in advance, it’s still really hard to do asset allocation or whatever with a high chance of being right, let alone not knowing what’s going to happen.”

Haghani was a Monevator reader back in the day. I’d love to think my co-blogger’s passive investing articles added our two pence to the intellectual capital behind this research.

Anyway if you’re the sort who doesn’t believe something until you’ve tried it for yourself then you can (a) join our Moguls membership gang (and be sure to track your returns!) and (b) try the game for yourself on the Elm Funds website.

~~Lie about~~ let us know how you do in the comments below!

Have a great weekend.

From MonevatorWhat to do if you left it late to start investing – Monevator

From the archive-ator: Bridging to FIRE with an ISA – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Banks must refund fraud in five days, but losses capped at £85,000 – BBC

OECD lifts UK GDP outlook, but our inflation is still stickiest in G7 – Reuters

Landlords ‘forced to sell up’ over UK’s energy upgrade plans – This Is Money

London closes gap on New York as top global financial centre – Yahoo Finance

The ‘affordable’ shared ownership homes costing residents half their wages – Guardian

Labour reportedly considers watering down non-dom reforms – BBC

Cult card game Cards Against Humanity is suing SpaceX – The Verge

How fast will active ETFs grow? – Morningstar

Products and servicesHow to handle buying a leasehold property – Guardian

Three lesser-known cash back sites to help you save when shopping – Which

Get £100-£2,000 cashback when you open a SIPP with Interactive Investor (T&Cs apply. Capital at risk) – Interactive Investor

John Lewis price match: how it works – Be Clever With Your Cash

How does Nationwide’s new £175 switching bonus compare? – Which

Vanguard plans fresh push into active fixed-income market [Search result] – FT

How to downsize your home successfully – This Is Money

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Is your energy bill right? – Be Clever With Your Cash

Art deco homes for sale, in pictures – Guardian

Comment and opinionLose all your money – Fortunes & Frictions

Inflation-proofing pensions is no mean feat – FT

Was Jack Bogle right about Smart Beta all along? – Morningstar

Short-term investing is a long shot – Behavioural Investment

Retail investors won on fees but they are losing on risk – Bloomberg via W.M.

What it takes to work for longer – Morningstar

Til stress do us part: money advice for couples – The Joint Account

Factchecking the myth of Central Bank omnipotence – Musings on Markets

U.S. markets mini-specialThe U.S. now comprises >60% of global trackers but accounts for only 26% of GDP… – Verdad

…and the ‘relentless’ rise continues – Sherwood

Naughty corner: Active anticsWhy quality stocks perform so well – CAIA

Microstrategy is bad at timing the Bitcoin market – Sherwood

New Softbank books mini-specialThoughts on Gambling Man: The Wild Ride of Masayoshi Son [Search result] – FT

In Money Trap, an ex-Softbank exec revisits the madness – Semafor

Kindle book bargainsWhat They Don’t Teach You About Money by Claer Barrett – £0.99 on Kindle

Quit: The Power of Knowing When to Walk Away by Annie Duke – £0.99 on Kindle

The Good Enough Job by Simon Stolzoff – £0.99 on Kindle

Grit: The Power of Passion and Perseverance by Angela Duckworth – £0.99 on Kindle

Environmental factorsSouthern Water may ship water from Norway due to drought fears – Sky

UK recycling rate falls to just 44%… – Guardian

…but could a new £1bn recycling plant in Flintshire turn things around? – BBC

The fight to save Sri Lanka’s natural flood buffers – BBC

Electric car production falls despite 2035 combustion engine deadline – Sky

An Australian oyster reef is revived – Hakai

Robot overlord roundupIsrael clears chatbot to give buy/sell advice – Bloomberg via Advisor Hub

DuoLingo’s CEO explains how the company harnesses AI – Sherwood

Microsoft relaunches ‘privacy nightmare’ AI screenshot tool – BBC

Enterprise philosophy and the first wave of AI – Stratechery

OpenAI to remove non-profit control, give equity to Sam Altman – Reuters

World’s first AI arts museum will open in Los Angeles in 2025 – SCMP

Off our beatLinkedIn has become an obsession for corporate top brass – Sherwood

Where do music genres come from? – The Honest Broker

Misinformed about misinformation – Tim Harford

The extraordinary artist recluse rediscovered in Swindon – BBC

How Zelda became a first-time protagonist in her own series – Polygon

Never quite enough – Humble Dollar

Do it your way – Morgan Housel

And finally…“It’s not hard. Stop thinking about what your money can buy. Start thinking about what your money can earn. And then think about what the money it earns can earn.”
– J.C. Collins, The Simple Path to Wealth

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: Future proofing poor traders appeared first on Monevator.

Grit: The Power of Passion and Perseverance

The Simple Path to Wealth: Your road map to financial independence and a rich, free life

Rare THE BLACK SWAN The Impact of the Highly Improbable Nassim Nicholas Taleb Fine/F [Hardcover] unknown

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You partied in your 20s and 30s. Or you had kids early and there was no money leftover. Or perhaps you got divorced and your partner took the lot. Bottom line: you’re late to start investing.

Are you doomed to eat cat food in your retirement? To be grinding out another shift in your 80s as the oldest barista on the block?

Probably not – provided you to take sufficient action now to turn things around.

You’ll need to be more focussed than a younger saver though, without their head start.

And maybe you should do a few things differently.

Saving graceImagine you’ve woken up penniless after 20 years in a coma – long of hair, but short of time.

The good news? You avoided selfies, Brexit, Covid, social media, and the last series of Game Of Thrones.

However you also missed out on two decades of compound interest effortlessly growing your wealth.

It’s a financial morality tale is as old as ~~time~~ spreadsheets, handed down from bloggers to Twitter pundits to TikTok influencers.

Person A and Person B both start work in their early 20s. They earn the same salary.

Person A notices there are a lot of old people around and begins to save, before they too get old.

Person B imagines they’ll wear crop tops forever, eats out or orders in every day, spends everything, saves nothing, and reaches their 40s with little to show for it except for a pretty Instagram account.

Run the numbers and Person A may already be headed for a comfortable retirement in their early 60s.

But person B will need to save much more – and/or for much longer – just to catch-up.

What happens when you invest earlyWe’ve marvelled at the mathematical wonder of compound interest on Monevator before:

Consider two investors: Captain Sensible and Captain Blithe.

From the age of 25, Captain Sensible invests £2,000 per year in an ISA for 10 years until he is 35. At 35 he stops and never puts another penny into his fund again.

Captain Sensible then leaves his nest egg untouched to grow until he hits age 65. He earns an average annual return of 8% and when he looks at his account 30 years later, he has £314,870 to play with.

Captain Blithe, meanwhile, spends the lot between the ages of 25 to 35.

Only when he hits 35 does he sober up and start tucking away £2,000 per year in his ISA. He keeps this up for the next 30 years until he reaches 65.

Captain Blithe earns an average annual return of 8%, too. He ends up with £244,691.

To recap:

– Captain Sensible has invested a total of £20,000.

– Captain Blithe has invested a total of £60,000.

Yet Captain Sensible’s pile is worth over 28% more than the late-starting Captain Blithe’s – even though Sensible only invested a third of the amount.

Compound interest takes a while to get interesting.

All things equal, the earlier you start, the bigger your pension snowball will be by the time you’re old enough to start worrying about it.

What if it seems too late to start investing?Of course hearing “you should have started earlier” isn’t any more welcome in personal finance than when you’re facing last dibs at a swingers’ party.

There’s not much you can do about that now. What matters is how to best proceed.

The good news is that beginning in 2012 most people have been auto-enrolled into pensions at work.

But if this came too late for you – or if you didn’t put enough away – then start addressing things today.

Powering-up your pensionTo catch up with swots like me who were aggressively saving by age 23, you have two broad routes:

1: Take the conventional approach on steroids. Live much more frugally, spend a lot less, save much more, invest riskier, work longer – and try to do it all smarter to further ratchet up your returns.
2: Do something different. Start a business, take a more active approach to getting rich, marry strategically, rob a bank, punt on crypto…

Clearly you can also pick-and-mix from these options.

But know that all of them – from making your own lunch to save an extra tenner to gambling your life savings on a start-up – come with potential risks, rewards, and the chance of outright failure.

Risky bets like putting real money into the likes of Bitcoin might well speed up your gains.

But very often taking bigger or less orthodox risks will see you do worse. People try to get rich quick because it promises a shortcut, not because of any stellar track record.

So you must consider the options for yourself and chart your own course.

Just for the record, we strongly advise against robbing a bank!

Start at the end: work out your retirement income needsWe’ve looked at devising your investing plan before, and also how much you can eventually withdraw from a portfolio.

But before you get to that good stuff, you need to understand how far behind you are – and what investing success would look like.

When it comes to retirement, success mostly means meeting your annual spending requirements with a low risk of running out of money.

So you’ll want know how much you’ll need – realistically – to spend in your retirement years.

A good way to get a handle on this number is to track your current spending. Use that as a base to figure out your budget, adjusting as seems appropriate. For instance, fewer work suits in retirement, but more gardening magazines.

For a quick start though, see estimates from the likes of the Pensions and Lifetime Savings Association (PLSA) and Which magazine.

Here are the latest annual retirement income figures from the PLSA:

Source: PLSA

All figures like this are controversial (read a relevant Monevator comment thread for a taste) because our expectations are all different.

So it’s always best to work out your own figures if you can.

How to figure out how much income you need to retire.

But for the purposes of a late-starter getting – well – started, ballpark figures will help you to zero-in on the scale of the challenge.

From there you can estimate the size of retirement pot you’ll need to generate your desired income – in conjunction with your State Pension – and so what shortfall you face, especially as a later starter.

You can always further refine your numbers as you go.

More on how much to put into your pension to achieve your goals

Sensible ways to get your pension plans back on trackSo you’re on the wrong side of those Sensible Sarah versus Spendy Samuel spreadsheets?

Let’s look at your main evasive action options, with links to further reading.

Save moreBy far your best remedial action is to put much more of your salary into your retirement pot. Ideally in the most tax-advantaged way.

Every penny you save rather than spend today is more income for your future self.

Also, by getting used to a leaner household budget now, you may be happier making do with less when you do retire.

Crucially, your savings rate is one lever that’s mostly under your control – unlike say investment returns or how many healthy working years you have left.

Remember there are young FIRE-seekers who are targeting retirement in their 30s or early 40s by saving hard and investing.

To some extent you can flip that script, copying their tactics to catch-up late.

Savings rate to the rescue

Work for longer and retire laterAnother sure winner. Every year you stay in paid employment is (a) an extra year to put savings away, (b) another year for your pension pot to compound, and (c) one less year in retirement that your pension has to pay for.

Working for longer is probably not the most appealing prospect, but maybe you can make lemonade out of lemons and enjoy a late bloom at work? Or pivot to a second career?

Our final years in work are usually extra-valuable because earnings are higher at the end of our careers than at the start. (Though professional footballers and lap-dancers may need to pursue a different tack).

One more year: justified

Laser focus on your pensionNormally we think it’s a good idea to save into both an ISA and a pension, given they are both tax-efficient wrappers.

That’s because money in an ISA is much more accessible – which can be a huge benefit if you need it.

But saving into a pension usually has a numerical edge due to tax-bracket arbitrage, salary sacrifice, and the tax-free lump sum you can withdraw on retirement.

As a late starter, ISA savings may be a luxury you can’t afford. Run the numbers to see if you’re better-off throwing everything you can into your pension in your precious remaining work years.

Maximise your employer’s pension match Your employer is obligated to chip in 3% of your qualifying earnings into your pension under the workplace pension rules. You must contribute 5% of your earnings (though this will cost you less in take home pay terms, after tax relief) for a total minimum contribution of 8%. Some employers are more generous though, and will match further contributions you make up to some limit. This is effectively a hike to your salary, albeit a pay raise that you must put into your pension. Contribution matching is an unbeatably cost-effective way to turbo-charge your savings rate, so you should almost always try to maximise your employer’s contributions. (Ideally via salary sacrifice).

Locking more money away for decades probably won’t come easy if you’ve been a spender all your life.

At least as an oldie you’re closer to the age where you’re allowed to get your hands on the money again…

SIPPs vs ISAs: which is the best pension vehicle?

Increase your salaryI hear you: no shit Sherlock:

“Earn more money so I can save more money. Why didn’t I think of that?”

Understood. But it’s worth a second reminder that how much you can feed into the hopper of your retirement investing engine is what will largely determine what you can spend in retirement.

Maybe you planned to coast as a team leader rather than pushing hard to become a department head?

Or to stay in a steady public sector job, rather than following your former colleagues into the tougher but more lucrative private sector?

Obviously I don’t know your work situation. The permutations are endless.

My point is just that easing up and retiring early isn’t on the horizon for you. So maybe knuckle down and work harder instead?

Think of it as the bill coming due for all that spending you did 20 years ago…

The number one moneymaker for 99% of people

Invest more in risk assetsOkay, we’re heading into more controversial territory. But if you can stomach the extra volatility, then it might be worth running your portfolio a little hotter in the hope of bigger gains.

What would this look like?

For a passive investor it means a larger allocation to equities – such as your global tracker fund – and holding less in defensive assets like bonds, cash, and gold.

For example, instead of the industry standard 60/40 portfolio split between equities and bonds, perhaps you’d go 75/25 instead.

In theory, you can expect (but not be certain) to earn higher returns over the long term with a higher allocation to equities.

The price you’ll pay will be a bumpier ride – and the potential for unlikely but possible lower final returns. (Here’s how that could happen).

Remember: the market doesn’t care about your pension predicament nor your hopes for higher returns.

Markets will certainly crash from time to time – in the worst case right as you retire – so do keep the riskiness of your portfolio under review as you get older and your pot grows.

What you need to know about risk tolerance

Use leverage (but only via a mortgage)This is even riskier again, and definitely not for everyone.

But if you find yourself in your early 40s, say, with inadequate pension savings when your ‘What About My Retirement?’ lightbulb goes off, then gunning for expected equity returns of 6-10% (hopefully) and tax relief in a pension may make more sense than paying off mortgage debt costing you 5%, say.

There’s a panoply of options here, from choosing not to make overpayments on a traditional mortgage to switching to an interest-only option, to remortgaging to extend your mortgage term.

All these paths have downsides. Such risks are what ‘pays’ for the potential upside from getting more money growing in your pension for longer.

I’ve written a lot about these pros and cons before. And like I did then, I’ll stress again that paying down a mortgage ASAP is also a fine strategy – even for late starters. You can always go on a massive savings push once you’ve cleared the mortgage. Even if it’s not the financially optimal path, clearing your debts may be more motivational for you. That matters!

I’d certainly urge you to reject any other kind of debt when borrowing to invest.

Mortgages are low cost, they buy you somewhere to live, and they’re not marked-to-market, so you won’t face a sudden cash call during a stock market rout.

Other kinds of debt are much more expensive and/or risky.

Should you pay off the mortgage or invest?

More radical ways to boost your retirement incomeIs amping up the conventional approach not moving the dial for you?

Have you left it so late – or are your ambitions are so big – that you need more money than 20 years of diligent plodding can possibly deliver?

Let’s run through a few more disruptive alternatives.

Keep working in retirementMaybe you can’t hack the rat race anymore in your late 60s, but you could live with doing a few more years of lower-stress work?

So-called ‘BaristaFIRE’ involves earning a bit through the sweat of your brow or muscles to top-up the income from your retirement portfolio.

Like this you can survive with a smaller retirement portfolio.

It takes a six-figure capital sum to generate £3,000 to £6,000 a year in retirement (a wide band to reflect the vast range of starting points, end points, and all the rest).

So earning say £10,000 a year from part-time work can make up for a lot of missing invested money.

But I probably wouldn’t work at a coffee shop or similar, if I’d been a high-earner in my main career and money was my main BaristaFire motivation.

Most Monevator readers should instead pursue part-time or consulting work in the same vein as their lifelong profession. Doing so will maximise the kerching!-to-effort ratio.

You don’t have to go nuclear on working for a living

Start a side hustleI believe everyone has a passion, hobby, aptitude, spare bedroom, or the free time to make £5,000 to £20,000 a year to supplement their main income – without the risks of quitting work to start a business.

You may disagree, which is fine but is also perhaps why you’re behind on your retirement savings…

The truth is options abound and I can’t list them all here. Be creative, test and iterate, and back yourself.

CNBC’s Make It videos are a great source of inspiration.

The better pushback is that for a high-earner, it’s not worth messing around with side hustles for £10,000 a year when they are earning £100,000+ in their day job.

And I agree. Such people are probably better off getting promotions or doing more overtime.

But for the average earner on £35,000, say, the extra cashflow of £5,000 from a side-project can go straight to the bottom line to massively boost your pension savings.

Risky businessOf course if you want to make really big bucks then starting a proper business is one of the best ways. Perhaps the only way for most for us.

But that doesn’t mean it’s easy – or in fact less than unlikely or near-impossible. (Beware survivorship bias!)

The risks vary. If you’re trying to create a start-up software business, say, or to launch a restaurant, then your chances of success are low.

Data suggests 90% of startups fail.

But if you’re an established architect wanting to set up your own practice doing what you already do and with an existing book of contacts, for example, then there’s surely less risk of outright failure.

Either way, your workload goes through the roof when you run your own business.

By all means be an entrepreneur if it’s your life goal. But I wouldn’t quit work to start a business to try to fix my pension pot.

Seven reasons why you shouldn’t start your own business

Invest actively Some active investors do beat the market. A handful even over the long-term.

Warren Buffett, I’m looking at you.

You’re not Warren Buffett and you haven’t got much chance of finding the next Buffett, either.

But if you can – or if you have edge yourself and so can pick your own stocks to beat the market – then by definition this will increase your long-term returns.

Perhaps there’s a case for investing into a few previously proven but out-of-favour active funds that might recover over the long-term, if you really want to roll the dice. Say with 25% of an otherwise passive equity allocation.

Examples as I write could be investment trusts like Scottish Mortgage, Finsbury Growth & Income, Pershing Square Holdings, and RIT Capital Partners. These funds have all compounded money very well over the long-term but are more or less in a funk right now. And they all sit on big discounts.

To be clear though, there’s zero guarantee that these or any other active funds will beat the market again in the future.

And needless to say you should not take my top-of-head list as any sort of investment advice. Do your own research!

Remember: you’ll probably do worse if you invest actively. You’re unlikely to beat the market and you’ll pay more in fees for trying.

But there’s always a chance… so onto the list it goes.

Consider joining Monevator Moguls if you’re an active investor

Broaden your investing horizonsSome ways of making money sit between investing and running a business.

Moves like investing into a family or friend’s franchise business, running a multi-unit buy-to-let portfolio via a limited company, or reserving property off-plan in the hope of flipping it for a profit later.

These are idiosyncratic investments where the outcome will be about your aptitude – and luck – rather than what the S&P 500 does.

Again, possibilities abound. I’d suggest looking at areas close to your own professional expertise. You might have some kind of edge or insight there.

For example, if you’re a dentist then perhaps you know there’s a need for a new multi-practice building in your local area? You could be part of a consortium that gets it built and occupied.

That sort of thing. Good luck!

There are many ways to be an investor

Back a wildcardThere’s no end of other high risk, high reward ‘opportunities’ out there.

And yes – I’m lifting my fingers off the keyboard to put ‘opportunities’ into air quotes because one person’s reasoned speculation is another person’s reckless gamble. If not a borderline scam.

Into this bucket we might put everything from punting on cryptocurrencies to extreme concentration into just a few company stocks (putting it all into nVidia, say) to investing more than a small percentage of your net worth into a handful of private or crowdfunded start-ups.

I would define this category as anything where if a hundred of us have a stab, 90 of us will lose some or all our money – or at the least lag the market in the case of listed shares – but 5-10% might see huge returns.

So as the man once said: “Do you feel lucky, punk?”

Personally, I would again at most ring-fence a portion of my assets for such antics. Maybe a maximum 10% allocation.

That way if I did pick a winner it would meaningfully move the dial, but if – as is most likely – it goes tits up then I’m not too far further behind on my goals.

If you say “No way, not touching this stuff with a bargepole” then I can only applaud your good sense.

Taking more risk does not guarantee more reward

Beg, borrow, steal… or marryWe all know other ways to get rich that aren’t written about on worthy websites like Monevator.

And as an upstanding citizen I don’t recommend any of them. Besides the moral issues, do you really want to risk your reputation or your liberty for the sake of a slightly comfier retirement?

Perhaps marrying rich is the exception. But I’m the wrong person to ask about marriage, as I see mostly risks…

Maybe read some Jane Austen!

If you want to make easy money, do something hard

Better late than neverFor some of our regular readers, this post will have seemed like one long ‘obviously’.

Such people began saving and investing when they were very young maybe, or they’re on the other side of work already and enjoying the fruits of their labours.

Good for them!

However I do regularly hear from people with proper jobs and responsibilities who’ve no idea where they stand or what to do about their pensions – and they’re sometimes only ten to 20 years from retirement.

If that’s you, then don’t panic. Follow the links in this article, learn more, and begin to create your plan.

For most non-investment crazed would-be retirees, I’d suggest stick mostly (or entirely) to the sober tactics, with maybe an added side hustle.

Beyond that you could perhaps make a modest 5-10% allocation to a few out-of-favour trusts or to very carefully chosen long-shot bets in the hope – but not expectation – of faster gains.

But you must figure out what works best for you.

Who knows? You might even have fun doing so.

I’m sure I’ve missed out a few possibilities above. Let me know in the comments below – and do tell us your story if you closed the gap in your retirement savings later in life yourself!

The post What to do if you left it late to start investing appeared first on Monevator.

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What caught my eye this week.

Some good news for investment trust fans this week, as the Financial Times reports:

The UK government has exempted investment trusts from onerous cost disclosures in a move analysts believe will boost the £260bn industry and could support trusts’ share prices.

In a joint statement this week, the government and Financial Conduct Authority said investment trusts will be excluded from European regulation that affects how their charges are reported.

The rules on packaged retail and insurance-based investment products, or Priips, meant that investment trusts appeared more expensive than other types of financial product.

This is because institutions such as wealth managers and private banks would have to include the cost of investment trusts in their “ongoing charges figure” for clients, while shares and other types of investments were excluded from the fee.

Investment trusts were brought into the Priips regulation a decade ago. But this has deterred institutions from buying them due to having to report artificially higher costs, analysts said.

Will this tackle the wide discounts that have plagued trusts for the last couple of years?

It can only help.

But trusts have suffered from a pile-up of other problems too – not least the bear market for British shares since late 2021, and more widely all things not-Big-Tech.

Still, the industry seems ecstatic.

One manager, William MacLeod, compared the rule change to the Big Bang of the 1980s. MacLeod is quoted in This Is Money as saying:

“What’s happened today is a lot less dramatic than the big bang in the 80s, but for those of us in the sector and all investment company investors, it is no less seismic.

“It is momentous breakthrough that is long overdue.

he campaign group – helped immensely by the support and dedication of Baronesses Bowles and Altmann – has worked tirelessly for these changes for a number of years now and today is a day of both relief and celebration.

“Righting this wrong is profound for the UK market, the sector, and investors of all sizes.”

There’s plenty more jubilation where that came from, and elsewhere:

Christian Pittard, head of closed-end funds at abrdn, said:

“The new Government has made boosting economic growth – by channelling capital into areas like renewable energy and infrastructure– its raison d’etre.

“These funds already invest billions into these areas – delivering crucial economic growth projects.

“However, cost disclosure rules, which have amounted to a distortive ‘double counting’ of costs, have negatively impacted investor sentiment, therefore choking flows into investment trusts. They have been a key cause of these three lost years of infrastructure investment.”

Made in the UKMost Monevator readers are (rightly) passive investors, so you may meet this excitement with a shrug.

But even if it doesn’t affect your investing directly, trusts are important for the British stock market – with their £260bn in assets representing 30% of the FTSE 250 index – and arguably for the UK economy, by funnelling capital towards infrastructure, renewables, property, and other investment.

Trusts still have 99 problems – everything from the shift to indexing and consolidation among wealth managers to recent poor returns – to overcome.

But at least cost disclosures now ain’t one.

As I wrote in Moguls a while back, there’s seemingly value on offer with many investment trusts.

Some have since recovered, but many extra-wide discounts persist. Perhaps this move on disclosures will be a catalyst to reverse things?

Read the press release from the FCA (if you’re having trouble sleeping)

How to back Monevator versus the robotsTalking of hidden value, it’s been a while since I did a housekeeping note on our membership service.

Monevator member numbers are still inching higher.

But we do seem to have hit a newsletter industry-wide plateau that predicts a maximum percentage of free email subscribers will pay the minimum £3 a month we ask for.

Nevertheless, we’re still thrilled so many of you have signed up!

Which is why I want to remind members again that:

If you’re having any kind of log-in problems as a member, it will almost certainly be a cookies issue. Please clear your cookies (at least the Monevator ones) and make sure you allow third-party cookies. Also turn off ad-blocking for the Monevator website. Logged in members see an ad-free Monevator anyway! The cookies are needed for the software to show you member content. If you are fanatically opposed to all cookies, you can still read our member content via the emails…
…on which note if you’re not getting member emails despite being subscribed to free Monevator emails – and you’d like be emailed both – then please let me know in the comments below or use the contact form to tell me. There’s a couple of dozen members not getting member emails, and I can change that if I know who you are and what you want.

Rise of the robotsAgain, please do consider signing up to at least our Mavens member tier if you’ve not already done so.

There’s more than a year’s worth of Mavens and Mogul articles ready for you to tuck into.

Meanwhile, Google is now inserting huge AI summaries at the top of all its search results in the UK.

This means Google gets to sell advertising to web searchers without those searchers ever seeing the work of the people who actually put the knowledge online.

It’s early days, but I could see us eventually paywalling the whole of Monevator.

Obviously as someone who has shepherded two to three free articles a week on to this website for the past 17 years, that’s the last thing I want to do.

Our whole modest mission was to do our bit for everyone’s financial savvy, as best we could.

But I’ll be damned if I’m going to slave to keep training a robot to parrot my stuff while Monevator visitors dwindle to zero.

It may ultimately be futile to resist the AI-era, but if it comes to it we’ll try writing only for the real flesh-and-blood people who value us most, not for a mega-corp’s bottom line.

Sorry for the downbeat note, which is hopefully over-pessimistic.

Have a great weekend!

From MonevatorNo Cat Food retirement portfolio update 2024 – Monevator [Members]

Passing investing, edge, and market efficiency – Monevator

From the archive-ator: How to spot a bull market top – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

US Federal Reserve goes big with a 0.5% interest rate cut… – CNBC

…but Bank of England keeps UK rates on hold at 5%… – Guardian

…with core and services inflation in the UK still too hot – Portfolio Advisor

Nearly 2.1m British savers set to pay tax on their cash interest – This Is Money

British government debt hits 100% of GDP – Reuters

Consumer confidence plummets ahead of ‘painful’ Autumn Budget – This Is Money

Stablecoins are crypto’s breakout profit machine – Sherwood

‘Buy the dip’ has a patchy record [Note: ‘buy the dip hit ratio’ axis is LHS] – Goldman Sachs

Products and servicesFour questions to ask a potential financial advisor – Which

Fixed mortgage rates fall again, but at a more subdued pace – Mortgage Advisor

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

The 15 towns set to get a new banking hub – This Is Money

Supermarket Christmas savings schemes explained – Be Clever With Your Cash

Get £100-£2,000 cashback when you open a SIPP with Interactive Investor (T&Cs apply. Capital at risk) – Interactive Investor

How to get 10% cashback from UK attractions with American Express – Which

Homes for sale with first-time buyer incentives, in pictures – Guardian

Comment and opinionAn app for that? No thanks Vanguard! – Simple Living in Somerset

Invest like the worst: wealth-destroying concentration – Acadian

The important parts of investing you can’t quantify – Morningstar

Why Britain has stagnated [Long report] – Sam Bowman et al. at Foundations

Are demographics destiny for the stock market? – Of Dollars and Data

Only investing at the peaks: animated edition [with video] – A.W.O.C.S.

Choose boring over exciting – The Financial Bodyguard

A deep dive into the Renter’s Rights bill [Podcast] – The Property Podcast

Five strategies for reducing an inheritance tax bill – The Orchard Practice

Are passive investors affecting the stock market? [Podcast] – Rational Reminder

Exploring the ‘hidden’ risks of lifestyle pension funds – This Is Money

Does the so-called behaviour gap really exist? [Research] – SSRN

Naughty corner: Active anticsGrowth isn’t enough when it comes to a good stock pick – Humble Dollar

Nick Sleep’s Nomad Partnership letters [Podcast] – Founders

Startup mortality rates and venture capital investing – AVC

Veteran value investor Bill Nygren [Podcast] – Behind the Balance Sheet

A profile of AQR’s Cliff Asness – Institutional Investor

Kindle book bargainsWhat They Don’t Teach You About Money by Claer Barrett – £0.99 on Kindle

Quit: The Power of Knowing When to Walk Away by Annie Duke – £0.99 on Kindle

The Good Enough Job by Simon Stolzoff – £0.99 on Kindle

Grit: The Power of Passion and Perseverance by Angela Duckworth – £0.99 on Kindle

Environmental factorsIs it time to invest in the UK’s green transition again? [Search result] – FT

It’s getting wet out there – Klement on Investing

ESG is dead. Long live ESG – FT

Only 2% of $3 trillion in green bonds drives real climate action – Bloomberg

Fossil fuels mini-specialFossil fuel rollercoaster – Cold Eye Earth

The sort-of environmental case for US fracking – Slow Boring

Robot overlord roundupWhy Microsoft’s co-pilot AI falsely accused court reporter of the crimes he covered – The Conversation

Engels, agriculture, and AI – Fork Lightning

Off our beatYoung women are starting to leave men behind [Search result] – FT

Statistics: may contain lies [Podcast] – Decision Nerds

Amazon orders its 350,000 employees back to the office, five days a week… – Sherwood

…which makes it a ‘dinosaur’, says UK management expert – Guardian

Are we too impatient to be intelligent? – Behavioural Scientist [h/t Abnormal Returns]

How to avoid ‘sanewashing’ politicians – Poynter

Avoiding Alzheimer’s – Humble Dollar One and Two

Moments that change your life – We’re Gonna Get Those Bastards

Take something away – Collaborative Fund

And finally…“Don’t tell me what you think, tell me what you have in your portfolio.”
– Nassim Nicholas Taleb, Skin in the Game

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: Trust cost rules change, and a plug for us appeared first on Monevator.

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A few years ago I wrote about market efficiency and investing edge – and about how you don’t have it.

But let’s dig deeper into why this is true.

You often hear from retail punters and professional investors alike that passive (or index) investing makes markets less efficient.

Their argument is that this inefficiency is what justifies active management.

Well, they’re wrong – but not in the way you might think. The reality is more nuanced.

Let’s do a little maths to explain how passive investing actually makes life harder for active managers, not easier.

Model market: Alice, Bob, and CliftonImagine a market with two stocks, XLT and YPR, and three investors: Alice, Bob, and Clifton.

The total market capitalisation is $1,000.

Between them, Alice, Bob, and Clifton hold portfolios that add up to that $1,000.

There are no other companies and no other investors – we’re keeping things simple – but the ways in which this model is ‘wrong’ are not really material to the point today.

Alice and Bob each hold $300, while Clifton has $400.

XLT and YPR each have 100 shares outstanding, with XLT priced at $6 per share and YPR at $4.

(Yes, this is starting to sound like GCSE maths, but stay with me.)

In other words:

Now, Alice, Bob, and Clifton all hold market weight portfolios. This makes them passive investors by default.

Ideologically though, Clifton is your classic index fund investor – passive through and through.

Alice and Bob, on the other hand, are active traders. They are willing to take a punt if they sense an edge.

So this market is 40% passive (Clifton) and 60% active (Alice and Bob).

Dumb passive money?One common misconception is that passive investors blindly ‘buy expensive stocks’ when prices rise.

Let’s expose this myth with an example.

XLT releases stellar results before the market open, and Alice decides she’s bullish. She calls Bob to buy some of his XLT stock, knowing that Clifton – the passive guy – basically does not trade. (Clifton doesn’t even bother going to the office till after lunch!)

Here’s how their conversation goes:

Ring, ring…

Alice: “Hey Bob, I’m in the market for XLT. What are you offering?”
Bob: “Hmm, I saw their results. Strong stuff. I’d have to start with an 8…”
Alice: “I was thinking more like $7.95.”
Bob: “LOL, nope. I’d buy from you at that price. $8.05 – final offer.”
Alice: “I’ll leave my bid on Quotron. Call me if you change your mind.”
Bob: “Catch you later.”

When Clifton finally gets into the office – sometime after his tennis match and a long lunch at the club – he logs onto his Quotron and sees that XLT has jumped 33% to $8.00.

A news headline reports: XLT Surges on Blowout Results – Light Volume.

Pleased with his morning’s ‘work’, Clifton updates his portfolio to reflect the new prices.

So note that nobody did any trading at all here. Alice and Bob just sort of agreed that $8 was a reasonable price for XLT, and so, by proxy, did Clifton.

This is how most price moves in the stock market happen. You don’t need trading to move prices.

The alpha chaseFast-forward a few weeks, and Alice gets some inside info on XLT – let’s say from a friendly round of golf with its CEO. The company is about to secure a major government contract.

Alice tries again to buy from Bob, who smells something fishy. He agrees to sell her some XLT shares – but at an even higher price, $10 per share.

Since this is a closed system, Alice needs to sell YPR to raise the cash to buy XLT. And guess who she has to sell it to? Bob. They agree to swap their stakes.

Alice is now all-in on XLT, while Bob holds more YPR. (For convenience we’re ignoring that Bob would probably demand a discount on the YPR he’s buying, as well as a premium on the XLT he’s selling – Alice’s ‘market impact’).

Here’s a status check:

And here’s the kicker: for Alice to overweight XLT, Bob must underweight it. Clifton, as the passive investor, doesn’t change his positions at all.

This is a zero-sum game. Every dollar of ‘active share’ that Alice holds has to be offset by Bob’s:

None of this has changed their relative portfolio values – but it will.

When XLT surges 50% on news of the contract, Alice makes a $60 profit.

But Bob? His loss is the exact mirror of Alice’s gain:

Since anyone can just buy the market, what matters for active investors is outperformance.

Alice’s outperformance (aka alpha or profit) of $60 is exactly offset by Bob’s underperformance of $60.

Bob still made money. Just less money than he would if he’d stayed market weight.

I know I keep making the same point, but it’s important: Alice can only make her $60 alpha at the expense of Bob.

The winner needs the loser.1

Increasing passive shareNow let’s imagine that Clifton, our passive investor, controls more of the market than before.

Let’s say the market has shifted so Clifton now runs $600 of the total $1,000.

Meanwhile Bob only has $100 to manage while Alice’s capital stays the same at $300.

The passive share of the market has grown from 40% to 60%. Let’s re-run that first conversation between Alice and Bob that bumped up the price of XLT to $8, to see where it gets us.

Ring, ring…

So far, nothing changes. However when Alice returns from golf with XLT’s CEO and tries to buy more shares, things get trickier.

Bob doesn’t have enough shares to sell her all that she wants. Now Bob only has ten shares of XLT, priced at $10 each, for a total of $100.

Alice has $120 worth of YPR to sell, but she can’t buy as much XLT as she would have liked:

As passive investors like Clifton take up more market share, Alice’s strategy runs into a brick wall. She can’t go all-in on her insider tip because there aren’t enough active participants to trade with.

And that’s a major problem for her alpha.

In fact let’s check what it’s done to everyone’s alpha compared to our previous example of 40% passive market share:

It’s got worse for everyone except Clifton!

Alice’s alpha has reduced.
Bob’s negative alpha, in proportion to his capital, is now even worse.
Clifton doesn’t care either way.

The passive doom loopLet’s imagine that Alice keeps getting lucky – or inside information – and Bob consistently underperforms.

Eventually, some of Bob’s investors will redeem their money. Diehard believers in the quest for outperformance, they would like to hand it to Alice – but they can’t.

Why not? Because Alice’s strategy is capacity-constrained.

Alice can only make money if she can trade against someone else, like Bob. But if Bob’s investors leave him and put their money into Alice’s fund, she’ll have fewer people to trade with – meaning she can’t deploy the capital effectively.

Bob’s redemptions have to flow to Clifton.

And so passive money grows, and active managers like Alice and Bob have ever fewer opportunities to beat the market. As passive share increases, active management becomes harder and harder.

It does not matter how good Alice’s inside information is. Her ability to monetise her edge is limited by the supply of suckers she can trade against.

This is where the so-called doom loop comes in.

As passive investing grows, active investing gets tougher, which drives more money to passive funds, which makes life even harder for active managers… and so on, in a vicious cycle.

Who’s Alice?So, how do you spot a bad hedge fund?

Easy. They’re the ones willing to take your money.

The true hedge fund giants – names like RenTech, Citadel, and Millennium – won’t even let you invest.

Why? Because their alpha is capacity constrained.

These guys often can’t even compound their own money.

If you’re an investor with RenTech – which means you’d have to work there – it cuts you a cheque for the profits every quarter. You don’t get to leave the money in there compounding for the long-term.

Such funds have already soaked up all the market inefficiencies their strategy has unearthed.

They can’t let just anyone in – in fact they need suckers on the other side of their trades, so why not you.

Don’t be BobFinally – who is Bob?

Bob is anyone willing to underperform for long periods without having the money taken away.

For years, this was the underperforming active mutual fund manager.

Now? Increasingly, it’s retail investors.

Why do you think hedge funds, prop shops, and market makers will pay brokers to trade against their retail order flow?

Cough cough – I mean, provide ‘price improvement’ services!

Don’t be Bob.

Follow Finumus on Twitter and read his other articles for Monevator.

Incidentally I hope our model market makes it obvious, if it wasn’t already, that Alice’s insider trading is not a ‘victimless crime’. She is taking money directly from Bob.

The post Passive investing, edge, and market efficiency: winners need losers appeared first on Monevator.

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And we’re back, with the first check-in for our newly-minted model retirement portfolio.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post Decumulation: No Cat Food retirement portfolio update 2024 [Members] appeared first on Monevator.

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What caught my eye this week.

Recent weeks have seen us debate whether you should sell ahead of – what’s still only rumoured – capital gains tax rises.

But as St. Charlie liked to remind us: invert, always invert!

To wit: tax-motivated sellers might create opportunities for bargain-hunting buyers.

Of course every tax-fearing seller must already be finding a buyer for their shares, investment trusts, or buy-to-let property.

Because no buyer, no sale.

But that eternal truth doesn’t mean that sudden – and hurried – selling can’t overwhelm natural demand, pushing prices below where they’d be if Rachel Reeves had instead decided to take the rest of 2024 off.

Bricking itSo are we seeing any signs of frantic or panic selling so far?

Maybe the very faintest signs – especially if you want to see it, I suppose.

Property is where there’s the strongest signal of tax-motivated selling going on.

Just this week Rightmove reported a surge in larger homes for sale that’s supposedly driven by CGT fears.

As reported by The Guardian:

Rightmove said various factors could be causing the increase in owners of larger homes wanting to sell. One was falling mortgage rates following the Bank of England’s 1 August interest rate cut, and the expectation of more to come.

“Another factor is increasing speculation around a CGT rise,” the website said. “In addition to landlords, second homeowners of larger homes, in particular, could be hit by any increase to CGT, which may be leading some to cash out now.”

Last week I linked to reports that some landlords in London are selling up for the same reasons.

Buy-to-let hasn’t been attractive in London for years. It’s easy to imagine the prospect of a CGT hike as the final straw to prompt some sales.

After all, you can’t defuse capital gains built up on a two-bedroom flat in Clapham piecemeal like you can with shares. Tenants tend to get cross if you try to partition and flog off their second bedroom.

Final straw menVeteran landlords in the South East could well be sitting on hundreds of thousands of pounds worth of gains per BTL.

And I imagine some framing their choice as sell now and buy an annuity (or similar) and escape a 40% hit – or else hold the properties ‘forever’ as a pension.

Because people really really hate paying capital gains tax.

Nevertheless property is property – big, lumpy, illiquid. It can be quicker to sell the idea of university to your school-hating 13-year old than to get a terraced house off your hands and the money in the bank.

I’ve read articles suggesting workarounds, enabling speedy sales agreed ahead of the Budget to complete afterwards. But I don’t know whether these strategies are credible – or even strictly legal.

What I am happy stating though is that if I was a first-time buyer (or even a still-keen landlord) looking to buy, this would all be music to my ears.

There must be some decent deals out there for those who can move quickly.

Au revoir, mon chériHow about shares? Are we seeing any downward pressure that we can pin on Budget Day worries?

Well…maybe.

Broker Winterflood reported this week that already-wide discounts on investment trusts have gotten a bit wider. Only by 20 basis points to 14.2% as of Thursday.

Which is vaguely… suggestive, I suppose.

Sources in the CityWire article citing this discount widening mooted a ‘buyer’s strike’ was to blame. Budget Day-minded, yes, but more ‘wait and see’ than ‘get me out of here’.

Also markets have been more choppy recently. So it might be fanciful to see CGT motivations at work.

On the other hand, a bit like BTLs, investment trusts are quintessentially held by greybeards who tended to get into them back before passive investing became popular. Folks like HariSeldon from our recent FIRE-side chat.

And the richer ones may well have sizeable holdings outside of tax shelters. Especially if they didn’t read Monevator, and so didn’t do all they could to defuse their gains and shelter their assets over the years.

Might they be selling at the margin?

I guess. Though they’d need to be pretty long-term owners to have big capital gains, given most trusts have been through the ringer for the past couple of years.

And surely long-term owners are more likely to stay that way? They’ve sat through plenty of scares before.

Baby stepsAs for small caps, I think I’ve noticed odd moves downwards in some small caps I follow.

But I could be fooling myself. These little shares bounce around all the time, as their market is so thin.

True, there has been weakness in the AIM 100 index, coinciding with the CGT drumbeat getting louder:

Source: Hargreaves Lansdown

Which is again… a bit suggestive. The FTSE 100 and the US markets are higher over the same timeframe.

But the AIM index does include plenty of companies that the Budget might also make ineligible for business relief – useful for inheritance tax planning – if other rumours turn out to be true.

Also the (non-AIM) FTSE Small Cap index has been more resilient. Which doesn’t suggest private investors are rushing for the exit.

A big leapWhat would it look like if UK private investors were dumping stocks for CGT-mitigating reasons, rather than because of the underlying fundamentals?

Well, I’d expect to see steady selling ahead of Budget Day on 30 October.

That would drive some underperformance by UK equities, mostly at the smaller end of the market.

Then after the budget we could expect a bounce, irrespective of if or how CGT levels are changed. (Because it will probably be too late to sell by then to avoid any announced hike.)

And markets being markets, presumably that bounce will be somewhat front run…

Okay, this is getting speculative!

As a naughty active investor, I have the dream of mis-pricing due to sellers wanting rid for their own reasons filed next to childhood memories of sloppy ice-creams eaten on sunny beaches.

Heaven!

At least in theory – before you learn about heart disease, diabetes, skin cancer, and how hard it is to beat the market.

It’s not something the average Monevator reader needs to ponder, anyway.

Unless just maybe you’ve inherited a few hundred thousand pounds, and you’re in the market for your first two-bedroom ex-BTL flat?

In which case, good luck and don’t make an offer until you see the whites of their eyes!

Have a great weekend.

p.s. Nearly a fifth of you said you were selling for CGT-related reasons in our recent poll, so we know it’s happening. But has anyone spotted any buying opportunities as a result? Whether shares, bonds, or bricks and mortar – please let us know in the comments below.

From MonevatorOur updated guide to help you find the best broker – Monevator

Pay off the mortgage or invest (with calculator) – Monevator

From the archive-ator: They don’t tax free time – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

HMRC drops ban on fractional shares in an ISA – Which

First-time buyers have two months left to save £15,000 in stamp duty – Your Money

Tesco loses Supreme Court ‘fire and rehire’ case – Sky

Vodafone-Three merger: tens of millions could face higher bills, says UK watchdog – Guardian

Second rate cut by ECB as euro area growth falters – Sky

Barclays report claims 13m UK adults sitting on £430bn of investable cash – Money Marketing

Families with twins face an additional £20,000 hit – Twins Trust

China mulls raising retirement age as workforce ages – Semafor

Long NHS delays in England leading to thousands of deaths, inquiry finds – Guardian

Products and servicesNationwide, Natwest, and TSB slash mortgage rates for smaller deposits – This Is Money

Pension Wise launches digital guidance service – Which

Dangers for FOMO mortgage hunters as rates fall – BBC

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Vanguard launches long-awaited app for UK investors – Your Money

Insurance rates still too high for pay-monthly customers – Which

Get £100-£2,000 cashback when you open a SIPP with Interactive Investor (T&Cs apply. Capital at risk) – Interactive Investor

Is investing in rum a sober choice? [Search result] – FT

Vinted will alert you if you breach HMRC’s new selling rules – Skint Dad

Nationwide and Santander change-up their current account fees – Which

Homes for sale with stylish extensions, in pictures – Guardian

Comment and opinionInvestors must survive – Behavioural Investment

Britain’s new Sovereign Wealth Fund: what can it learn from others? – FT

If the prices are wrong you should be rich – A Wealth of Common Sense

Give bonds some credit – Humble Dollar

Spend money according to your plans – Darius Foroux

Can your children really help you cut your tax bill? – This Is Money

Top 10 savings hacks – Be Clever With Your Cash

Mark Dampier’s side of the Woodford/Hargreaves story – Money Marketing

International diversification…diversifies! – Verdad

Compound interest is apolitical – Tony Isola

Trusting the wrong people – Abnormal Returns

The minimum amount of money where work becomes optional – Financial Samurai

The ETF market: in zine form – Dave Nadig

Cliff Asness: the less-efficient market hypothesis [Research] – SSRN

Naughty corner: Active anticsAlphabet has never been this (relatively) cheap versus the S&P 500 – Sherwood

An angel investor’s ‘resignation letter’ – Reaction Wheel

China’s mysterious deflation – Scott Sumner

Price predictions mini-specialShould you ignore past stock market returns? – Morningstar

The case for trend following – Optimal Momentum

Kindle book bargainsQuit: The Power of Knowing When to Walk Away by Annie Duke – £0.99 on Kindle

The Good Enough Job by Simon Stolzoff – £0.99 on Kindle

Grit: The Power of Passion and Perseverance by Angela Duckworth – £0.99 on Kindle

The Missing Cryptoqueen by Jamie Bartlett – £0.99 on Kindle

Environmental factorsLow-carbon homes can save £1,341 a year in bills, study shows – Guardian

What China’s EV revolution looks like on the ground… – Big Technology

…and what it might mean for the UK car market – This Is Money

Solar panel installation slump in UK blamed on the cold summer – This Is Money

UK watchdog gives funds anti-greenwashing rule extension – Reuters

Robot overlord roundupAI and the technological Richter scale – Zvi Mowshowitz

OpenAI reportedly in talks to raise at $150bn valuation – TechCrunch

How to navigate a tech world dominated by AI – Uncharted Territories

Here’s what AI does next – The Honest Broker

The end of work – Daniel Miessler [h/t Abnormal Returns]

Right-wing influencer shills mini-specialStop letting right-wing influencers cosplay as ‘independent media’ – Taylor Lorenz

Mysterious influencer network pushed sexual smears of Kamala Harris – Semafor

Off our beatHow a mind-boggling device changed economic history [Search result] – FT

Inside Thailand’s $2 billion scam industry – Newsweek

Boomer Apple – Stratechery

The mysterious, meteoric rise of Shein – The Atlantic via MSN

The great global divergence of values – Garden of Forking Paths

Six ideas to keep Poland’s economic miracle going – Noahpinion

How long til we’re all on Ozempic? – Asterix

It’s another British multimillionaire’s solemn farewell tour – Marina Hyde

And finally…“Everything, in retrospect, is obvious. But if everything were obvious, authors of histories of financial folly would be rich.”
– Michael Lewis, Panic!: The Story of Modern Financial Insanity

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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When interest rates are high or rising, you might wonder: “Should I pay off my mortgage or invest? Which strategy will put me financially ahead in the long run?”

Very low interest rates following the global financial crisis made larger mortgages much more affordable.

At the same time, strong returns from investing trounced the relatively low savings you made from paying down your mortgage instead.

With hindsight then, investing in the markets during the very low interest rate era was much more profitable compared to paying off your mortgage early.

However this comfy state of affairs was upended when rates rose fast in 2022.

Anyone who hadn’t properly stress-tested whether they could handle higher interest rates had a rude awakening when, say, their 2% five-year fixed rate deal expired and they had to remortgage at 6% or more.

It was a reminder that paying off a mortgage will always be worth considering. Debt can be deadly. Owning your home outright can be financially liberating, whereas running a mortgage comes with risks.

Very few people who pay off their mortgage regret it.

But this is Monevator. We like to kick things around – and sometimes to do things differently.

Where do we stand today? I’ve updated this article and our spreadsheet to reflect higher interest rates since it was last updated in January 2022. But remember mortgages are a long-term commitment – you’ll probably see multiple cycles of rate rises and cuts over the full term. Assess the risks accordingly! Only you can decide what’s right for your situation.

Pay off the mortgage or invest?Borrowing to invest is typically a bad idea.

Returns from investing are uncertain and volatile.
Debt – and the cost of debt – is a certain liability.

However mortgage debt is relatively cheap and manageable. I believe it’s the only way most people should consider borrowing to invest.

A mortgage is money rented from a bank. Typically we use that money to buy a property. But if we delay repaying the mortgage to build an investment portfolio, we’re effectively using the mortgage to invest.

In this scenario our home stays mortgaged for longer, like an investment property.

It’s almost as if you’re a landlord – someone who borrows money from a bank on your behalf – except you’re your own tenant.

If you trust yourself to meet your mortgage payments whilst also saving into an investment portfolio for the next 25 years, then with average investing luck you’ll probably end up better off investing versus repaying the mortgage.

However there’s a lot to think about when deciding whether to pay off the mortgage or invest. The decision is as much about risk – and emotions – as any reward.

Come with us via the scenic route! We’ll tour the landscape, and wind up at a calculator that enables you to further explore the options.

First things first: Non-mortgage debt must goHave you got credit card or store card debt or any personal loans? Get rid of that debt first.

Student loans may be an exception, as MoneySavingExpert explains. Think carefully before repaying any student loans.

The interest rates on credit cards and loans are much higher than on a mortgage. Credit cards typically charge 25% or more.

That rate is almost triple the average returns you could expect from the stock market.

The risk/reward equation of trying to grow your money faster than you’re losing out due to expensive debt is terrible.

Running a credit card debt at 25% while investing in shares is like rowing across the channel on a raft made from chicken wire.

At 7% or even 8% – a very cheap personal loan – the maths might work. (Though I don’t think it’d be worth the risk).

At 25% it definitely doesn’t.

If your already-optimistic 10% stock market returns are sapped by taxes and costs, then even loan rates of 7% aren’t worth thinking about.

And many people would expect much lower returns from a diversified investment portfolio – perhaps as little as 4% to 6% from today’s levels, though investment giant Vanguard for one is a bit more optimistic.

In short – unless you’re Warren Buffett – only mortgage debt is cheap enough, given the risks, costs and taxes, and likely returns from investing.

What about margin? Some ~~gung-ho~~ sophisticated investors use margin debt from a broker to fund property. The risks are magnified because unlike with a mortgage, margin debt is marked-to-market. This means that if stocks fall, you must stump up more assets or else repay the debt. The strategy can work, but it’s well beyond the scope of this article. I suggest 99.9% of readers push away thoughts of margin debt. With a 20-foot barge pole.

Pay off your mortgage: a good, safe optionIf you can pay off your mortgage early, you’ll be in a great place financially.

There is no law of smart investing that says you should do anything other than pay off your mortgage first.

Many people would kill to be mortgage-free.

Crucial point alert! Repaying a mortgage is a form of saving. If you pay £10,000 off your mortgage with a cash windfall, it has the same impact on your net worth as putting it into a savings account. When you pay down the debt, your (negative) mortgage balance is made £10,000 less negative. When you save the money, your (positive) cash balance is £10,000 higher. Your net worth – assets minus liabilities – is the same in both cases.

Repaying your mortgage is usually a better option than saving in cash.

The average cash savings account pays 3% as I write – and you can do better if you shop around.

Most new mortgages charge a lot more. So unless you’re still on some dreamy super-low fixed mortgage rate from the old days, you’ll probably earn a higher return paying off your mortgage and avoiding interest compared to earning interest on cash.

Taxing mattersIndeed depending on your personal tax situation and where you hold your savings, the benefits of paying down your mortgage can be even bigger.

Once your personal savings allowance is exceeded, interest income on cash outside of an ISA is taxed.

In contrast, paying down your mortgage delivers a tax-free return via those future interest payments that you’ll never need to pay.

Note that you should still have an emergency fund before investing or making over-payments on your mortgage. Just in case you need cash in a hurry.

If you for some reason you want to hold even more cash at the same time as a mortgage – say if your income fluctuates a lot – then consider an offset mortgage.

Pay off your mortgage to get out of debt earlyPaying off a mortgage early will slash the years you’ll live in debt.

Imagine you borrow £250,000 at 4% over 25 years.

According to the Monevator mortgage calculator, you’d pay £1,320 a month, give or take a Mars Bar.
Our calculator also handles over-payments. Let’s say you can bring your monthly payment up to £1,600 by overpaying £280 a month.
You’ll save £42,151 and cut nearly seven years off the life of your mortgage.

The red line in the graph below shows how overpaying accelerates your mortgage repayment schedule:

I’m ignoring a few things here, especially inflation and the time value of money.

If you go shopping with £280 today it’ll buy much more than in 25 years time.

But that would be true too if you kept that £280 in cash or invested it in a fund. So we can ignore inflation when comparing these options.

More reasons to murder your mortgagePaying off a mortgage early is a great aspiration, and for good reason.

Being debt-free is mentally liberating. Pay off your mortgage early and you experience that benefit sooner and enjoy it for longer.

Other pros of paying off your mortgage include:

It’s a guaranteed return. You’ll earn whatever interest you save, unlike the variable and unknown returns from the stock market.
It reduces risk. The smaller your mortgage, the less chance a financial upset like unemployment, illness, or divorce sending your finances spiralling out of control.
It’s simple. There’s no fussing with funds or shares or anything else. Just throw any spare money at your mortgage!
You can remortgage to a cheaper rate when you’ve built up more equity in your home. That will save you even more money.
You may be happier investing in volatile shares when you have no mortgage. You should have more spare cash to do so, too.
Selling your home is tax-free. If you sell up and go traveling, say, you’re not taxed on any gains you make on realising your own home investment. If you’d instead invested spare cash outside of an ISA or a SIPP, you might. True, the ISA and pension contribution limits are very generous – £80,000 in total in a year – so that usually won’t matter. But it may be best to put big windfalls like bonuses or inheritances into paying off your mortgage, rather than investing outside tax wrappers.

You can be too clever in life. Paying off the mortgage is hard to beat. I’ve never met anyone – aside from online commentators – who regretted it.

Now, personally I run an interest-only mortgage in pursuit of higher returns. While this got hairy in recent years when rates rose, I don’t regret it.

But I would never chastise anyone who chose to clear their debts ASAP instead.

For the average wage slave, being mortgage-free is one step to nirvana.

Invest instead: risks and rewardsOkay, let’s look at the case for investing.

There’s only one reason to invest instead of paying down your mortgage.

You hope investing will leave you richer!

The long-term average return from developed world stock markets depends on how you measure it. But it’s in the ballpark of 7-10% a year.

Real or nominal returns? The 7-10% returns I quoted are in nominal terms – with no adjustment for inflation. Often we prefer to talk about real (that is, inflation-adjusted) returns with investing. But it makes more sense to use nominal figures when comparing whether to pay off your mortgage or invest, because your mortgage calculations will also use nominal figures. Indeed you might even consider your mortgage a hedge against inflation, since inflation erodes the real value of your debt over time.

Returns of 7-10% returns from investing (if achieved) compare well even to mortgage rates of 4-6%.

The catch is you can’t get a mortgage to buy shares.

However by running a 4% mortgage, say, and investing spare cash into the market instead of paying off your mortgage, you might earn 7-10% over the long-term from your portfolio, and pocket the difference.

Is it worth it?At the very least your portfolio needs to deliver higher returns1 than your mortgage rate for investing to be profitable.

But considering the risks of investing, you’ll want to do much better than just scraping ahead for the uncertainty to be worth it.

Aiming for a high return means investing in riskier assets – specifically shares.

And shares are volatile. Your portfolio’s value will fluctuate. You could suffer a deep bear market where you’re down 50%.

Over a typical 25-year mortgage term, you’ll likely see a couple of very big declines.

Worst of all, there’s no guarantee that even a globally diversified equity portfolio will do better than paying off your mortgage. Only historical precedent.

This is all very different to the certain return you get from paying down a mortgage.

House prices are volatile, but your mortgage balance isn’t. It’s irrelevant if house prices fluctuate when it comes to the returns you see from paying off the mortgage or investing. You’ve already locked-in the purchase price of your home. Paying off the associated mortgage delivers a known return. Investing earns an uncertain one. House prices fluctuate regardless.

How to invest instead of repaying your mortgageRegularly investing into index funds is the best approach for most.

Investing globally diversifies your money across many stock markets. That way you’re not exposed to any one country, sector, or region.

Index funds will get you the market return at the cheapest cost.

We think a global tracker fund is the only equity fund most people need.

If you wanted to try for higher returns, you could tilt your passive portfolio towards value shares and small caps, especially early on when you’ve more time to make good any disappointments.

There’s no guarantees you’ll not do worse for trying to do better, though.

If you’re a naughty active investor, you’ll have your own ideas about how to invest to beat paying off your mortgage.

Just remember that the ownership of your home could be at stake if you can’t meet your mortgage payments. This should influence the risks you take!

Interesting choiceSuppose you have an interest-only mortgage.

If you can’t repay it at the end of the term because your bets on Bitcoin or blue-sky biotechs blew up, you’ll probably have to sell your home to repay the bank.

Invest wisely!

More commonly you’ll have a repayment mortgage.

Here it’s only your potential over-payments on the mortgage that you’re instead directing into investing.

You’ll still pay off your mortgage over 25 or 30 years with regular monthly mortgage repayments.

So investing whilst running a repayment mortgage is less risky than opting for an interest-only mortgage.

True, if your investing does well you’ll make less money with a repayment mortgage than if you’d gone interest-only.

But it may still have been worth it to reduce risk. You’re already taking on risk by investing in shares instead of clearing your mortgage, remember.

Equities are your growth engineWhat about other assets – like bonds? They’re usually part of a passive portfolio, right?

The trouble is that as you add safer assets to counter the volatility of your equities, you also reduce expected returns.

And this really matters here, because you’re pitting investing against the certain return you can get from repaying your mortgage.

Is it sensible to put 40% of your portfolio into a bond ETF returning 4%, when you could use that money to pay off mortgage debt costing 5%?

On the face of it, no – except there’s more to diversification than that.

Up to a point, adding safer government bonds to an equity portfolio will reduce risk (volatility) more than it reduces returns.

And a smoother ride can make it easier to stick to your investing plans.

Still, if you’re going to invest instead of taking the safer return earned by repaying your mortgage, you’ll probably want to invest pretty aggressively.

Equities should probably comprise at least 70% of your portfolio if you’re to have a good shot of making all the risk and uncertainty worthwhile.

On which note…

You might regret investing, if you’re unluckyKnow that there’s no guarantee you’ll do better by investing.

Sure, historical stock market returns suggest that over a mortgage term of 25 to 30 years you’d be unlucky to lose out.

That’s assuming you invest regularly, mostly in equities, and stick with it through the tough times.

But the past is no guarantee of the future.

Also, just like retirees you face sequence of returns risk, especially with an interest-only mortgage.

Because what if the stock market crashes a year before your debt is due?

Course correct as you goLuckily you have some flexibility over a long mortgage term.

For example, if your investing portfolio shoots the lights out for a decade, you might change gears and shift to paying off your mortgage instead. (As opposed to pushing your luck into a stock market bubble.)

You could even sell some of your bulging portfolio to repay your mortgage early. The best of both worlds!

Avoid early repayment charges. Take note of your mortgage’s fine print. Most lenders only allow a portion of the balance or initial advance to be repaid each year without penalty – for example 20%. You can still sell down your portfolio by more than this if it seems appropriate. Just keep the proceeds in cash, and pay off your mortgage as the terms allow.

Alternatively, you could simply use new cash from your salary to overpay your mortgage. Your existing portfolio could then be left to (hopefully) keep growing.

Watch the direction of interest rates! What made sense with mortgage rates at 4% will look very different if you must remortgage at 7%.

It’s essential to use tax sheltersYou’ll want to invest in a tax shelter to keep all your returns. Either an ISA or a SIPP2.

If you pay tax on your investing gains then your subsequently lower returns will struggle to beat paying off the mortgage. Once you take risk into account, it’s almost certainly not worth it.

Note though that there’s a snag with relying on a SIPP to shelter your investments, especially if you have an interest-only mortgage. Access to pension cash is restricted by age.

What if you find you want (or need) to repay the mortgage sooner than you’d expected to, and all your money is in a SIPP?

In that case you’d have to wait until you’re allowed to withdraw money from the SIPP – so into your late-50s. You might then use your pension’s tax-free lump sum to pay down your mortgage.

But until then you’d be stuck.

Investing while running a mortgage for normiesOf course, most people have a mortgage whilst they earn a salary and pay into a pension – and for much of their working life.

Like this they too are funding their pension via that mortgage debt, as we’ve discussed above.

But few will ever think of it that way. Including many of those who criticise articles like this one!

As for ISAs, their tax-free status is such a boon we’ve suggested that opting not to repay a big debt – like a mortgage – or even taking out new debt might be worth it just to use as much of your annual ISA allowance as you can. This way you can best build up your tax-shielding capacity for the future.

ISAs are accessible at any time, too. This flexibility might be crucial if your plans change.

Long story short: think carefully about how and where you run your assets. If you decide to invest instead of paying off your mortgage, you’ll probably want to use both ISAs and a pension.

More reasons to run a mortgage and invest Time diversification. Investing in equities is for the long-term. But if you wait until you’ve paid off your mortgage before investing, you’ll have a shorter time horizon. * Experience. You need to get used to volatility in risky assets. Starting young helps. * Asset diversification.* There’s much more to the economy than house prices. Do you want all your eggs in the property basket while you pay off your mortgage?

For my part, I run an interest-only mortgage while investing mostly in equities. I’ll probably keep doing this until either my mortgage rate rises substantially or I can’t find any markets worth investing in.

Higher rates since 2022 have made it a tougher decision for sure. But I judge it’s still the best long-term strategy for me. As for the near-term, interest rate cuts are coming.

Investing will not be the right choice for everyone – or even most people – and this is not personal advice!

So do your own research. Properly weigh up the many benefits of paying off your mortgage instead.

Mortgage repayment calculator/spreadsheetTo help you decide whether to pay off the mortgage or invest, we’ve created a calculator embedded into a Google spreadsheet that can help you calculate and visualise the potential returns.

(Thanks to Monevator reader ArnoldRimmer for the initial work here.)

Open the spreadsheet in a browser. Then make a copy of the sheet. You can now edit your copy to play with the numbers for yourself.

If you share the sheet with friends or family we’d love it if you’d send them to the original sheet please. It includes a link to this article, so they can read all the important background information.

The six yellow cells are the ones to edit to try out different outcomes.

The spreadsheet runs the numbers on four scenarios:

Repayment mortgage. No extra savings – you spend your spare cash.
Repayment mortgage with mortgage over-payment.
Repayment mortgage, but investing instead of making over-payments.
Interest-only mortgage. Investing instead of any mortgage payments.

You input the mortgage size and term, interest rates, amount of cash directed to either over-payments or investing, and your expected return.

The table below plays out those numbers over 30 years.

The first four columns shows your growing net worth from repaying the mortgage and/or investing. The final two columns shows your portfolio growth, without netting off the mortgage balance.

The cells flip to green when your net worth becomes positive and you repay your mortgage – or you could do so from (tax-free) investments.

Remember: real-life returns are not smooth. Calculations like this can only give an indication of how an annual return would compound over time. In reality annual returns would be lumpy. Some years they will be negative. Perhaps very negative. Your investment portfolio will go down, maybe by a lot! Do not expect an easy ride.

Our spreadsheet lets you explore what’s possible – but it cannot map the future, which is unknowable.

Scenario planning 101For example, the spreadsheet tells us that a £250,000 mortgage charging 2% over 25 years with £250 a month in either over-payments or investing at a 7% return delivers:

You can see with this example that investing whilst running the mortgage would leave you much better off (Scenarios 3 and 4).

But simply over-paying your mortgage is financially good, too (Scenario 2).

And even in the first scenario you had £250 a month extra to spend on fun. The extra gains in the other three scenarios didn’t come for free.

Perhaps you object to this interest rate or investment return? After all, mortgage rates are now much higher than 2%, and are probably set to stay higher.

That’s fine and I agree. It’s the whole point of making this spreadsheet editable.

With this update I’ve increased the default mortgage rates to 4.5% and the mortgage size to £300,000.

But you can create your own copy and try out whatever figures you think are realistic.

Remember real-life investing is volatile and uncertain, whatever numbers you use. If it wasn’t then this strategy would be a no-brainer. It’s not, because the potential downside is real, especially over shorter periods.

Our spreadsheet is a guide to what might play out over 25-30 years – a hypothetical future seen through a rear-view mirror.

You mileage will definitely vary.

So… pay off the mortgage or invest?The decade or so after the financial crisis was very kind to investors. Most markets did well, especially the heavyweight US.

At the same time – and not coincidentally – interest rates stayed low.

In hindsight it was a great time to invest rather than pay down a mortgage.

I’d even argue this wasn’t completely unforeseeable.

After the March 2009 rout, the odds of superior returns – greater than 10% – from shares over the medium-term looked pretty good.

I wrote that year that a decade of 20% a year returns seemed possible, given the crash we’d just seen.

If you invested the money you saved in lower mortgage payments in those gloomy times, you deserve applause – or maybe your own hedge fund!

But were the record numbers then paying off their mortgages chumps?

I don’t think so.

As I said at the start, paying off your mortgage is never a bad idea. There are financial benefits, and it reduces risk. There are non-financial wins, too.

One lump or two?Remember our spreadsheet only shows smooth growth over the years.

In reality it would be a wild ride of unpredictable annual highs and lows.

And markets today look much more expensive. Interest rates are higher. It does not seem such a propitious time to fund an investment portfolio via a mortgage, compared to 2012 say.

For disciplined investors with broad shoulders and girded loins, running a mortgage while investing will probably still win in the long run.

But do your research, think about risk tolerance, and make your own mind up.

Note: This article was first published in 2011, heavily updated in January 2022, and updated again in September 2024. As usual I’ve retained all the reader comments below – they provide fascinating insights as rates fall and rise over time. But do check when a comment was posted for full context.

After taxes and fees.
Self-Invested Personal Pension

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What caught my eye this week.

I found it hard to be outraged by last week’s decimation in the number of pensioners who’ll get winter fuel payments.

Restricting the annual cash award to those on means-tested benefits will see only about 1.5m pensioners getting the goodies in future.

The other 11.4m pensioners will just have to use their own money to pay their bills, like the rest of us.

Of course in many cases ‘their money’ will be, for you dear reader, ‘your money’

Monevator’s readership skews far wealthier than average, and it’s clear you’re aging out too.

So no doubt I’m biting the hand that feeds/reads me.

Nevertheless, downsizing winter fuel largesse will save the taxpayer £1.5bn much-needed pounds. A good call, as far as I’m concerned.

Low-to-middle earners have had it worse than pensioners for years, and a lot of the strain on the UK’s balance sheet is there because of national lockdowns that especially protected the elderly.

I’m not arguing here that it was wrong. Just that it’s right for the oldies to now share the burden.

If you feel differently then you could sign Age UK’s petition to reverse the decision.

However if you’re a wealthier pensioner who will really miss £200, maybe you could move to a smaller, warmer home instead?

Cheaper cosier homesRightmove came out with interesting figures this week. It flags a vast pool of housing equity that could be unlocked by empty-nesting OAPs rattling around in much bigger houses than they need.

The agent claims that swapping a five-bed home for a three-bed could release £500,000 on average:

Source: Rightmove

Besides a one-off cash tsunami, Rightmove also calculates that moving to a smaller, energy-efficient home could save more than £3,000 annually in utility bills.

The lost £200 winter fuel payment is small beans by comparison.

Unlocking this sort six-figure sum – tax-free – would solve most pensioners’ cost-of-living problems.

Though of course, most pensioners – even wealthy ones – don’t live in five-bed houses.

True, but the same principle holds up and down the ladder. Exchange hundreds to thousands of square feet you don’t need for an otherwise higher standard of living in a smaller property, with lower bills.

Few of these millionaire homeowners could have imagined the windfall gains they’d see from the UK’s relentless property boom when they first bought all those decades ago.

It doesn’t seem unreasonable to suggest more of them might tap into their good fortune to help ensure their own comfortable old age.

Down and not-outIt seems a no-brainer. Yet whenever you suggest asset-rich pensions should downsize if they need more money, there is indignation. (I look forward to reading the good natured variety in the comments below!)

Why should people be forced out of their family home? They may not need those bedrooms, but oh the memories!

That sort of thing.

Or – and I have more sympathy for this one – fine but where are we meant to downsize to?

The UK does have a shortage of high-quality, desirable homes for ‘aging in place’ as the Americans say. And what does exist seems very expensive.

Now that people are living so much longer and in many cases retiring so much richer – especially asset-rich – it’d be nice if property developers responded with bespoke communities of well-priced amenity-adjacent homes that suited ageing owners. Downsizing destinations that are just to good to refuse.

Add it to the list please, whoever is fixing the UK property market!

Oh, and for the record I don’t think anyone should be forced out of their home by government edict.

But equally, I would far rather my share as a taxpayer of that £200 winter fuel payment went towards an inner-city kid’s education instead – or an actually-poor pensioner’s living costs – than to fluff a weekend getaway for a pair of silver foxes living in a £1m-plus rectory.

If you can afford to heat a far bigger house than you need yourself, then fine.

But I don’t see why the state should help pay for it.

Fair enoughI accept there are interesting wider questions about how to juggle supporting or taxing the elderly versus giving the young a leg-up.

My feeling is life chances at birth are not even close to equal. That is mostly why I favour supporting younger people, as well as the better bang-for-the-buck the state will enjoy from their subsequently more productive working lives.

Together with the fact that the young are in the most trouble right now.

(I’m excluding here the several dozen kids with over £750,000 amassed in their Junior ISAs, as per a recent Freedom of Information request. Those lucky mites can fend for themselves too…)

Moreover by the time someone is 70, their life choices have usually contributed hugely to the state they find themselves in. Not exclusively – luck, good and bad, always loom large – but no, I also don’t have a lot of sympathy for someone who never worked much, or who earned well but frittered it all away.

This is exactly what irks many of us who save hard versus our peers, and yet end up being taxed to support the indolent as much as the unfortunate in their old age.

You earned it, you spend itFor many of you, the argument against higher inheritance taxes is similar. If someone did strive to improve their fortunes, why should they be stung extra hard for not frittering the money away?

Understood but personally, I would look to increase inheritance taxes if I was Rachel Reeves.

That’s because I maintain I’d be taxing (more heavily) the recipients of the inheritance who did nothing to earn it. Not the deceased who strived to earn and save it.

But I can see why blurred thinking around this distinction causes so much rancour.

Similarly, with the question of downsizing – or even paying for care home fees – a lot of the anger at the idea of going smaller in their old age isn’t because people actually need all that space to keep a lifetime’s clutter that nobody will want when their gone.

It’s because the should-be-downsizer and/or their children want to transfer that family home – a valuable asset remember – as tax-efficiently as possibly.

And again, ensuring genetically fortunate 50-year-old heirs stay as wealthy as possible isn’t my priority.

The bottom line is the state is cash-strapped, the young can’t afford even starter homes without parental support (where it’s available), we don’t build enough of the right properties for either the young or the old, and something has to give.

Don’t worry – I’m sure I’ll take my lumps too in the Budget come October. No doubt I’ll bemoan it too!

Have a great weekend.

From MonevatorA new long-term World Index for GBP investors – Monevator

Now could be a better time to retire – Monevator

From the archive-ator: How to protect your portfolio in a crisis – Monevator

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How the UK’s poor paid the price of ‘cheapflation’ in the cost of living crisis – Guardian

London house prices post first annual rise in more than year – Bloomberg via Yahoo

New Brexit inspection charge is “huge extra expense for nothing” [Search result] – FT

Give schools a stake in NatWest to teach young about investing, says Lord Lee – This Is Money

Road sweeper denied crowdfunded holiday will go on trip after all – Guardian

UK CPI inflation reverses trend with a 2.2% rise, but uplift less than expected – Sky

Products and servicesMortgage rates fall as Nationwide offers five-year fix at 3.83% – This Is Money via MSN

Is the new Amazon reward credit card worth going for? – Which

How to get a top 6.1% rate on £10,000 of savings with Raisin – This Is Money

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HSBC student account review: get £125 – Be Clever With Your Cash

Are you due a refund of overpaid pension tax? – Which

Homes next to lakes for sale, in pictures – Guardian

Comment and opinionWhy it’s usually a mistake to own individual stocks – Oblivious Investor

Can you afford a grown-up gap year? [Search results] – FT

A Boglehead interviews new Vanguard CEO Salim Ramji – ETF.com

The inflation scare is over [US but relevant] – Sherwood

Can economists help investors avoid recessions? [Spoiler alert…] – Morningstar

You are on your own – Abnormal Returns

Four dangerous assumptions that could hurt your retirement plan – Morningstar

The Stoic guide to investing – Darius Foroux [author of The Stoic Path to Wealth]

What’s the big idea? – Behavioural Investment

Bonds are still a hedge against bad times in the stock market – A.W.O.C.S.

The prenup prescription [Podcast] – Next Gen Finance

All hat no cattle – Humble Dollar

CoastFIRE mini-specialWhat is CoastFIRE? – Of Dollars and Data

The minimum investment amount where work becomes optional – Financial Samurai

Naughty corner: Active anticsSuper smash: how Nintendo prints money – Sherwood

What do VC returns look like in practice? – Hunter Walk

The big forces – Paul Podolsky

Great explanation of a carry trade – Capital Gains

Kindle book bargainsThe Happy Index by James Timpson – £0.99 on Kindle

Freakonomics by Steven D. Levitt – £1.99 on Kindle

Smarter Investing by Tim Hale – £9.29 on Kindle [£9.29! But rarely reduced]

Rebel Ideas: The Power of Diverse Thinking by Matthew Syed – £0.99 on Kindle

Environmental factorsOffshore wind developer Orsted drops green ‘mega’ plant plans – This Is Money

Big tech’s bid to rewrite the rules on net zero [Search result] – FT

“They encouraged us to insulate our home. Now it’s unmortgageable” – Guardian

Liked to death? – The Conversation

Robot overlord roundupAutomation is coming for private equity’s junior roles [Search result] – FT

Off our beatWhy one doctor prescribes walking to his patients – GQ

The freedoms and risks of being raised in a Utopian commune – Guardian

Elon Musk is a threat to international peace – Slate

In defence of beautiful housing – Roger Scruton Legacy Foundation

The real questions posed by counterfeit clobber [Search result] – FT

China’s rhetoric turns dangerously real for Taiwanese – BBC

We oldies can’t help but think of death – The Spectator

Runner raced against grandson on 85th birthday – BBC

And finally…“The rich get the assets, the poor get the debt, and then the poor have to pay their whole salary to the rich every year just to live in a house. The rich use that money to buy the rest of the assets from the middle class and then the problem gets worse every year. The middle class disappears, spending power disappears permanently from the economy, the rich becoming much fucking richer and the poor, well, I guess they just die.”
– Gary Stevenson, The Trading Game

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Freakonomics: A Rogue Economist Explores the Hidden Side of Everything

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A couple of years ago I buffed up my crystal ball with Mr Sheen but the picture was still a dark one. Specifically, the risk to near-term retirees running into a poor sequence of returns looked high to me.

As things turned out, soaring inflation together with tumbling equity and especially bond markets did indeed make 2022 a year to forget for diversified investors.

One crappy year is easy to ride out when you’re young, accumulating savings, and many years away from pulling the plug. Lower prices are a bonus, enabling you to buy assets more cheaply.

However a bear market is a scarier and potentially more damaging prospect around retirement age.

Sequence of returns risk turns on the order in which investment returns occur. And we need to pay particular attention in the early years of retirement.

Negative returns at the start of retirement can lop chunks off the longevity of a retirement portfolio, due to your need to make withdrawals for income from your shrinking pot.

That’s true even if you eventually see decent average annual returns over the length of your retirement.

The bright sideHopefully the pointers in my piece on how to soften the blow were helpful if you were retiring – or just thinking about it – in 2022.

What’s more, the worst of the portfolio drawdown was short-lived. Equity gains in 2023 and 2024 – beginning shortly after the Truss fuss – plastered over much of the damage. At least in nominal terms.

On the other hand, while bonds long ago stopped plunging, they’ve barely bounced. Bonds are like a coin that’s fallen out of your pocket to skitter beneath the sofa. Down, out of sight, and maybe out of mind.

As for inflation, thankfully it’s returned to near-target levels. But that doesn’t undo the prior period of very fast rising prices.

Downgraded retirement dreamsOnce prices go up they usually stay up. That’s what makes runaway inflation so terrifying to those on fixed incomes.

The Pension and Lifetime Savings Association has hiked by 34% its estimate of the annual income required for a ‘comfortable retirement’ for a single person, compared to 2022. That’s more than enough to eat into the income buffer of almost any plan.

We can debate the PLSA’s assumptions (and Monevator readers did at the time). But everyone agrees the cost-of-living has soared.

For many retirees, this will mean a much tighter spending budget than they expected to play with. Or even a return to work for some.

Things could only get betterIt’s important to stress that those who retired in 2021 or 2022 aren’t doomed to penury, just because of a single annus horribilis.

Sustainable withdrawal rate assumptions underpin many plans – often simplified to the 4% rule. And these are backtested across far worse bear markets and inflationary episodes than our recent wobble.

Think wars, depressions, and even gnarlier inflationary episodes.

True, the 2022 vintage of retirees will see lower returns in the future from pulling their 4%-or-whatever out of a smaller pot of savings in the first year. That’s just maths.

They’ll probably more feel the pain of higher prices too, compared to someone whose portfolio was fattened for years before we ran into the inflationary buzzsaw.

But assuming they had enough money at the start to prudently retire in a sustainable way, the past couple of years shouldn’t derail them.

Yet at the same time, anyone who delayed retirement until after bonds had finished their swan dive and inflation its Olympic high jump might be feeling quite smug today.

Bonds are backMuch of what dinged the prospects for a 2022 retiree now gives today’s sufficiently well-funded retiree more reason to look forward to life on their 4% – or thereabouts – withdrawal rate.

Note: I’m not forecasting a bull market here. (Nor was I predicting a certain equity crash in 2022.)

Forecasting future equity returns, especially over the short-term, is either very hard or impossible, depending on who you believe. Equity valuation levels can give us a clue to longer-term returns. And very high valuations do tend to point to lower returns eventually. But even this method isn’t foolproof, and it’s definitely no short-term timing signal.

However things are different with bonds (and perhaps also with so-called bond proxies).

Bond maths rules the roost. Higher bond yields will deliver higher future returns, versus lower yields.

Conversely, very low yields on bonds was exactly what made the outlook in early 2022 so troublesome. As central banks hiked interest rates aggressively against a backdrop of rocketing inflation, bond prices were nailed-on to fall.

In the end yields across the market went much higher than almost anyone had predicted, putting bond prices in the dumpster.

It was the worst bond rout of all-time in the US – and the UK was not far behind.

But those same falls also transformed the prospects for bonds. The negative bond yields of a few years ago have been vanquished. Even after a recent rally, ten-year gilts are still yielding 3.9% nominal. Buy and hold such a bond to maturity and that’s the return you’ll get.

It’s a similar story with inflation-linked bonds and – to widen the lens – annuities.

A better time to retire on an annuityThe following table shows changes in annuity rates since December 2021:

Source: Sharing Pensions

To be sure, annuity payouts need to be higher – inflation pumped up retirement costs by 30% or more remember. Yet even that vertiginous ascent has been outpaced by the rise in what £100,000 now gets you.

Property rental yields have risen too – albeit offset by higher borrowing costs – for those who still fancy the challenged buy-to-let route to a retirement income.

Naturally speaking, incomes are higherWe can also see the better sitrep for today’s imminent retirees by considering the level of natural yield your money now buys you.

Aiming to live on the income thrown off your portfolio is controversial. I won’t re-litigate the pros and cons in this post. I’m not suggesting this is how you should invest your retirement savings or that lifelong passive investors should buy active funds.

See my Mavens post from January if you’re curious.

Instead let’s simply consider the sort of hands-off-ish portfolio I personally might put together, assuming I wanted to live on a natural yield today. Just as a pointer to the value on offer:

| Asset | Allocation (%) | Yield (%) | | JP Morgan Claverhouse | 10 | 5.0 | | Murray Income | 10 | 4.4 | | City of London Trust | 10 | 4.7 | | Bankers Investment Trust | 10 | 2.4 | | Henderson Far East Income | 5 | 10.8 | | Renewable Trusts basket | 5 | 7.5 | | Infrastructure Trusts basket | 5 | 6.5 | | UK Property REIT (IUKP) | 5 | 3.7 | | Intermediate (10yr) gilts | 20 | 3.9 | | Index-linked gilt ladder | 20 | 0.5 | | Portfolio yield | 4.0% |

Source: AIC, ETF factsheets, author’s calculations and guesstimates

Despite my allocating a fifth of the portfolio to index-linked gilts for safety reasons, we’re still hitting a 4% initial natural yield, which I have every reason to believe would grow over time – and with a decent shot of keeping up with inflation over the long-term.

Compare that to when I sounded the sequence of returns alarm in early 2022.

The 10-year was then yielding about 1.6% and the yield on linkers was negative. Without looking back and doing a deep comparison, I know equity income trusts were on average around par so we can assume slightly lower yields, while infrastructure and renewable trusts were about to nosedive from high premiums to deep discounts. I’d estimate that added about 200 basis points to their running yields.

If I plug my 2022 yield guesswork into the same assets I get an estimated 2022 yield of just 2.9%.

This isn’t even to talk about the pounding of capital values that was about to hit such a portfolio over the rest of 2022 and beyond – from which it wouldn’t have yet recovered.

Indulging retirement daydreamsOf course you might reasonably argue that if you were being active about things, then perhaps you’d have owned a different portfolio in 2022.

A global tracker didn’t yield much in 2022, but it’s well up in capital terms over the past two years.

However I stress again I’m not citing this portfolio to sneak in a pitch for natural yield. I’m just showing how the re-pricing of assets – and the taming of inflation – might make today’s retirees more confident.

Of course inflation may not be tamed.

Inflation erodes the purchasing power of your money, making it one of the biggest threats to retirement income. As we saw above higher inflation also means higher living costs. If inflation takes off again then my example 4% nominal yield will obviously wilt in real terms.

But as best I can tell the omens on inflation look good.

Higher yields make this a better time to retireOf course an equity market crash could happen at any time, too.

The US in particular still looks historically expensive, despite the recent wobble. While that doesn’t mean it’s sure to decline, it does mean we should curb our expectations for equity returns on a ten-year view. Especially given the big proportion the US makes up of global tracker funds. (Around two-thirds).

This isn’t like after the global financial crisis, when you could feel fairly confident you were buying up bargains.

On the other hand, much of the rest of the world’s equities look fairly valued.

And my own income preference – to lean into equity income trusts – would see my hypothetical portfolio very tilted towards UK equities, which seems a pretty good place to be. The UK market has only just started coming back into favour.

But most importantly, far higher bond yields – and the repricing away of crash-risk in these assets – means you can diversify a portfolio without feeling like you’re sitting on a box of nitroglycerine.

I’d far rather start from here than there!

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The great financial educator William Bernstein said: “You have to understand what market history looks like. What market history tells you is that the very, very best investments are made when things look the worst.”

It’s for similar reasons that I write so often about the past. I want to try to understand what fleeting or lasting horrors my investment choices might inflict even before any rewards come due.

This means examining as fully as possible the asset classes that comprise today’s investing mainstays.

First-world problemsMost Monevator readers’ portfolios are dominated by World equities – that is, developed world stocks.

But there’s a problem if you want to know how the World index has performed over the long-term.

Which is that the two benchmarks that stretch back farthest are pay-walled.

Fair enough, I suppose. Professors’ Dimson, Marsh and Staunton’s DMS database and Global Financial Data’s indices are both based on exhuming stock returns from fusty old journals and ancient newspaper archives. Someone’s got to keep the wonks fed and watered.

But that doesn’t help the investor in the street. People like us who are keen to avoid becoming investors out on the street, by educating ourselves in the ways of the investing world.

True, you could simply use the MSCI World’s easily-accessed tale of the tape. Its data runs from 1970.

But in my view that paints too benign a picture.

No Great Depression, no World Wars, no decade of deflation, no deglobalisation.

While 50-odd years sounds like a long time, we can only really see how equities responded to a wide set of conditions by retrieving the greater part of the 20th Century.

Introducing a new world indexWe need more open-source data. And I’ve found it!

Enough to create a World index reaching back to 1919:

I’ve taken historical country-level stock market returns from the Macrohistory database.
I then weighted each country using stock market capitalisation data from the paper, The Big Bang: Stock Market Capitalization in the Long Run.
Then I currency-converted all the results to GBP1 using exchange rate data from the Macrohistory team.

This process enabled me to assemble a World index in GBP that begins in the aftermath of World War One. At the other end of the timeline, the new index segues into the MSCI World GBP from 1970.

The resulting World equity index is not perfect (and I’ll explain why further down) but I believe it’s good enough.

So I’ll use this index to represent the World equities portfolio in future Monevator long-term performance articles.

In the meantime, the rest of this article will chart how world equities have fared from 1919 to 2023.

Then I’ll briefly pop the bonnet on the index as a treat for the hardcore at the fag end – I mean the grand finale – of this piece.

Investing returns sidebar – All returns quoted in this piece are real annualised total returns. That is, they’re the average annual return (accounting for gains and losses) realised in a given time period. These returns include the impact of reinvested dividends, but strip out the vanity growth delivered by inflation that does nothing to boost your actual spending power. Local currency returns have been converted to GBP.

World index: long-term equities growthHere’s the World equities growth chart using our new index versus two rival long-term benchmarks: US and UK equities:

Data from JST Macrohistory2, The Big Bang3, MSCI, Aswath Damodaran, and FTSE Russell.
August 2024

The graph reminds us again that the rest of the advanced world has struggled to keep pace with US equities since the mid-1990s, aside from a brief panic room huddle during the Global Financial Crisis.

We can also see that home bias cost UK investors dearly throughout – even though the UK has remained one of the world’s top-performing markets over time.

World index annualised returns in GBP (% per annum)Let’s now look at the long-term average real return numbers with dividends:

| 2023 | 10 years | 20 years | 50 years | 105 years | | World equities | 8.9 | 8.4 | 6.7 | 5.5 | 6.8 | | US equities | 16.5 | 11.6 | 8.3 | 7.5 | 7.7 | | UK equities | 0.6 | 2.3 | 4 | 6.2 | 5.6 |

The US wipes the floor with the rest of the world across every timeframe. Particularly in the last ten years as the ascendency of Big Tech – and its concentration in US stock markets – has left competing sectors looking like yesterday’s news.

It would be interesting to see whether the US still dominates in an alternative world with the Big Tech winners stripped out. We’ll save that for another time.

World index: annual returnsAnnual World index results resemble any other crazy equity returns chart. They look like an abstract cityscape of soaring skyscrapers and deep shafts boring into negative space.

Happily however the towering returns outnumber the dark days lost in bunkers.

Thus somehow our long-term financial wellbeing emerges from this profile of sky-dwellers and underlanders.

Annual returns: World vs US vs UK stock market indicesA question: does diversifying across the world take the edge off those trips to the bargain basement?

This chart indicates that the World index might provide some downside protection relative to single country markets.

The cyan bars seem to punch shallower holes than the USA’s red. Though also notice how dynamically America tends to bounce back.

Drawdowns: World vs US vs UK stock market indicesThis is the trauma room chart: a raw record of loss and terrible stock market slashes. All the same, you can see how the Great Depression is mitigated by the World index versus the US during the 1930s. (The impact of the Great Depression was not so severe in the UK, for one thing.)

World War 2 and subsequent recessions were also typically blunted by a World stock assemblage.

A notable exception is the early 1990s slump when the Japanese stock market bubble burst. The Tokyo stock exchange comprised over 40% of the index in 1989 but it made up only 11% ten years later.

Holding the World portfolio also exacerbated the Dotcom Bust of the early 2000s, as Japan continued to sell off and the UK piled on the pain too.

The risk-adjusted viewAll told, our eyes do not deceive us. The numbers show that the World index has inflicted less volatility on investors over the long-run (1919-2023):

| Index– | Annualised return– | Volatility– | Sharpe ratio | | World | 6.8% | 17.3% | 0.39 | | US | 7.7% | 19.7% | 0.39 | | UK | 5.6% | 20.5% | 0.27 |

The higher your Sharpe ratio, the better your risk-adjusted returns. That is, the more return you get per unit of risk as measured by volatility.

From this we can conclude that the World has proved every bit as worthwhile a buy as the US when returns are costed against the volatility you endured to attain them. (This is the essence of the Sharpe Ratio measure.)

Viewing the benchmarks on the single dimension of returns would imply that world equity diversification has proved sub-optimal, compared to if you’d gone all-in on the US.

But taking that broader view reveals how the rest of the world offers good reason not to pin all our hopes on perpetual American exceptionalism.

World index market shareThe MSCI World is utterly dominated by the US stock market these days. It currently weighs in at a 71.7% share of the index:

Source: MSCI. August 2024

Our investing fate is inevitably reliant on the world’s most important capital market, though that’s nothing new.

This next chart compares the market capitalisation of each of the major developed world stock markets:

Source: The Big Bang. August 2024.

We can see that the US has almost always been the biggest player – offset to a greater or lesser degree by the UK, Japan, France, Germany, and the plethora of smaller fish known as ‘Other’.

Since 1919, the US share of the world market has ranged from 31% (1988) to 73% (1951).

For what it’s worth, the US is close to its historical ceiling right now.

Inside the World indexI want to emphasise that the World index presented here is not the global index.

I’m relying on MSCI World figures from 1970 onwards. That index excludes the emerging markets. Its Asian representatives are limited to Japan, Singapore, and Hong Kong.

Pre-1970, I use Macrohistory’s country list. That is limited to the Anglosphere, Japan, and Europe.

Macrohistory’s research omits Austria, New Zealand, Ireland, and Eastern Europe.

Indeed, it’s the absence of Austria and Russia that enforced our 1919 cut-off. Those two imperial stock markets weighed about 5% each before World War One intervened (by the light of the DMS database).

South Africa is the other notable no-show. Its stock market accounted for a couple of percentage points of the whole during most of the period.

Every benchmark makes some exclusions for reasons of practicability. Ours are imposed by the limits of publicly available data.

Even so, we’re happy that our numbers are a credible representation of the historical World index. The loss of fidelity versus commercial alternatives doesn’t change the lessons we can learn.

Finally, I’d just like to thank the academics responsible for the Macrohistory database and The Big Bang research. They have created an immense resource and been incredibly generous in freely sharing it with the world.

Thank you Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, Alan M. Taylor, and Kaspar Zimmermann.

Take it steady,

The Accumulator

British Pounds Sterling.
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
Dmitry Kuvshinov and Kaspar Zimmermann. 2021. The
Big Bang: Stock Market Capitalization in the Long Run. Journal of Financial Economics,
Forthcoming.

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What caught my eye this week.

I am just back from two days away for a wedding with a slightly sore head, a very favourably updated impression of Liverpool, and our regular weekend links only now finalised and tidied up.

Oh, and also to the discovery this morning that I hadn’t done as badly as I’d gathered from furtive half-glimpses at my live portfolio-tracking spreadsheet in the quiet moments before the cake was cut.

Rather, I’d forgotten one of my recently re-upped stocks was due a 10-to-one stock split at the end of the week!

Phew – it turns out there’s a benefit to my usual active obsessiveness after all. But also an even-bigger case for slipping my reading glasses into my wedding suit and never mind lumpy pockets in the photos.

Alright that’s it for a ~~soaring treatise~~ waffly intro this week. Thanks to my email software, I know a select few of you are out there banging ‘refresh’ repeatedly in your eagerness to get your weekly investing reads.

Enjoy, and have a great weekend!

From MonevatorWhat next for Bill Ackman and Pershing Square Holdings? – Monevator [Members]

US historical asset class returns – Monevator

From the archive-ator: Five lessons for investors from an Olympic superstar of 2008 – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Housebuilder says consumer confidence has returned amid cheaper mortgage rates… – Guardian

…but landlord sales are rising as financial pressures grow [Search result] – FT

Founders in line for £850m as Hargreaves Lansdown agrees to sale – This Is Money

Various US trading platforms suffered outages during the recent sell-off – Sherwood

Volatility pros say record VIX surge on Monday was a head fake – Bloomberg

Products and servicesHargreaves Lansdown’s private equity bid could herald fees makeover [Search result] – FT

NS&I offers new two and five-year fixed savings for the first time since 2009 – This Is Money

Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct (T&Cs apply. Capital at risk) – Charles Stanley Direct

The cheapest ways to watch Premier League, EFL and other football on TV – Be Clever With Your Cash

Are private banks still worth it? [Search result] – FT

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Why is home insurance more expensive for period properties? – Which

The new ’74’ number plates banned because they’re too rude – This Is Money

How an Australian built herself a tiny house fit for a big life – Guardian

Comment and opinionThe well-off people who can’t spend money – The Atlantic via MSN

Taking the keys – Humble Dollar

No purpose or place – Life Beyond the Daily Grind

Meaningful investing that actually matters, with Meb Faber [Podcast] – 50 Fires via Spotify

Market volatility is business as usual mini-specialWhy the markets are down (and it’s okay not to care) – The Atlantic

Reasons to sell – Spilled Coffee

I can’t explain – Behavioural Investment

How long can stocks underperform? – Of Dollars and Data

No news trumps fake news – A Teachable Moment

This is normal – A Wealth of Common Sense

Naughty corner: Active anticsCNBC’s perfect market-timing indicator – Charlie Bilello via X

Does WallStreetBets deliver alpha? – Alpha Architect

Classifying economic regimes – Verdad

A great company that’s a turtle not a hare – Morningstar

The active management reinvention project – Investment Ecosystem

Kindle book bargainsThe Happy Index by James Timpson – £0.99 on Kindle

Freakonomics by Steven D. Levitt – £1.99 on Kindle

Smarter Investing by Tim Hale – £9.29 on Kindle [£9.29! But rarely reduced]

Rebel Ideas: The Power of Diverse Thinking by Matthew Syed – £0.99 on Kindle

Environmental factorsNorth-South charger divide threatens EV revolution – This Is Money

Ocado starts trial selling everyday products in reusable packaging – Guardian

Inside Silicon Valley’s grand ambitions to control our planet’s thermostat… – Noema

…but many are wary of planet-scale engineering projects – New York Times [h/t Abnormal Returns]

Great Barrier Reef at record temperatures – Semafor

Lab-grown eel meat is a slippery business – The Generalist

Robot overlord roundupWhere Facebook’s AI slop comes from – 404 Media

Are we in an AI bubble or not? Arguments for and against – Sherwood

LLMs are a dead-end, new AI prize founder claims – Free Think

It’s practically impossible to run a big AI company ethically – Vox

AI Friend or AI Friendo? – Spyglass

Off our beatThe new-ish weight loss drugs are starting to look like miracle cures – Wired

You’d be amazed how little being an Olympic hero on Team USA pays – Sherwood

“Why I hate Instagram now” – The Atlantic via MSN

Etsy is struggling to keep its platform curated for handmade goods – Semafor

A ‘strategic Bitcoin reserve’ is an absurd idea – The Overshoot

How to know if you’re living in a doom loop – The Honest Broker

A few little ideas – Morgan Housel

And finally…“A bubble can easily be punctured. But to incise it with a needle so that it subsides gradually is a task of no small delicacy.”
– John Kenneth Galbraith, The Great Crash 1929

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Here’s some useful data on US historical asset class returns, both in regular ol’ USD terms and, more usefully for UK investors, GBP flavour.

By converting US returns into sterling and subjecting them to the wealth-stripping acid of UK inflation, we can see if American investment exceptionalism holds up for Brits.

We’ll start with US asset class real returns including reinvested income (in USD) since 1900:

Data from JST Macrohistory1 and Aswath Damodaran. July 2024.

As you can see, equities (stocks) have done much better than bonds or cash over the long-term.

Three important caveats:

The seemingly inexorable rise of equities disguises many setbacks, such as the 2008/9 bear market.
The US has been one of the very best performing countries in stock market terms over the past 124 years. Extrapolating this to other regions (or even into the future) could be misleading.
A UK investor putting money to work in the US faces currency risk, which can increase or reduce your returns, as we’ll see below.

Let’s now look more closely at US historical annualised2 asset class returns including gold and commodities.

US asset class annualised returns (% per annum)

| 2023 | 10 years | 20 years | 50 years | 90 years | 124 years | | Equities (stocks) | 21.9 | 9.2 | 7 | 7.1 | 7.1 | 6.7 | | Government bonds | 0.5 | -0.4 | 1.1 | 2.7 | 1.4 | 1.4 | | Gold | 9.2 | 2.3 | 5.6 | 2 | 1.3 | 0.7 | | Commodities | -10.9 | -3.8 | -2.6 | 0.5 | 3.4 | – | | Cash (Treasury bills) | 1.6 | -1.4 | 0.9 | 1 | 0.4 | 1 |

Data from Summerhaven3, BCOM TR, JST Macrohistory4, Aswath Damodaran, The London Bullion Market Association, and Measuring Worth. July 2024.

Investing returns sidebar – All returns quoted are inflation-adjusted, annual total returns (including dividends and interest). Investing fees are not included.

As the table shows, US equities have delivered returns far ahead of inflation.

There are only a few other stock markets in the world that can compete with the US, as our World equities post reveals. (That article needs an update, but if you’re thinking Scandinavia and the other Anglophone countries are contenders – plus South Africa – then you’re on the right lines.)

While USD gold and commodity results are nothing to write home about, their government bond and cash returns have trounced their UK equivalents even more soundly than equities in relative terms.

But the question is: do monster-truck size US profits hold up for UK investors once brought ashore?

US asset class annualised returns in GBP (% per annum)

| 2023 | 10 years | 20 years | 50 years | 90 years | 124 years | | Equities (stocks) | 16.5 | 11.6 | 8.3 | 7.5 | 7.3 | 6.9 | | Government bonds | -4 | 1.8 | 2.3 | 3.1 | 1.6 | 1.6 | | Gold | 5 | 4.9 | 7.1 | 2.3 | 1.4 | 0.9 | | Commodities | -15.9 | -1.4 | -1.3 | 0.6 | 4 | – | | Cash (Treasury bills) | -2.9 | 0.8 | 0.3 | 1.4 | 0.6 | 1.1 |

Source: see table one

The pound strengthened against the dollar in 2023, weakening US returns once translated into sterling. Moreover, our annual inflation rate was considerably worse too, reducing a UK investor’s real return further.

Over longer periods, the secular decline of the pound has boosted US returns for UK investors: a useful hedge for the loss of purchasing power associated with our waning influence.

And yet over the very long-term, it’s mattered little whether you consumed your US profits in pounds or dollars. On the UK side, the currency gains were mostly offset by our higher inflation (see the 124-year column).

Most Monevator readers likely invest in a global tracker fund and thus their fortune depends far more upon US equities than any other market.

But should we also be positioned in US Treasuries ahead of gilts?

Well, read that article and you’ll see that superior US bond returns don’t always arrive when we need them – i.e. in the midst of a stock market crisis.

Using historical asset class returnsAn understanding of historical returns is important because it helps us get over behavioural quirks such as recency bias.

Recency bias is the tendency we all have to think that things will continue in the same vein as they have recently, even when the long-term data says otherwise.

For instance, if you go out in a T-shirt and shorts in October in Scotland without checking the weather forecast – just because it was sunny yesterday and the day before – then you are suffering from recency bias.

(You’ll probably soon be suffering from the flu, too!)

Hence it’s very misleading to consider just the last couple of years of asset class returns when deciding how to construct a long-term portfolio.

Only cash and very short-term government bonds provide a secure return over a short period.

All other asset classes are too volatile for that.

For example, let’s consider the equivalent historical data for the US as seen from the vantage point of 2013.

Returns to 2013: US asset class annualised returns in GBP (% per annum)

| 2013 | 10 years | 20 years | 50 years | 90 years | 114 years | | Equities (stocks) | 28.8 | 5.1 | 6.5 | 5.5 | 7.1 | 6.4 | | Government bonds | -13.8 | 2.7 | 3.7 | 2.5 | 2.1 | 1.5 | | Gold | -30 | 9.4 | 3.2 | 2.8 | 1.5 | 0.5 | | Commodities | -12.6 | -1.1 | 2.2 | 2.1 | – | – | | Cash (Treasury bills) | -0.4 | -0.2 | 0.9 | 1.6 | 1.2 | 1.1 |

Source: see table one

You can see the long-term return figures are little changed (for instance, equities had returned 6.4% p.a. over the 114 years to 2013, versus 6.9% p.a. over 124 years to 2023).

Shorter-term though, things are different.

Against popular expectations, 2013 was a stellar year for US stocks. Yet 10-year returns still bore the scars of the Global Financial Crisis, while bonds and gold were uplifted by the same.

Over the longer term, the traits of the different asset classes typically reassert themselves, although the true potential of gold is still a mystery.

The long and short of itStocks tend to outpace other asset classes over the medium to long-term precisely because they are far riskier over the short-term.

If the expected returns from equities weren’t higher than bonds, then nobody would choose to own them over less volatile and ultra-safe bonds – and the prices of stocks would accordingly fall until their expected returns rose.

That’s exactly what happened after bubbly periods for equities such as 1999 or 1929.

But while all this looks obvious in hindsight, timing the market to try to avoid booms and busts is notoriously difficult.

Nearly all the methods of stock market forecasting you’ll read about have proven very unreliable, and the best method isn’t much better than that.

This means that most people trying to save and invest for the future are best advised to follow a passive investing strategy, rebalancing their portfolios periodically to smooth out the booms and busts.

Over the long term – such as 40 years of investing towards retirement – the characteristics of different asset classes such as stocks, bonds, and cash should play out like they have in the past.

For that reason, if you’re using an investment return or compound interest calculator then it’s okay to use long-term historical returns as a proxy for the interest rate function required. Just bear in mind that the US stock market has been one of the best-performing of all developed world nations.

UK historical asset class returns offer a more cautious reference point.

Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
The average annual percentage amount by which each asset grew (or shrunk) over the period.
Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert, “The First Commodity Futures Index of 1933,” Journal of Commodity Markets, 2020.
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.

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The 60% gain in the year or so since I featured Pershing Square Holdings (Ticker: PSH) in my first Moguls post was giving me a headache.

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What caught my eye this week.

There have been several times over the past couple of years when I’ve had to admit to myself I miss the pandemic.

Not, it goes without saying, the horrible deaths.

Nor the vaguely wartime spirit and the disaster movie nightly briefings.

Not even the pretty good go of it that Monevator readers and myself made of talking – and constructively disagreeing with – each other through the early uncertainty, science, and economics of those first few weeks (before the debate metastasised into just another of the bifurcations that everything resolves to now). Though I do have fond memories of those conversations.

No – I mean the feeling of being completely off the hook.

Of not berating myself for declining to YOLO through some particular evening but preferring to stay in with a book.

Or of not feeling that I had to see a certain few people who to be honest I now haven’t seen since Covid. (They probably felt the same way.)

The quiet peace for large stretches of time of simply being alone.

You’ve got to fight for your rightPerhaps it’s unsurprising I found myself taking the other side of an essay this week in The New Humanist urging us all to finally shake off the pandemic and to get out more.

In The Introverts Are Winning, author Marie Le Conte laments how:

In the years after restrictions were lifted, many naturally outgoing people – this writer included – have found it that bit harder to get their friends out of the house.

Plans somehow require more effort than ever to get made, and are always at risk of getting cancelled at the last minute. A spontaneous pub trip, once a cornerstone of British social life, now takes work to organise.

All true of me. Indeed if you defined me by my social life, I went into the pandemic a slightly grumpy 35-year old and came out a young-ish 50-something.

And these days, when it comes to going ‘out out’, as my girlfriend would say (over WhatsApp, of course, where much of our relationship happens) I very often cba.

Le Conte quotes French philosopher Pascal Bruckner – author of The Triumph of the Slippers – who believes:

“A new anthropological type is emerging: the shrivelled, hyperconnected being who no longer needs others or the outside world. All of today’s technologies encourage incarceration under the guise of openness.”

Which… seems a tad harsh?

Nobody goes there anymore. It’s too crowdedBut I don’t know. Maybe Bruckner’s right.

Because when the author of The Introverts of Winning in The New Humanist makes her case for visiting the outside world, it sounds to me like little more than a charity drive for my local newsagent.

Le Conte does not paint a compelling picture of that realm of strangers, awkwardness, intolerance, and rage.

Indeed compared to the joy of staying in – where everything is predictable, and most of human culture is at the end of a finger tap or the click of a remote control – choosing to have a spontaneous meeting with some other zombies who’ve stumbled blinking into messy and literally unfiltered reality sounds about as appealing as letting a drunk carol-singing rugby team in one by one to use your downstair’s loo.

Mushroom for a funghiDon’t get me wrong, I’m not a social recluse. Not even a wallflower.

For years The Accumulator thought I was an outright hedonist, until he knew me better.

I enjoy social stuff on my terms and my schedule. It’s all the unwanted stuff that does me in.

But I do find it easy to be alone.

I once did a work-related psychometric test, and the chap who conducted it (who for various reasons I knew independently of this test) raised an eyebrow when he gave me the result and told me he almost never saw people like me in testing – because they never made it to an office job.

I watch news stories about intrepid explorers living alone for two months with a shrug. So easy!

Coop me up in the International Space Station with a couple of others though and I’d be out the waste disposal chute long before my time was up.

I’m a high-functioning ultra-introvert in what was– until the pandemic – always an extrovert’s world.

Let’s all not meet up in the year 2000Add it all up and even I know that I would hate to go back to prescribed global lockdowns.

My bout of Covid I mentioned before that started a few weeks ago has given way to what my GP calls a resilient ‘rebound infection’ and I’m now on antibiotics – plus rest and more rest.

As a result, I’ve spent most of the actual sunny bit of this summer canceling engagements.

It’d be nice to see my friends. It’s all a bit more 2020 than I’d prefer.

But, on the other hand, to go back to 2019?

Or even to the early 2010s – the last time that I commuted daily back and forth on a crowded tube to an office in the rush hour – with all that entailed?

Or to feel like I had to stay out in some pub, front room, club or garden party for an extra hour and then another hour because someday I’d be 30/40/50-years old and I’d regret leaving?

Well someday has come and I don’t regret the times I did leave.

I have other regrets! But overdoing it just to keep up with the extroverts is not one of them.

Not going out to work, eitherIncidentally and on an investing note, this is all what’s kept me from piling into commercial property.

A favourite old real estate stock I follow is yielding 9%, has all its offices in ring-fenced special purpose vehicles so shouldn’t collapse in a realistic worst-case scenario – and as I wrote a few weeks ago I believe interest rates are coming down anyway.

But maybe the return-to-work bounce has peaked too?

That’s not something we had to consider before when judging the commercial real estate cycle. What went down may no longer come back up.

The world is different. Bruckner is right.

He’s got the whole world in his handsMaybe you’re an outgoing party-mainlining extrovert and if so good for you.

If these difficult years we’re living through have excelled at anything, it’s making more room for self-identification. Let the party crowd party harder I say.

Even I will see you at some future party. But I’m not sure which – and I won’t be at the one after that.

Not now – not after the pandemic. It broke that compulsion. Now there’s simply too much good stuff to stream on Netflix and Spotify instead. And all those specialist aquarium videos to watch on YouTube that didn’t exist five years ago, let alone when I was a fish nerd of a kid.

If enjoying so much good stuff makes me a ‘shrivelled, hyperconnected being’ then all I can say is shrivel me more.

At home aloneI know some of my carelessness about hitting my social step count nowadays must be an age thing too – my 35-to-55 transformation notwithstanding.

But still I wonder – worry even – whether future generations of introverts will enjoy the same get out of jail card on their tendencies that I now do, whatever Bruckner thinks.

Because awareness of that card was what the isolation of the pandemic gave us. A rare gift.

Future introverts may well have everything they need in their living room – or on a quiet walk in gloriously deserted countryside. (With everything else they need summonable on their phones, of course).

But I suspect they’ll be made to feel guilty about it.

What about you? Do you miss the greatest excuse for not going to a wedding since WW2? Or have you been revenge socialising since the moment the last curfew ended?

Let us know in the comments below. Especially if you can tease out an investing-related angle.

And have a great weekend whoever you’re with – or without.

From MonevatorMonzo pension: is it any good? – Monevator

From the archive-ator: I, Robot – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Bank of England cuts rates to 5% – BBC [Are you ready for lower rates?]

US recession fears fuel swings in interest-rate expectations – Morningstar

Winter fuel payments scrapped for pensioners unless on benefits – Which

UK house prices on track for 2% rise in 2024 – Zoopla

Controversial stablecoin Tether says it made $5.2bn in the first half of 2024 – The Block

The business cycles of India and China are decoupling – Apollo

Products and servicesNew lender offers mortgages of six-times income – This Is Money

TSB has launched a £190 current account switch offer – Which

How to spot car boot sale bargains – This Is Money

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Virgin 10% regular saver review – Be Clever With Your Cash

What’s behind the 10-times jump in some home insurance premiums? – Which

How to pick a financial advisor – Guardian

A personal cybersecurity concierge is a new perk, and need, among the wealthy – CNBC

Writer retreats for sale, in pictures – Guardian

Comment and opinionWays in which Rachel Reeves could raise £22bn of tax – Tax Policy Associates

Waiting for ‘the dip’ to invest – Oblivious Investor

Has the FCA’s Consumer Duty helped consumers? – Which

Bond ETFs are eating the bond market – Financial Times

Insurance boss issues warning over using pensions to drive UK growth – Guardian

Calculating what grandparents’ childcare is really worth – This Is Money

How to invest in a classic car (without crashing your finances) [Search result] – FT

The 11th Commandment: keep politics out of investing decisions – A.W.O.C.S.

Risk – We’re Gonna Get Those Bastards

Fantasy Island – Humble Dollar

US alternatives-in-ETFs that will someday come here mini-specialManaged futures ETFs gaining traction on diversification benefits – Morningstar

BlackRock leads firms racing to put private assets into ETFs – Bloomberg via Yahoo

‘Dr Doom’ Nouriel Roubini looking to launch his first ETF […] – Bloomberg via W.M.

Naughty corner: Active anticsLikening fund flows to ‘Ponzi maths’ – CAIA Association

To infinity and beyond bonds – Man Institute

The negative impact of crowding on active performance – Alpha Architect

The flipside of financial innovation: why contracts fail [Research] – SSRN

Kindle book bargainsThe Happy Index by James Timpson – £0.99 on Kindle

Freakonomics by Steven D. Levitt – £1.99 on Kindle

Smarter Investing by Tim Hale – £9.29 on Kindle [£9.29! But rarely reduced]

Rebel Ideas: The Power of Diverse Thinking by Matthew Syed – £0.99 on Kindle

Environmental factorsMarketing a tote bag as reusable is silly. Say no to more stuff – Guardian

Homeowners can get up to £2,000 off a heat pump with a Halifax mortgage – T.I.M.

The very hungry urchins – Hakai

Pre-Covid austerity in the UK hurt climate goals and energy security – K.O.I.

Robot overlord roundupAs Snippet says, this chart explains why AI start-ups are getting all the VC money – Bessemer

What is AI? The definitive guide – MIT Technology Review

The AI-enabled restaurants of the future – Semafor

Just four companies are hoarding tens of billions of nVidia GPU chips – Sherwood

Silicon Valley’s trillion-dollar leap of faith – The Atlantic via MSN

How does OpenAI survive? – Ed Zitron

Off our beatThe United States of Cults – The Lefsetz Letter

The finality of everything – More To That

One man’s IVF journey – Guardian

So, you say you want a revolution? [Podcast] – Hardcore History via Apple

Sympathy for the CD – Guardian

Inside the race to make the fastest running shoe [Info-story] – FT

Warren Buffett’s breakup with the Gates Foundation will hurt the world – Vox

Click me you idiot – Sherwood

Russia’s surprising consumer spending boom [Search result] – FT

‘Humongous’ fort found in Wales rocks theory of Celtic-Roman peace – Guardian

Think like an Olympian – Vox

And finally…“No one ever told me that grief felt so like fear.”
– C.S. Lewis, A Grief Observed

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The Monzo Pension has launched more softly than a marshmallow rocket lofted on a cotton wool plume.

And so far Monzo’s new offering looks strangely unambitious and feature-free, while simultaneously being quite innovative with its focus on solving customer problems such as: “How on Earth do I get a grip on my pensions without knowing much about pensions?”

Dive in for our thoughts on the Monzo Pension, how it works, and – crucially – how its key features stack up against comparable products on the market.

How does the Monzo Pension work?Unlike any other pension scheme we know about, the Monzo Pension doesn’t want your money. At least not the new money you may be paying into a workplace pension or SIPP every month.

For now at least, Monzo’s pension is aimed squarely at sweeping up the trail of old pensions that many of us leave behind as we move from employer to employer.

It’s not easy to remember everyone you worked for. (Sometimes it’s preferable to forget.) One or two changes of address later and your annual statement from the pension providers of WeLikeEmYoung&Cheap PLC disappears into the void, never to be seen or thought of again.

Which is exactly how millions of people in the UK get detached from the Infinity Stones of pension power scattered around their own personal cinematic universe.

Monzo’s innovation is to offer itself as the superhero that will reunite these pension shards for you.

Actually, this isn’t really a difficult quest. Indeed Monzo outsources the task to its pension tracing partner, Raindrop.

Other pension providers use Raindrop too. You just need to tell the pension detectives who you worked for and when, while ponying up your National Insurance number.

Yet tracking down old pension pots is one of those things that’s hard to get around to if you have a life. (Note to self: get a life.)

So kudos to Monzo for nudging its customers into action.

What investments does the Monzo Pension offer?Once your cash ker-chings into your new Monzo SIPP account it will be funnelled directly into your choice of investment fund.

And you can have any investment fund you like so long as it’s BlackRock.

Specifically a BlackRock LifePath Target Date Fund.

Is that it? I have a choice of… one fund?

Yep.

Monzo is big on keeping it simple.

Still, if it’s only going to offer one fund then Monzo has made a pretty good decision:

BlackRock is a leading global fund provider. We’re completely happy to use its products ourselves.
A Target Date fund is a very sensible, hands-off, multi-asset fund that’s ideal for anyone who is investing for their retirement.

There are actually nine Target Date funds – but they vary only as much as trains following the same route do. The difference lies in the time they leave the station, not in their quality of service or final destination.

The relevance of each fund is signified by its target year. For example, the BlackRock LifePath Target Date Fund 2055 is intended for people who want to retire sometime in 2053 to 2057.

Want to retire in 2052? Then it’s the BlackRock LifePath Target Date Fund 2050 for you.

Monzo simply drops your cash into the Target Date Fund that’s closest to the date you wish to retire.

How Target Date funds workTarget Date funds are designed to automate most of the investing decisions you have to make en route to retirement.

You get a diversified portfolio as standard. But your mix of equities and bonds shifts as you approach your target / retirement date.

At the beginning of the journey you’re likely to be hurtling along: pedal to the metal in a portfolio dominated by high-risk, (hopefully) high-reward equities.

By journey’s end though, your Target Date fund is easing off the gas like a fully-autonomous vehicle. As you glide into retirement, the fund will be mostly invested in low-ish risk, low-ish reward bonds.

How a Target Date fund derisks its assets over time. Source: BlackRock.

Essentially, a Target Date Fund prioritises wealth building when you’re decades away from retirement. It then gradually transitions to preserving what you’ve got, the closer you come to needing the money.

This is an orthodox and perfectly respectable retirement path designed to guard against an untimely stock market crash wrecking your plans.

However the Target Date approach is not guaranteed to work – because nothing is.

Target date profileOne weakness of Target Date funds, in our view, is that they’re light on inflation-hedging assets.

A greater concern though is psychological.

Automation creates the impression that you can take your hands off the wheel completely and everything will be okay.

In reality, you still need to periodically check your investment progress and decide whether you’re setting enough aside to support the retirement you want.

With that said, we’re still big fans of target date funds precisely because they simplify the pension-saving process for people who don’t want to handle the intricacies themselves.

Moreover, there’s no evidence that you’ll do any worse for ceding control versus adopting a flashier strategy.

Keep it simple, soldierDon’t fall for the spiel that a simple investing approach won’t cut it.

The investing arena is a cesspit of FOMO. Like Instagram, investment propaganda is flooded with snapshots of people doing spectacularly well. Or rather people who look like they are doing well – possibly because they or their paymasters have something to sell.

A Target Date fund is the investing equivalent of someone the Instagram algorithm would never promote. An unassuming person you wouldn’t look twice at. Someone who isn’t perfect and has their ups and downs. But someone who nonetheless leads a good life because they focus on what truly matters.

They’re balanced and content and don’t fret about those with a better story to tell.

Are the Lifepath Target Date funds ethical?You can check out the Lifepath Target Date funds page for yourself. It’s a masterwork of fluffy corporate accessibility unburdened by details.

There’s much talk about ‘considering’ sustainability but no firm commitment. The other key documents similarly neglect to make specific ethical promises.

That said, many of the investments held by the fund are labelled ESG-friendly.

‘Environmental, Social, and Governance’ is the supposedly ethical trifecta of buzzwords touted by financial services nowadays.

In theory the badge indicates your investment is being measured against some kind of ethical standard.

The trouble is working out what that actually means.

You should not assume that an ESG designation means your investments are aligned to your own values.

And don’t presume that your ESG investment incentivises companies to stop manufacturing arms, or to cease polluting the environment, or to refrain from exploiting their workforces.

In short, if you’re serious about ethical investing then the ESG label isn’t enough. You’d need drill into the detail and find out what your fund is investing in and whether that allows your conscience to rest easy.

Another way of putting this: there are no easy answers.

How much does the Monzo Pension cost?You’ll pay annual investment fees of 0.45% to Monzo and an additional 0.18% to BlackRock.

If you’re a Monzo Plus, Premium, Perks, or Max customer then Monzo only takes 0.35%.

In pounds and pence those fees mean:

For every £100 your investment is worth, BlackRock snaffles 18p and Monzo 45p.

Even when your pension pot reaches £10,000, BlackRock would still only take £14 and Monzo £45 per year.

That sounds like buttons and indeed BlackRock’s charge is very competitive versus equivalent products.

But Monzo becomes a very expensive platform if your pension sits north of £50,000.

In fact, when your pension balance reaches £100,000 Monzo will be charging you £450 per year, based on the fee schedule that’s been laid out at launch.

In contrast you can easily find pension providers who will bill you only around £200 for a SIPP that size. Go have a look at our broker comparison table.

Fast-forward a few decades and, with a fair wind, you could plausibly end up with £1 million or more in pension wealth.

Monzo would deduct £4,500 a year for that. Whereas a cheaper fixed-fee pension provider would still only tap you for £200.

Ballers bewareMonzo’s charges are fine if you’re starting out and you want everything in one place alongside your other Monzo services.

But you’ll pay through the nose for the Monzo Pension privilege if (/when) you’ve socked away some serious wealth.

Remember that high costs rob you of investment performance, leeching away pounds that should instead be compounding on your behalf.

Imagine two ghost cars driven by different versions of your future self. One carries too much weight and loses a second per lap, then two seconds, then three, then… you get the picture.

Are my investments safe with Monzo Pension?Monzo’s Pension scheme is covered by the UK Financial Conduct Authority’s Financial Services Compensation Scheme (FSCS).

The scheme is designed to pay up to £85,000 per person if your FCA authorised investment platform cannot meet its financial obligations to you.

£85,000 is the maximum compensation you can claim for both your Monzo Pension and your Monzo Investments accounts. You aren’t entitled to £85,000 per account.

The same limit applies if BlackRock collapsed. Again £85,000 is the maximum amount you can claim for all your BlackRock investments.

Read up on the rules if you’re particularly concerned about FSCS investment protection.

And do note that the scheme doesn’t cover you if your investments fall in value.

Anything else I need to know about the Monzo Pension?Although you can’t contribute new money to your Monzo Pension yet, Monzo is planning to switch on this fundamentally basic feature sometime.

Meanwhile, if you want to retire on your Monzo Pension then the options are currently poor. You’d either have to:

Buy an annuity with the bulk of it
Or take the whole amount as a lump sum – potentially exposing yourself to a large tax hit

The most popular and flexible retirement option – pension drawdown – is not available.

Perhaps drawdown will be enabled in the future. Or maybe there’s no rush because the majority of Monzo’s customer base is far from retirement.

Either way, it’s only a minor inconvenience because you can always transfer your pension to another provider later to access a full range of retirement options.

Happily, Monzo does not charge exit fees if you switch.

Is pension consolidation worth doing?Not intrinsically. Merging your pensions doesn’t make them worth any more.

There’s no economy of scale you’re capitalising upon, it doesn’t mean they’ll be better managed, and the whole is not greater than the sum of its parts.

Consolidation is good if:

Gathering all your pensions together in one place makes things simpler. Paperwork hassle is slashed and you can see how you’re doing at a glance.
Consolidation makes sense if your new provider is more cost-effective or offers benefits you weren’t getting elsewhere.
That’s about it.

But consolidation isn’t so good if:

Your old scheme offers benefits that won’t be honoured by your new provider. Double-check before moving any pension. Ask your old administrator if your pension comes with safeguarded benefits.
Your new provider goes bust and your account exceeds the FSCS compensation limit.
Your new provider goes bust, you’re retired, but you can’t draw an income until the whole mess is sorted out which takes over a year. (The Monevator house view is that all retirees should diversify across at least two pension platforms to avoid this scenario. It’s very rare but it happens.)
Your new provider is more expensive or offers worse investing options than your old provider.

Finally, as Monzo to its credit points out: you should keep paying into any workplace pension you can access, at least up to the limit of the employer contribution.

You can’t beat free money!

A capital ideaAs weird as it is that you can’t pay new money into the Monzo Pension (yet), we still think Monzo’s entry into the market is a good thing.

Putting the emphasis on rounding-up old pensions is a truly innovative move that will help a lot of people.

Moreover, the sheer lack of fund choice is incredibly daring in an era where choice is fetishised.

Choice overload is a massive problem in investing. So it is wonderful to see a provider who understands its customers well enough to say: “Do you know what? This will do ya.”

And for many potential users we don’t disagree.

Take it steady,

The Accumulator

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What caught my eye this week

I developed Covid on my long-awaited holiday at the end of June, its symptoms lingered for nearly four weeks, and I’m now a week into some kind of chesty-cough cold that smuggled itself in through the back door during the kerfuffle.

So maybe it was all the cough medicine and lack of sleep playing tricks with me… but wasn’t that Olympics opening ceremony in Paris last night completely bonkers?

Audacious, inexplicable, tedious, striking, cringe, and unhealthy for the rain-sodden elite athletes – and usually all at once. Probably the most French thing I’ve seen since Luc Besson’s The Fifth Element did Star Wars in haute couture.

(Well, not counting the date I had with a French girl in my early 20s who I met on a work trip who traveled from Paris to see me, greeted me with a compilation tape which turned out to be mainly women wailing against the sound of church bells, declared all the food at the trendy yet affordable restaurant I’d gingerly selected to be inedible, and who then watched me eat three courses over three untouched plates of her own food because no, it wasn’t ‘inedible’, and I wasn’t going to go without pudding.)

I have no investing angle on this to torture into shape. Life can’t be all cold rational numbers you know.

Just ask whoever did the accounts for last night’s bonkers extravaganza.

Taxing mattersOne quick errata: we overlooked the revised rate of capital gains tax for higher-rate payers on property disposals in our update yesterday. It is now 24%, down from 28%, as our ever-alert readers spotted. Thank you!

Although as another reader wryly observed: who knows how long anything in the current regime will survive contact with Rachel Reeves, anyway?

Something in the tax and pension system will change with Labour’s Budget in the Autumn, that’s for sure.

However I wanted to update these articles ASAP on account of all the emails and comments I’m getting that referred to the old capital gains allowance.

Much more than, say, a year ago.

To me that points to more people contemplating evasive action – shooting first, and planning to read all those The Autumn Budget And Your Finances summaries later.

Which I’ve mixed feelings about.

I took a big tax hit in 2021 on disposing of a six-figure position that had more than ten-bagged for me – just about the last of my legacy unsheltered holdings.

I feared a capital gains tax hike that never came.

But then tech stocks crashed and I felt tentatively smug as the very same shares I sold would have halved in value.

I was right to be tentative though. The stock – which I never repurchased in anything like the same size – recently hit a magnificent all-time high.

The point is that absent a crystal ball, it’s impossible to know what exactly to do.

For example, you could sell a big position like I did to take the tax hit upfront and aim to use the proceeds to fuel your ISAs for a few years – but perhaps the annual ISA allowance will be cut.

Or one of a hundred other permutations.

This is why strategy always trumps tactics. Fill your ISAs and max out your pensions where possible then move to paying down your mortgage. If after all that you still have problems, maybe best to be grateful compared to poorer households still reeling from much higher prices and mortgage costs?

Well, be grateful but continue to hunt for an optimal solution I guess, but with a smile. Because the tax hit on investing returns is very real.

Have a great weekend!

From MonevatorOptimising the All-Weather portfolio – Monevator [Members]

Capital gains tax on shares – Monevator

From the archive-ator: How a boring broker will make you richer – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

European and UK investors dodged £80bn in fees over 12 years with index trackers [Search result] – FT

Treasury minister says government will consider investment trust disclosure reforms – AIC

Revolut’s long wait for a UK banking licence finally comes to an end – City AM

Coinbase UK fined £3.5m for onboarding ‘high-risk’ customers – Coin Telegraph

Why the London vs New York IPO problem is a distraction – Semafor

Future of 1p and 2p pieces in doubt after Treasury orders no new coins – Guardian

What happens when you add crypto to a portfolio? – Morningstar

Products and servicesMortgage rate hopes as Nationwide offers rate below 4%… – BBC

…but Lloyds boss warns rate cuts are mostly baked-in already – This Is Money

A third of UK adults now use digital wallets [PDF] – UK Finance

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Do Kids Pass and other family discount passes save you money? – Be Clever With Your Cash

Is it worth getting a student bank account? – This Is Money

NatWest tweaks mortgage rules to be more Airbnb-friendly – Which

Can the natural diamond market regain its sparkle? [Search result] – FT

Spending abroad: the dos and don’ts – Which

Grand townhouses for under £1m for sale, in pictures – Guardian

Comment and opinionThe average cost of a lifetime in Britain hits £1.68m – This Is Money

$656,000 worth of frugal things Mr M’Stach still likes to do – Mr Money Mustache

Going back to work is hard after 12 years of FIRE – Financial Samurai

Maybe she was born with money – Money With Katie

Bill Perkins makes $100m a year but plans to die with zero – Noah Kagan

Stay in the game, investors… – Humble Dollar

…and let compounding do its work – Behavioural Investment

The folly of certainty – Oaktree Capital

Lifestyle creep is mostly a myth – Of Dollars and Data

Maxims for thinking analytically – Novel Investor

Aging mini-specialWhen work gets harder with age – Flowing Data

Six lessons from six years of retirement – Humble Dollar

On being 80 – Humble Dollar

Naughty corner: Active anticsA time-traveller’s guide to stock market winners… – Sherwood

…and a warning that even these can give holders ulcers – Baillie Gifford

…plus the Bessembinder paper it’s all based on [Research] – SSRN

An introduction to economic moats – Flyover Stocks

The London discount is about performance, not geography [Search result] – FT

A stock market return of historic proportions is taking shape – WSJ via MSN

A history lesson – Optimistic Callie

The rise of alternatives… – Verdad

…could drive a private equity liquidity squeeze [Nerdy] – MPI

Kindle book bargainsEnvironomics: How the Green Economy is Transforming Your World by Dharshini David – £1.99 on Kindle

The Hidden Half by Michael Blastland – £0.99 on Kindle

How to Own the World by Andrew Craig – £0.99 on Kindle

Never Split the Difference by Chris Voss – £0.99 on Kindle

Environmental factorsEarth likely just had its hottest two days in thousands of years – Axios

Have wind farms gone too far… offshore? – Klement on Investing

New European rules to curb deforestation have worrying flaws, scientists say – Science

Robot overlord roundupAI’s real hallucination problem – The Atlantic

Putting six free AI models to the (financial) test [Research] – SSRN

Off our beatThe dark protectionism of Trump and Vance – Roger Lowenstein

‘Xitter’ is the CNN of social media – Spyglass

Going to bed with the mafia – Klement on Investing

The problem with cities – Dror Poleg

Baby talk [Warning: potentially distressing historical detail] – Aeon

How tyrants fall – The Garden of Forking Paths

Compete in over 100 boardgames at the Mind Sports Olympiad in London – M.S.O.

And finally…“When you have to kill a man it costs nothing to be polite.”
– Winston Churchill, Churchill: Walking with Destiny

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The Hidden Half: How the World Conceals its Secrets

Never Split the Difference: Negotiating As If Your Life Depended On It

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Considering how few people ever have to pay it, there’s always a lot of worry and political noise about capital gains tax on shares.

Capital gains tax (CGT) falls due on investments you sell for a profit in any given tax year, unless:

The asset is sheltered in your ISAs or pensions.
Your gains are covered by your annual capital gains tax allowance.
Your gains can be sufficiently offset by your trading losses on other shares and assets. See our guide to defusing your capital gains below.
The asset is exempt from capital gains tax.

CGT on shares and other assets is payable on your profits – that is, the difference between what you bought the asset for and what you sell it for, after costs.

For example if you buy a share for £100 and sell it for £1,100 ten years later, then your gain equals £1,000.

CGT is payable on your total taxable gains in a tax year. All capital gains and losses are pooled together for HMRC purposes.

If you fall into the ‘liable for tax’ net then you’ll pay CGT on the gains you’ve made above your tax-free allowance.

However, there are plenty of strategies you can legitimately use to reduce or eliminate capital gains tax on shares.

How much is capital gains tax on shares?The capital gains tax rate on shares and other investments is:

10% for basic-rate taxpayers.
20% for higher-rate taxpayers and additional-rate taxpayers.

Other investments are also taxed at the same rate as shares, except for second-homes and buy-to-let properties.

The CGT rate for property is:

18% for basic-rate taxpayers.
28% for higher-rate taxpayers and additional-rate taxpayers.

The rate you pay normally depends on your total taxable income, and what sort of assets you’ve made a profit on.

Beware that basic-rate taxpayers can pay CGT at the higher rate, if your gains nudge you up a tax band.

You can work it out like this:

Subtract your annual CGT allowance from your total taxable capital gains.
Now add to that your total taxable income (including salary, dividends, savings interest, pensions income and so on, minus income tax allowances and reliefs).
You pay the higher CGT rate on any profit that falls within the higher-rate income band.

Note: Scottish and Welsh taxpayers pay CGT at UK rates. A higher-rate Scottish taxpayer may pay capital gains tax at the UK basic taxpayer level.

You need to report your taxable gains via your annual self-assessment tax return.

Do this if your total taxable gain in the tax year exceeds your annual capital gains tax allowance…

…if your sales of taxable assets are over £50,000 and you’re registered with HMRC for Self Assessment.

For example, if you sold £70,000 in shares, then you’d need to report the gain – because the amount sold is higher than the CGT reporting limit of £50,000.

Remember that sales of assets in ISAs and SIPPs aren’t reported. Don’t count them in your sums at all.

Offshore funds may pay tax at even higher than CGT ratesCapital gains on offshore funds are taxed at higher income tax rates – rather than CGT rates – if they:

Do not have UK reporting fund status.
Aren’t protected by an ISA or SIPP.

Check that any offshore funds you own (i.e. any not domiciled in the UK) have UK reporting fund status. This should be indicated on the fund’s website. HMRC also keeps a list of reporting funds.

A kicker is that you can’t cover non-reporting fund gains with your CGT allowance either.

Capital gains allowance on sharesThe annual capital gains tax allowance (or Annual Exempt Amount) for your total profits is £3,000 – starting with the tax year 2024-2025.

The UK Government regularly issues updates on CGT.

Capital gains tax exemptionsSome investments and other assets are exempt from capital gains tax:

Your main home (in most cases)
Individual UK Government bonds (not bond funds)
Cash which forms part of your income for income tax purposes
NS&I Fixed Interest and Index-Linked Savings Certificates
Child Trust Funds
Premium bonds
Lottery or betting winnings
Anything held in an ISA or SIPP

Capital gains tax is payable on shares, ETFs, funds, corporate bonds, Bitcoin (and other cryptocurrencies), and personal possessions worth over £6,000, including some collectibles and antiques.

Avoiding capital gains tax on sharesYou can reduce your tax bill by offsetting trading losses against your capital gains. This is known as tax loss harvesting and it is a legitimate way to avoid capital gains tax on shares.

Terminology note Tax avoidance means legally reducing your tax bill such that HMRC won’t raise an eyebrow. Tax evasion involves things like owning shell companies like some people own shell suits, and funnelling cash to places with super-yacht congestion problems. These days the best phrase to use in polite society is tax mitigation.

Tax-loss harvesting involves selling shares and other assets for less than you originally paid for them. You strategically sell assets to realise losses you are already carrying in your portfolio, thus minimising your capital gains.

You don’t try to create losses with bad investments! That is where people can get confused.

The goal is ideally to reduce your gains to within your CGT allowance for the year.

We’ve come up with a quick step-by-step guide to help you do this.

Calculate your total capital gains so farTot up the gains, if any, you’ve made from selling shares, funds, and other chargeable assets this tax year (which starts on 6 April).

Your records (or your platform’s statements) are worth their weight at moments like this.

You need to include every sale you made over the tax year, regardless of what you did with the money afterward.

You make a capital gain on any share holding or fund (outside of ISAs or SIPPs) that you sold for more than you paid for it.

Work out each capital gain by subtracting the purchase value and any costs (such as trading fees) from the sale proceeds.

Add up all these capital gains to work out your total capital gain for the year.

Remember that shares and funds are not the only chargeable assets for CGT. You need to add all such capital gains into your total for the year. They all count towards your annual CGT allowance.

For example, any property – other than your main home – is potentially liable for CGT when you sell it.

See HMRC’s property guidance.

Calculate your lossesYou register a capital loss if you sold shares, other investments, or a dodgy buy-to-let flat for less than you originally paid for it.

Add up all your losses over the year.

Grit your teeth, fling your hands over your eyes, and peek at your grand poo-bah loss.

Remember it’ll be okay because you’ll harvest the loss to neutralise your gains.

Sales of CGT-exempt assets don’t count towards capital losses. You can’t count disaster-trades that happened within your ISAs and SIPPs, for example.

Now for the good bit: offsetting your losses against your gains.

Let’s say you made £15,000 in capital gains on shares over the year, and you made capital losses of £14,000. Your total gain is £1,000.

Your losses have trimmed your gains to less than your annual CGT allowance. No capital gains taxes for you this year! Though possibly you should swap share trading for a more lucrative side hustle…

You can also offset unused capital losses you made in previous years, provided you notified HMRC of your loss via earlier years’ tax returns.

(Best do so in the future, eh?)

Consider selling more assets to use up more of your CGT allowance and so defuse future gainsYou now know what your total capital gains for the year are (from step 1), after subtracting any capital losses (step 2).

If your total gains are higher than your CGT allowance

…then you’ll pay CGT on the gains above the allowance.

If you will have CGT to pay, then, before the tax year ends, consider selling another asset you’re carrying at a loss in order to offset that loss against your gains. This will further reduce or eliminate your capital gains tax bill.

If your total gains are less than your CGT allowance

…then you won’t have to pay any capital gains tax on those gains. Hurrah!

You don’t need to report the trades to HMRC, either, provided the total amount1 you sold the assets for is less than £50,000 or you’re not registered for Self Assessment taxes.

Before the tax year ends, consider selling down another asset you’re carrying that is showing a capital gain. This will enable you to use more of your available CGT allowance for the year – provided you don’t go over your annual allowance, of course.

Like this, you will defuse more of the capital gains you’re carrying. This can help you avoid breaching your CGT allowance in future years.

Admittedly this is pretty hard to do now, with the annual capital gains tax allowance having been cut to £3,000. (It used to be over £12,000.)

But every little helps.

If you’ve made an overall loss in a tax year

…after subtracting losses from gains, then you should declare it on your self assessment tax return.

Capital losses that you declare and carry forward like this can be used to reduce your capital gains in future years, when you might otherwise be liable for tax.

Losses can be a valuable asset, but only if you tell HMRC.

Reinvest any proceeds from salesIf you made any share sales to improve your capital gains position, then it’s time to reinvest the cash you raised.

These are the key techniques:

Bed and ISA / Bed and SIPP – Ideally you’ll now tax-shelter the money you released within a stocks and shares ISA or SIPP. That puts that money beyond the reach of capital gains tax in the future.

You can purchase exactly the same assets in your tax shelters, immediately.

New asset – If your tax shelters are full and you don’t want to earmark the money for next year’s ISA/SIPP, then you can reinvest in a different holding as soon as you’ve completed your sale.

This new investment starts with a clean slate for CGT purposes.

Beware the 30-day rule – You need to wait 30 days to reinvest in exactly the same share, ETF, or fund outside of your tax shelters.

If you flout the 30-day rule, then the holding is treated as if you never sold it. Which undoes all your tax-loss harvesting work.

Same but different – You can sidestep the 30-day rule by purchasing a similar fund (or share) that does the same job in your portfolio. For instance, the performance gap between the best global index funds is usually small.

You can defuse your gain, buy a lookey-likey fund straightaway with the proceeds, and keep your strategy on course.

Bed and spouse – This is the ever-romantic finance industry’s term for keeping an asset in the family. You sell the asset and encourage your spouse or civil partner to purchase it in their own account.

Your gain is defused and your significant other starts afresh with the same asset. This maximises the use of the two CGT allowances available to your household.

Tax on selling sharesThe cost of trading is a bit like a tax on selling shares. It’s a can’t ignore factor that means selling for tax purposes isn’t always a good idea.

Trading costs include dealing fees, any stamp duty you pay on reinvesting the money, and also the bid-offer spread on the churn of your holdings.

Trading costs can reduce the benefit of defusing gains – especially on small sums – and even more so if you pay CGT at the basic taxpayer’s rate.

It’s best to realise capital gains as part of your rebalancing strategy, when you’re already spending money to reduce your holdings in outperforming assets while adding to the laggards.

Deferring capital gains taxYou can defer capital gains tax on your shares and other assets by never selling.

No sale, no gain, no capital gains tax.

This is especially relevant if you’re an income investor who hopes to live off their dividends for the rest of their life.

In this case, you simply enjoy the dividend income from your shares and let the capital gain swell.

A risk though is you could someday be forced to sell.

Unforeseen emergencies are one problem. Routine events such as company takeovers, fund closures, or mergers can also count as disposals for CGT purposes. Then you’ll be hit with a big tax charge on the gains.

Best practice would therefore still be to try to defuse gains as you go, by using your annual CGT allowance as described above. This reduces the tax impact of any unforeseen sales in the future.

Capital gains tax on inherited sharesCapital gains tax is not payable on the unrealised gains of shares belonging to someone who dies.

Inheritance tax may be due on the value of the shares, but not CGT.

Any gain you make between the date of the person’s death and your disposal (of the shares, not the body) does count for capital gains tax purposes though.

That’s assuming you couldn’t tuck your inherited assets into a tax shelter straightaway. (You may have had other things on your mind…)

Capital gains on shares helpHMRC issues lots of guidance on calculating capital gains tax on shares.

It’s also an unwritten rule that we writers must include a warning about ‘not letting the tax tail wag the investment portfolio dog’ in any article like this.

It’s true that there’s a fine line to tread between avoiding a bigger capital gains tax bill and becoming dangerously obsessed with minimising it.

But in practice, most of us can do a fair bit of selling to defuse CGT – without derailing our strategy – just by repurchasing the assets within an ISA or SIPP.

Think of it partly as an insurance policy. You may as well use the allowances you’ve got now, in case you get more money and more capital gains on shares in the future – but not more allowances.

The CGT allowance could even be reduced or removed by a future government. (Rueful hindsight: since the first version of this article – and that sentence – was written, the CGT allowance was halved!)

Annual allowances like the capital gains tax allowance are usually a case of use it or lose it.

Note: the total amount not the capital gain!

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The All-Weather portfolio is reputedly better than conventional portfolios at balancing our need to take investing risks while at the same time cushioning us from the worst of:

Recessions
Inflationary shocks
Terrifying stock market crashes

We tested these claims in our All-Weather portfolio explainer post. We concluded that the strategy really has delivered over the long-term, reaching back to the 1930s.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post Optimising the All-Weather portfolio [Mavens] appeared first on Monevator.

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What caught my eye this week.

You can passionately make the case for financial independence being hugely positive versus retiring early being a bit of wild goose chase – and I have. But if some unfortunate office drone has just been sent to the seldom-visited filing cabinets in the strange rooms behind security to spend a week hunting for all the paper-based invoices from O’Brien and Sons from the 1970s, well, good luck getting them to vote for the job.

Of course many jobs are rubbish. But from the earliest days of this blog I’ve argued they used to be even worse. All repetitive manual paperwork and calling Mr Blimp ‘Sir’ as he dressed you down for wearing the wrong kind of tie again.

Not to mention the love of coal mining and sweating in an iron foundry that middle-aged middle-class columnists love to champion – but would be dead doing themselves in a fortnight.

Somebody’s got to do itThere’s a big difference between a job being unsatisfying and the actual work being pointless or futile.

Yet a decent chunk of the Retire Early and Forever cohort of the FIRE scene1 believe that modern jobs are literally pointless – even to the organisation they’re working for.

They cite arcane tasks steeped in ritual but bereft of meaning, such as preparing a presentation for a senior manager that they suspect will never be read. And to be fair most of us can agree with them about all those pointless meetings.

Overall though, I believe most of these jobs have a function – at least in the private sector.

Sure there might be a bit of padded headcount here or some not-yet-optimised away employees there.

But even badly-run companies won’t survive for long carrying too much deadweight that’s doing nothing to keep the operation going.

Strike throughI saw this when I was managing my own small start-up. There were never enough hands for all the work to be done – much of it indeed annoying or trivial-seeming.

Some of those hired hands were a bit useless, I reluctantly concede. But not what we had them doing.

At least not from the myopic perspective of our company. Which is to say: nobody was curing cancer.

That is clearly a big issue for a lot of people. If pushed, they can see their work has a function. But they don’t see the point for humanity, I suppose.

The other issue is the typical cog doesn’t have a good view of the machine. Your useless role writing up user manuals that you believe nobody reads might be a lifesaver one day when your company’s minor malfunctioning gadget brings a giant operation to a halt. Not to mention it’s hard to sell stuff without operating instructions, even if most people ignore them. So they’re a function of sales and marketing.

Or just ask whoever presumably has done something wrong at Crowdstrike. I don’t know what exactly crippled half the world IT system’s following its software update yesterday. But I’ll bet it’s a trivial-seeming thing gone wrong.

Not some exciting security function that was dreamed up by the company’s brain trust and lovingly laboured-on like Michelangelo working over a ceiling. Rather, the version control or installation code or similar.

Boring stuff that gets no acclaim, and that nobody rushes out of university to get started on.

But which is quietly absolutely essential.

It’s a wonderful lifeFor more on all this, you can click over to Byrne Hobart’s devotional paean to the complexity of modern workplaces on Capital Gains this week.

In taking down a Bible of the Modern Work is Rubbish movement – the late David Graeber’s Bullshit Jobs – Hobart writes:

Graeber estimates that roughly half of all work fits his fake job categorization, which implies that the economy’s productive capacity is roughly twice the output we actually get. It would be a pretty big deal if this were true: we could have a lot more leisure, and a lot more stuff.

And there are people motivated to make this happen! The strongest single argument against Graeber’s book is: did anyone at Bain or McKinsey read it? What about KKR and Blackstone?

Did any owner of any business of any size read it and say: “What a sec! That’s right! Most jobs really are fake jobs designed to make rich people feel good about themselves. But what makes me feel good about myself is having more money, so I’m going to start firing people and keeping the money.”

The closest you can get is Elon Musk at Twitter, which did reveal that the service could keep running, and ship new features, with a lower headcount. But that happened at a company that was notoriously inefficient, for years, and one where it’s widely-agreed that they unnecessarily blew their lead in short-form many-to-many communications, and took too long to get into messaging.

If there’s one large-scale example of the thesis playing out, and the thesis holds that it’s describing a ubiquitous phenomenon, something doesn’t add up.

Hobart rightly concedes that many jobs aren’t fun to do and also that many people are in the wrong jobs for them, personally.

But as he concludes:

The world is full of mysterious economic phenomena. You should expect it to be!

A world where you can consider a random career or business for a few seconds and instantly identify a way to double its efficiency is a much weirder world than one where those mysteries tend to have satisfying answers.

It’s also a world whose sizable and growing aggregate wealth is a big mystery: if we’re wasting more and more of our time, shouldn’t we be getting poorer?

Go give it a read and see what you think.

Honestly, with all the dire warnings about the typical worker’s imminent replaceability by an AI drone, it’d be nice to think we were just giving each other things to do out of habit, ego, stupidity, or an obliviousness to the bottom line.

In an AI-powered world we could then continue to pay ourselves to – metaphorically – dig holes on a Monday only fill them up again by Friday.

But real-world capitalism is far too ruthless for that.

Have a great weekend.

From MonevatorThe All-Weather portfolio – Monevator

How people invest their pensions and other assets – Monevator

From the archive-ator: Nine underrated tools to help you achieve financial independence – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK inflation holds steady at 2%, holding just above expectations – CNBC

Nearly 1.1m people immigrated to England and Wales in the year to mid-2023 – ONS

London leads surprise rebound in house prices – This Is Money

New law aims to prevent repeat of Truss mini-budget – BBC

Nationwide’s £2.9bn takeover of Virgin Money cleared by watchdog – This Is Money

More than half-a-million people now caught in 60% tax ‘trap’ – The Accountant

King’s Speech summary: Labour’s key agenda points… – BBC

…with a claim the pension shake-up could add £11,000 to average pots – Guardian

Money can buy happiness, suggests new study – Guardian

Supply chain stresses are coming back – Axios

Products and servicesMonzo launches a free card for under-16s – Monzo

First-time buyers handed 95% mortgage boost – Which

Should buy-to-let landlords fix now or risk a tracker? – This Is Money

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Keyless tech is contributing to a wave in car thefts… – Which

…what else is driving the car insurance crisis? [Search result] – FT

Pret to end ‘free’ coffee subscription – Be Clever With You Cash

Eco homes near the sea for sale, in pictures – Guardian

Comment and opinionA balanced portfolio always comes with regrets – A Wealth of Common Sense

When does it make sense to own a non-standard investment? – Humble Dollar

Is a ‘total bond’ fund still a good choice? [US but relevant] – Oblivious Investor

Rebalancing sometimes produces higher returns. Not always – Morningstar

Don’t take the last dollar – Of Dollars and Data

Wage dysmorphia – Guardian

When the game changes, invent a whole new one – Abnormal Returns

The cost of war – Klement on Investing

Three bad economic narratives that are dead but will persist – Cullen Roche

Commodities for the long run [Nerdy] – CFA Institute

The UBS Global Wealth Report [PDF] – UBS

Risk and luck mini-specialThe risks we miss – Humble Dollar

All the luck we cannot see – The Uncertainty of It All

Is risk always bad news? – Simple Living in Somerset

Naughty corner: Active anticsThe last time the S&P 500 dropped more than 2% was 512 days ago – Sherwood

Most investors don’t believe in efficient markets – Verdad

The increasing complexity of the ETF universe [Search result] – FT

Record speed-run into small caps leaves US stock market searching for catalysts – Sherwood

Asset manager profit margins are getting thinner – Institutional Investor

How to make and lose millions in the crypto economy and not lose your mind – Sherwood

Private equity’s dry powder mountain reaches record height – Institutional Investor

Kindle book bargainsThe Hidden Half by Michael Blastland – £0.99 on Kindle

How to Own the World by Andrew Craig – £0.99 on Kindle

Never Split the Difference by Chris Voss – £0.99 on Kindle

Bejiing Rules: China’s Quest for Global Influence by Bethany Allen – £0.99 on Kindle

Environmental factorsModelling the economic consequences of climate change – Klement on Investing

Lost area of Welsh rainforest to be returned to ancient glory – Guardian

Bliss cycling along the wild coast of Estonia – Guardian

Robot overlord roundupGoldman throws cold water on AI mania – Institutional Investor

Can AI make work meetings more bearable? – BBC

Samsung’s new image-generating AI tool is a little too good – The Verge

Assassination aftermath mini-specialThe Trump assassination attempt is a window into America’s fractured reality – Vox

This is the Great Ravine – Epsilon Theory

Off our beatPush the fence – Raptitude

Was Gareth Southgate great, or just lucky? – FT

Where to build a brand new town in Britain – UK Day One

Why skilled immigration is a national security priority for the US – Noahpinion

The knotty death of the necktie – The New Yorker

Underground cave found on moon could be ideal base for explorers – Guardian

It’s time to stop arguing over the population slowdown and to start adapting – Vox

Why is 80% of Mexico nearly empty? – Uncharted Territories

And finally…“Wealth is the absence of economic anxiety.”
– Scott Galloway, The Algebra of Wealth

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Financial Independence Retire Early.

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The main reason people try to keep up with the Joneses are the status games we all play.

Humans are social creatures. And throughout our evolutionary history, it made sense to be intensely concerned about our ranking within the tribe.

Status could mean the difference between eating, having children, and meeting – or meting out – violence.

Not to mention whether you get a backstage VIP pass for Glastonbury or you’re pitching your tent by the loos.

Status games are everywhere. Even when people have few expensive material possessions, you’ll notice they’ll find a way to get a status boost.

Think of holier-than-though students who flirt with communism. Impoverished kids trying to get an edge with a pair of rare Nikes. Or frugal savers who position themselves as above “all that consumerist crap” and in doing so aim to turn their practical choices into moral virtue.

As you doAnother – better – reason to twitch the curtains to see what our peers are up to is imitative learning.

We learn to fit in and get on by copying each other. It’s a social reality.

Before you say you’re “above all that crap” too, spend an hour in a kindergarten. See how impressed you are with the kid who ignores all the norms of how to eat, when to shout, and whether to use the floor as a potty.

Of course I still like to believe I’m different. Maybe you do too.

But the base rate before we even think about diverging is to know what others are doing with their lives.

Which is usually school, job, taxes, marriage, mortgage, kids, taxes, pension, retirement, taxes, death (and maybe taxes).

All fluffed upSome of these aspects of living are easier to pick up by copying – perhaps subconsciously – than others.

Fitness habits, say, or how to handle your child’s temper tantrum. Or when to suck up to a boss, which may be much the same thing.

But other stuff happens behind closed doors. We can only wonder how everyone else is doing it.

Perhaps that’s a secondary reason for the popularity of porn?

We’re all curious as to how everyone else is getting it on. For purely intellectual reasons, you understand.

Of course, for most people pornography is unrealistic. (The Accumulator excluded. He’s a legend in the bedroom and I claim my £50 in PR fees.)

We still can’t help benchmarking ourselves to all that athletic activity.

And similarly, we keep one eye on the Joneses – despite knowing better.

We usually don’t know what the Joneses earn or how they invest their money. As with their habits between the sheets, we only get the vaguest sense of whether we’re doing it right from the output presented by others. We mostly don’t know the inputs that enable it all.

And again, before you say you’re above such petty comparisons please spend 30 minutes sitting on the pavement outside Tesco asking if anybody can spare any change.

Then come back and tell me you’re oblivious to your status.

Size mattersWe all agree judging the Joneses ‘success’ by the car they drive or the handbag they tout can be as misleading as listening to a 17-year old boasting about their body count.

Nobody is doing an audit here. The Joneses may be whacking it all on a credit card. Perhaps none of that spending is making them happy, anyway. The whole shebang could be a mask.

Alternatively, they might be having a ball. Zero debt and up to their eyeballs in well-provisioned pensions, an ample larder, tasteful consumer goods, and a steady supply of plane tickets to sunnier climes.

Who knows? To go deeper we’d need a more complete picture.

This might be one reason for the appeal of our FIRE-side chats on Monevator.

The subjects are Joneses of a sort, sure. But the interviews highlight factors we understand to be more consequential traits to study.

How they invest, say, rather than how they do up their homes.

Or how they save, versus where they shop.

These traits are usually invisible to us in everyday life. Yet they’re much more indicative when it comes to achieving long-term financial success than material proxies of status.

Behind the numbersBroad brush surveys can also give us insights into what goes unseen with our fellow strivers.

Even the wooliest statistics can be surprising.

I was somewhat taken aback in 2023 to discover via a simple poll on Monevator that over 60% of our readers are higher or additional-rate taxpayers, for example.

From years of interacting with readers, I know your net worths typically skew higher than average, too.

This data has implications for the type of articles our readership is likely to want.

But it should also inform how we all approach reader comments left on our site.

Being relatively wealthy – or on their way to it – most Monevator readers’ lives won’t change much if they lose £5,000 in a downmarket, for instance, or if they make an extra £2,000 a year.

That is very different to the norm on many other sites – especially discussion forums such as Reddit, which skew a lot more young and up-and-coming.

Indeed, in an ideal world you’d see a reader’s age, income, net worth, dependents, and even their monthly outgoings alongside every comment they make – whether here or on Reddit.

That’s obviously impossible. Instead we can only get a sense of who someone is if they repeatedly write under the same username over a very long period of time.

The vast majority do not, which is why I urge constructive skepticism when it comes to financial opinions on the Internet.

You nearly always don’t know who you’re talking to. Yet personal context can change everything, turning prudence into folly or an investment into a gamble.

One (very rich) person’s £20,000 meme stock punt gone whoopsie, for instance, is another (much less rich) person’s would-be house deposit turned to smoke.

How people invest their pensions on one online platformEnter Interactive Investor’s new SIPP index (note: affiliate link), which has been cited by a few mainstream financial writers recently.

I thought perhaps this would give us some interesting insights into how people are choosing to invest pensions, a decade into the post-freedom era.

The report – which II is touting as a quarterly ‘index’ – certainly alludes to such insights. Both on how people invest pensions in the accumulation phase, and also when they begin to drawdown an income.

So as a financially-curious human – let alone an investing blogger – it promised to be interesting reading.

In truth though I gleaned surprisingly little useful info from this first incarnation of the report.

That’s because the platform tells us what kinds of financial vehicles its customers choose to invest pensions into – but not what those funds, trusts, or other stuff actually hold, except in the case of cash.

So we discover:

Source: Interactive Investor

…but what does this really tell us? (It probably also doesn’t help that I struggle to tell the difference between some of these shades of blue!)

True, we can see there are more funds and direct equities in the accumulation phase, and a lot more in investment trusts in the drawdown phase.

But without knowing what assets these funds are actually invested in, this information is pretty useless.

What’s more, is a greater share of investment trusts held in drawdown accounts because people are choosing to lean on these products as a source of retirement income?

It could be. Or it could be that Interactive Investor clients who are already in drawdown are from an older generation, and so are simply more inclined to favour investment trusts in the first place.

A table showing the most popular funds held in SIPP accounts before and after drawdown doesn’t shed much light either:

Source: Interactive Investor

Good luck getting much insight from this data dump – except perhaps that it’d be nice to own shares in Vanguard.

It’s what we invest pensions into that mattersWhat would be more useful would be to see what assets such everyday investors are holding on a ‘look-through’ basis.

For example, if they own a LifeStrategy 60/40 fund, then 60% would be allocated to their equities bucket and 40% to their bond bucket.

Total everything up across all their funds, trusts, and other investments, and we’d see a more useful overall asset allocation picture. It’d also show how it shifts through time too as they move into drawdown.

Instead the II SIPP report presents an old-fashioned marketers’ perspective on investing.

The report tells us what products are popular, which is doubtless interesting if you work at Vanguard or FundSmith. But it doesn’t tell us much about investors’ attitude towards particular assets – or even risk.

It is like when friends ask me about investing and tell me they “have an ISA”.

First you have to ask whether it’s a cash ISA or a stocks and shares one. If the latter, you must ask them what’s in it. Finally you gently explain that the ISA is only a wrapper – it’s not the actual investment.

It’s similar with a fund or an investment trust. What matters most for investing insight purposes is what these vehicles hold, not how they’re set-up and marketed.

Trend spottingTo be fair, the report does offer a few interesting tidbits in the commentary, albeit based on data that’s not surfaced to us as readers as far as I can tell.

We learn:

Passive funds have grown more popular in the last two years. They now comprise a majority of the top ten most popular funds for both accumulators and those in drawdown.
Younger customers are more into ETFs than older folk who prefer traditional funds and trusts.
Female clients saw higher returns than male customers over the past two years across all ages. This appears to be because they hold more collective funds and trusts, and fewer individual shares.
Younger clients in accumulation mode have seen much higher returns over the past two years than older investors in drawdown. That’s as you’d expect, because the latter should be taking less risk.

There’s the outline of a useful report here and I hope Interactive Investor continues to develop it. They get a lot more of this stuff to chew through in the US than we do, and it’d be churlish not to welcome additional UK-centric data.

But I’d like the platform to think more holistically about asset allocation for future iterations.

Rich pickings: how the wealthy do itAll this made me curious for more. So I hunted around and found a couple of fairly recent reports that do give us more specific asset indications – albeit not for what’s held in SIPPs alone.

First up there’s the Resolution Foundation’s report on the wealth of richer families.

This report was published in 2020, so take it with a pinch of salt – we’re on the other side of a bond market rout, after all, and some of its data goes back to 2018 – but for what it’s worth the Resolution Foundation reckons wealthy families were financially positioned as follows:

Source: Resolution Foundation

This is somewhat interesting, if dated – ‘zero return’ assets being to 2020 what flares were to 1975 – but at least it shows us how a reliance on cash decreases with greater wealth, and also that risk-taking increases.

However as I read the report this chart only gives us a sniff of where people actually have their money. That’s because it only seems to apply to the ‘financial asset’ sliver of how the Resolution Foundation divvies up overall household wealth.

And crucially ‘financial assets’ would seem to exclude pensions:

Source: Resolution Foundation.

So we’re back to context again, right? If I have a chunky paid-up pension that constitutes a huge chunk of my assets, then I’m probably going to take more risks in my online share dealing account.

Anyway you can read the full report for further breakdowns, which partly unpick this while introducing other issues.

Incidentally, the Resolution Foundation’s subsequent two wealth reports don’t break down financial asset allocation at all.

Lies, damned lies, and pension statisticsThe Resolution Foundation cites data drawn from the Office of National Statistics (ONS).

And poking around in the ONS archives does indeed flag up a treasure trove – albeit in rather raw form.

In particular, a 2023 data dump tells us how funded occupational pension schemes are invested, including asset allocation.

Loading the data into a spreadsheet yields the following ‘look-through’ breakdown of how pooled investments are allocated as of Autumn 2023:

| Asset class | Percentage | | Equity | 35% | | Fixed Interest | 10% | | Property | 2% | | Mixed asset | 35% | | Hedge | 1% | | Private equity | 0% | | Money market | 4% | | Other* | 13% |

Source: ONS. * We’re told ‘Other’ pooled investment vehicle asset types include cash, commodity/energy, structured products, unknown and with profits.

Job done? Not quite. The above data only breaks down pooled investments, but total pension assets also include direct investments into everything from cash to corporate bonds to unquoted private equity.

However these amount to only about another 11% or so of pension assets.

A bigger snag is the huge allocation to ‘mixed assets’ and ‘other’. This brings us back to the Vanguard LifeStrategy problem.

We could be looking here at 80% equities and 20% bonds – or 5% kumquats and 95% vintage cars! We just don’t know.

Still, the big picture seems to be much more than 50% in equities – I’d guess closer to 70% – along with a decent chunk in bonds and a smidgeon in cash.

Which seems about right?

Funds finding favourFinally, another way to envisage how our financial assets are invested – again not only our pensions – is to see where UK investment funds have allocated their money.

For this I turned to The Investment Association’s latest survey – and I’m pleased to feature another colourful chart to conclude our romp:

Source: The Investment Association

Again, this information only takes us so far in understanding exactly what assets the Joneses have bought into.

For starters, while the Investment Association says…

‘our funds data includes assets in open ended funds, investment trusts, ETFs, hedge funds and money market funds’

… this notably – and not surprisingly – excludes cash and directly held property.

Also, many entities besides private individuals have money invested in funds. But it’s all captured here.

And even where the money is ultimately on the balance sheet of a private investor, it will include Richard Branson and the Duke of Westminster as well as you and me. Such riches will further distort things.

Also ‘mixed asset’ is in there again to ambiguously stink up our conclusions.

Perhaps the clearest takeaway from the graph concerns a different if now very familiar story – the shrinking amount of UK fund industry money allocated to UK equities over time.

We (mostly) don’t invest pensions in pie-in-the-skyGoogling around provides plenty of other snapshots that I could have included in my review above. I haven’t exhausted the Internet!

But I’m calling time on account of my sore fingers and your waning interest.

Perhaps there is a perfect review of how pensions are invested out there somewhere. Please do share any better sources you’ve found in the comments below.

So have we learned anything from this exercise?

Only really that most money is broadly allocated across a wide range of assets – and that allocations do change with age and (possibly) with the shift to retirement.

That isn’t a newsflash. But perhaps it’s reassuring that while AI behemoths, cryptocurrencies, and meme stocks clog the agenda, the moneyed Joneses continue to plod sensibly along with broad portfolios that will outlive any particular fad.

And our pensions should be invested that way too.

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Conventional equity / bond portfolio splits did not acquit themselves well during the cost-of-living crisis. When the enemies at the gate were fast-rising interest rates and inflation, standard portfolios looked like a suit of armour missing its faceplate – nominally effective but with a glaring weak spot.

If only someone would invent the faceplate.

Well as it happens, somebody already has.

The All-Weather portfolio integrates a fuller spectrum of defences – including assets with a better record against the withering winds of inflation. (Hmm, smooth metaphor mixology – Ed).

We’ll examine the long-term track record of the All-Weather portfolio in a minute. But first we need to ask…

What is the All-Weather portfolio?The All-Weather portfolio was popularised by Ray Dalio, the founder of the Bridgewater hedge fund behemoth.

The portfolio is configured to contain downside risk by including a variety of asset classes such that the portfolio as a whole is capable of performing regardless of the macroeconomic conditions.

Bridgewater identified the weather conditions that investors should prepare for as:

Economic growth
Economic slowdown
Inflation
Deflation

Those scenarios and their asset class countermeasures combine to present an investment model:

The model’s four quadrants represent the main economic environments that we’re likely to pass through during our investing journey.

Pack a raincoat and a sunhatEach quadrant is staffed with the asset class(es) most likely to positively respond to its conditions:

Left-hand upper quadrant: Rising demand and low inflation is the economic equivalent of glorious sunshine. Fast-growing equities is the ready-to-wear investment outfit for this type of weather.

Left-hand lower quadrant: Falling demand and low inflation (or even deflation) means we’re in for a market storm. Shelter beneath a sturdy umbrella fashioned from bonds and cash.

Right-hand upper quadrant: We’re sweltering as rising demand and high inflation overheats the economy. Commodities are well-adapted to these conditions, even though they can feel ridiculous at other times – like wearing a giant sombrero to a board meeting.

Right-hand lower quadrant: Stagflationary intervals of falling demand and high inflation call for a coat of inflation-linked bonds. The UK’s own index-linked gilts were issued from 1981 partly to restore confidence in governmental fiscal responsibility after the stagflationary 1970s.

Imagine you find yourself invested during one of these four seasons at any given time. The model reveals which asset class is suited to each circumstance.

However even Bridgewater concedes it can’t consistently forecast shifts in economic weather fronts. Hence the All-Weather portfolio hedges uncertainty, by taking a position in each useful asset class.

Granted, this is a very simple model and asset classes aren’t guaranteed to respond according to type. Yet the empirical data shows that the strategy is relatively weather-proof over the long-term.

We’ll dig into the specific asset allocation recommended by Dalio’s portfolio in a moment, but first we need to acknowledge some caveats.

Caveat acknowledgementsInflation-linked bonds are only certain to hedge against inflation in the short-term if you hold them to maturity. You can’t do that with linker funds, but you can with individual index-linked gilts. See our post on building an index-linked gilt ladder.

Gold is sometimes placed in the right-hand quadrants because it has a reputation as an inflation hedge. This is a myth. See our post on whether gold is a good investment.

As it happens, gold still earns its place in the All-Weather portfolio due to its lack of correlation with equities and bonds. In asset allocation terms, gold is like that Swiss Army knife tool whose original purpose is a mystery, but which often comes in handy all the same.

The Ray Dalio All-Weather portfolio: asset allocationA passive investing version of the All-Weather portfolio could be structured like this:

30% equities
40% long-term government bonds
15% medium-term bonds
7.5% commodities
7.5% gold

You may be shocked by the idea of holding 55% in bonds. The Ray Dalio portfolio is designed like this because it’s informed by the principle of risk parity, which aims to better balance risk exposure across its different building blocks.

For example, a stock-heavy portfolio loadout – an 80/20 split or even the 60/40 portfolio – is making a big bet on the performance of equities. That’s obviously fine so long as equities perform. But if you live through a multi-decade stock market depression then you have a problem.

Meanwhile, the overwhelming bulk of such a portfolio’s risk exposure (as measured by volatility) is stored in its large equity allocation. When stocks plunge the portfolio does too, because it doesn’t pack enough bonds to offset the equity downdraught.

The risk-parity approach tries to solve this issue by attempting to equalise the amount of risk associated with each asset allocation.

We’ll see clearly in a moment that this strategy works – but there is a price to pay.

Why no inflation-linked bonds?If inflation-linked bonds are so great at combating inflation why don’t they feature in the All-Weather portfolio?

The short answer is that the portfolio was conceived in the US before TIPs existed. (TIPs – Treasury Inflation Protected Securities – are the American equivalent of the UK’s index-linked gilts).

Bridgewater acknowledges that inflation-linked bonds are an important part of the All-Weather strategy. However the investment community hasn’t updated on that fact.

It’s a strange instance of cultural inertia – a bit like the Japanese devotion to fax machines. We’ll look at a version of the All-Weather portfolio that does include index-linked gilts in the second part of this mini-series.

All-Weather portfolio drawdownsAlright, let’s check that the All-Weather portfolio works as advertised. Is it less volatile than conventional portfolios when the market blows a gale?

This drawdown chart shows us how the All-Weather portfolio performs vs 100% equities and the 60/40 portfolio during every market setback from World War 2 onwards:

Data from Summerhaven1, BCOM TR, JST Macrohistory2, British Government Securities Database, The London Bullion Market Association, Measuring Worth and FTSE Russell. July 2024.

Not reliving your personal worst nightmare in the stock market when you scan the graph above? We’re using annual returns, which can blunt the extreme edges of bear markets compared to monthly peak-to-trough measurements. (Sadly, monthly data isn’t publicly available for gilts pre-1998.)

You easily notice though that the deepest declines still look like jagged ravines – and that conventional portfolios fall much further than the All-Weather.

Navigating stock market hurricanes100% equity portfolios in particular aren’t for widows, orphans, or those with a dicky ticker.

For example, during the UK G.O.A.T. crash of 1972-1974, the All-Weather portfolio ‘only’ dropped -28% compared to -60% for the 60/40 and a mind-bending -72% for 100% equities.

Investing returns sidebar – All returns quoted are inflation-adjusted, GBP total returns (including dividends and interest). Fees are not included. The timeframe is the longest period that we have investable commodities data for. Equities are UK, because world data is not publicly accessible before 1970. The long-term historical gilt index is dominated by long-dated maturities. Separate data is not available for intermediates. Thus the All-Weather fixed income allocation here is 40% long bonds and 15% money market/cash. Portfolios are rebalanced annually.

Most extraordinary were the Dotcom bust and the Global Financial Crisis (GFC). While conventional portfolios heaped misery on their investors, All-Weather owners were asking “bovvered?” with a shrug.

Here’s the steepest loss each portfolio bore during those market tempests:

| Portfolio | Dotcom Bust | GFC | | All-Weather | -5.8% | -3.4% | | 100% equities | -38.6% | -32.1% | | 60/40 | -17.8% | -14.5% |

Those were two almighty crashes. The largest of the 21st Century so far! Yet the dip registered by the All-Weather portfolio would barely give you butterflies, never mind sleepless nights.

Casting our eyes back to the drawdown chart cum investing slasher flick above, we can also see that the All-Weather portfolio merely performed much the same as the 60/40 on some other occasions.

Typically this happened when bonds were crunched harder than equities and the performance of the All-Weather’s minor asset classes didn’t compensate.

The most significant of these incidents was in the late 1950s and during the 2022 bond crash.

Overall though, the All-Weather delivers on its promise of relatively smooth sailing.

See these 1934-2023 volatility figures:

| Portfolio | Volatility | | All-Weather | 9% | | 100% equities | 20.6% | | 60/40 | 14.8% |

Nice – but remember this stability has been bought by loading up on bonds and cash. And that must have cost a fair wedge of return, right?

Right…

All-Weather portfolio historical performanceHere’s the total return growth chart:

Inevitably, the All-Weather’s two-stroke equity engine leaves it underpowered versus normie portfolios.

A table of cumulative and annualised returns tells the story:

| Portfolio | £1 grows to… | Annualised return | | All-Weather | £15 | 3.1% | | 100% equities | £119 | 5.5% | | 60/40 | £34 | 4% |

And there’s the rub. Tricking the portfolio out with gold and commodities doesn’t circumvent the usual risk/reward trade-off (though other figures do show it’s far superior to a 30/70 equity/bond split). The dampening of drama on the downside means a lack of fireworks on the upside.

That said, if you like your returns risk-adjusted then the All-Weather delivers:

| Portfolio | Sharpe ratio | | All-Weather | 0.34 | | 100% equities | 0.26 | | 60/40 | 0.27 |

The Sharpe ratio is a measure of risk vs reward. The higher your Sharpe ratio, the better your risk-adjusted returns. In other words, the more return you get per unit of risk, as measured by volatility3.

By that measure the All-Weather portfolio offers more growth in exchange for the pain it causes. In contrast there’s scarcely any difference between the 60/40 portfolio versus 100% equities.

Which essentially means that UK government bonds have not been a great risk-reducer historically – much less so than in the US experience – as we pointed out when we wrote: Why a diversified portfolio needs more than bonds.

Should you choose an All-Weather portfolio?If you hate market turmoil or your focus is on holding on to what wealth you have, then Dalio’s brainchild looks like an excellent choice.

I’ve often wondered how I’d cope if I had to face a rout on the scale of 1972-74. The All-Weather portfolio would reduce my odds of ever being blasted like that.

But if you need more growth than the All-Weather offers then you’ll have to overclock your equities and accept the consequences. It’s that, extend your time horizon, or increase your contributions.

The undeniable downside of the All-Weather approach is this lack of equity oomph. That means it’s not ideal for young investors hoping for lift-off or for accumulators still far from their investing destination.

If that’s you then choose a more conventional portfolio, so long as you’re prepared to accept the risks.

How to build an All-Weather portfolio

Use a global tracker fund to include emerging markets diversification.
See comments above about using individual linkers to hedge inflation. If that’s too time-consuming then opt for a short-duration global inflation-linked bond fund hedged to GBP.
**Broad commodity ETFs diversify across commodities futures and are the right choice to replicate the asset class.

The ETFs I’ve listed in the table are just suggestions to get you started. They’re good but not intrinsically better than other choices you could make.

In truth, index trackers are like tins of soup: much of a muchness. For more options see our low-cost index funds article.

I wouldn’t use an intermediate gilt fund to replicated the original All-Weather’s 15% fixed income allocation. US intermediates are typically much shorter in duration and therefore less volatile than their UK counterparts. A money market, or short linker, or short nominal gilt fund can fill this slot.

Indeed the various options – plus material differences between the US and UK markets – might imply there’s some cunning asset allocation tweak that can squeeze a bit more juice out of the All-Weather portfolio for British investors.

We’ll investigate that in part two.

Take it steady,

The Accumulator

Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert, The First Commodity Futures Index of 1933, Journal of Commodity Markets, 2020.
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. The Rate of Return on Everything, 1870–2015. Quarterly Journal of Economics, 134(3), 1225-1298.
i.e. annualised standard deviation

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What caught my eye this week.

Everyone knows that meetings are the bane of office life. The only people who love them are the genetically bossy, the work-shy, or the lovelorn office junior who has a crush on an attendee from another department.

Anyone who gets paid to produce some kind of measurable output resents being pulled away from getting on with it. Especially when they’re being pulled away by those whose job amounts to telling them to get on with it.

Meanwhile actual bosses with actual power prefer to be somewhere else making actual decisions. Or at least enjoying a business lunch.

At best meetings are a necessary evil. At worst they’re scaffolding that helps to enable the nonsense and doublespeak that pervades modern corporations.

Presetting the agendaThe most dreadful meeting I ever sat though turned into one of those soul-destroying Kakfa-esque Hall of Mirrors.

It was worse because I liked this employer and I was early enough into the job to still believe the guff.

Titter if you like, but I was looking forward to a two-day brainstorming session to ‘reset’ our aims and ‘imagine’ the future of our division.

A senior out-of-town senior manager would even be joining us to give our conclusions the official seal.

And you know what? For the first one and a half days the meeting wasn’t bad at all. Ideas flowed with the coffee. Special boxes of doughnuts and sandwiches pepped up our energy levels. Hitherto quiet employees spoke up, and they were heard. Long-standing grievances were put on notice. And sensible – even aspirational – goals were tallied on a huge whiteboard.

But then, for the final afternoon session, things turned – to my innocent mind – surreal.

The out-of-town manager was no longer mostly listening and offering a nod or a word of facilitation.

Instead he took charge to make sure that our ideas became deliverable targets.

“So what I think we’re saying is…” he began, before listing a bunch of stuff that nobody had said at all.

Nothing much was to change – we’d apparently agreed – except that our revenue goal was up 25% and we should do more spam-style mass-marketing.

Naive numpty that I was, I couldn’t believe it. I’d been totally suckered in, and I was now dismayed.

“Don’t worry,” quipped an older hand at the team-building drink session afterwards. “They’ve done this loads of times – but nothing will come of it.”

It reminds me again why I blew up my corporate career.

Meting out the painDerek Thompson in The Atlantic (read via MSN) has a great piece out this week on what he calls the ‘industrial-meeting’ complex. Give it a read to feel seen for your own meeting agonies (or to feel grateful to be missing out on it.)

Thompson writes:

Altogether, the meeting-industrial complex has grown to the point that communications has eclipsed creativity as the central skill of modern work.

Last year, another Microsoft study found that the typical worker using its software spent 57% of their time ‘communicating’—that is, in meetings, email, and chat—versus 43% of their time ‘creating’ documents, spreadsheets, presentations, and the like.

Today, knowledge work is, quantitatively speaking, less about creating new things than it is about talking about those things.

I guess the one bright note is that Artificial Intelligence will find it hard to sit for hours in an excessively air-conditioned office, trying to mentally plan a summer break while two colleagues argue about who is really responsible for upgrading the office firewall, and wondering if anyone will notice if you snag that last oversized chocolate chip cookie. There might be jobs left for us yet.

Have a great weekend. Especially if you’re playing for England!

From MonevatorThe Slow and Steady passive portfolio update: Q2 2024 – Monevator

Are you ready for interest rate cuts? – Monevator

From the archive-ator: ETFs vs Index Funds: what are the key differences? – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Staff and pupils allowed late Monday starts as England play in Euros final – Guardian

UK economy returns to growth in May, beating expectations – CNBC

‘Swiftflation’ headache for the Bank of England – This Is Money

US inflation cools again, potentially paving the way for the Fed to cut rates soon – A.P.

Four-day week campaign to launch pilot looking at flexible working – Guardian

Big London office buildings proving almost impossible to sell [Search result] – FT

Number of millionaires to soar globally but plunge in the UK, research finds – CNBC

Labour’s housing plans will use land twice the size of Milton Keynes – Guardian

Softbank acquires UK chipmaker Graphcore – TechCrunch

The world’s poor have gotten richer – Axios

The lifecycle of market champions [A few weeks old, I missed it] – Bridgewater

LSE in peril mini-specialThatcher’s mistake – Prospect

London stock market rules shaken up to try to stop firms moving overseas… – Guardian

…but the initiative is not universally popular – Sky

Products and servicesMortgage competition heats up as rate decision looms – BBC

Nine ways to protect your savings from smartphone thieves – Be Clever With Your Cash

Sign-up to Trading 212 via our affiliate link to claim your free share and cashback. T&Cs apply – Trading 212

Barclays launches £175 current account switching offer – Which

Can the boom in dinosaur fossils survive? [Search result] – FT

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Should you pay £650 for the Amex Platinum Credit Card? – Which

How to negotiate your car insurance – Which

Is Amazon Prime Day any good? – Be Clever With Your Cash

Homes to watch sport from, in pictures – Guardian

Comment and opinionFollow Harry Dent at your peril – Think Advisor

How bonds became a serious investment choice again [Search result] – FT

Boreout at work and life – Life after the Daily Grind

Inside the Bank of England’s gold vaults with Idris Elba [Video] – W.G.C. via YouTube

How the ‘single tax’ can break financial resilience [Search result] – FT

Over decades global stock markets have got less risky, more rewarding – Morningstar

The overlooked risk of regret in retirement [Podcast] – Humans Vs Retirement

The capital gaze – Money With Katie

Looking different – Humble Dollar

In search of the elusive neutral interest rate [Nerdy] – CFA Institute

Passive index investing in the dock mini-specialAre index funds a bubble? – JL Collins

GMO: Passive investing’s impact has been overblown, but it’s not negligible – Institutional Investor

Passive investors and the AI bubble [Search result] – FT

Naughty corner: Active anticsThe US stock market’s internal agonies have reached epic proportions – Sherwood

Stock splits and stupidity – Arcadian

Here’s what Mt. Gox repayments mean for Bitcoin markets – Axios

Bill Ackman wants to monetise his X account to the tune of $25bn – Sherwood

The easiest way to replicate a multi-factor hedge fund is with cash – Finominal

How stocks became the #1 game in America – Bloomberg [h/t Abnormal Returns]

It’s time for the Fed to cut rates – Claudia Sahm

Kindle book bargainsThe Hidden Half by Michael Blastland – £0.99 on Kindle

How to Own the World by Andrew Hallam – £0.99 on Kindle

Never Split the Difference by Chris Voss – £0.99 on Kindle

Bejiing Rules: China’s Quest for Global Influence by Bethany Allen – £0.99 on Kindle

Environmental factorsWind is now generating more energy in the US than coal – Sherwood

Trophy killings spark fierce battle over the future of ‘super tusker’ elephants… – Guardian

…even as Pablo Escabar’s abandoned hippos wreak havoc in Columbia – Smithsonian

Polluters provide higher returns than non-polluters – Alpha Architect

Indonesia and US seal $35m debt swap to protect coral reefs – Reuters

Attention wild swimmers! Researchers want to study your poo – Sky News

Urgent action required to prevent a micro-plastic crisis – Guardian

Robot overlord roundupDeepMind paper proposes 10x more computation without 10x more compute [Research] – PDF

Pop Culture [or, the AI Emperor has no clothes] – Ed Zitron

I’ll have my AI email your AI – Six Colours

The AI summer – Benedict Evans

Off our beatTechnocratic Southgate has become a reckless adventurer [“Phil Foden’s on fire…”] – Guardian

Why India will become a superpower [Search result] – FT

Digital déjà vu – Of Dollars and Data

Why has it been so wet and rainy in the UK? – BBC

“The kidnapping I can’t escape”– New York Times [h/t Abnormal Returns]

Massive spike in tourists has European cities fuming – Sherwood

Wimbledon leaves $100m on the table – HuddleUp

We’re in a new era of survey science – Slate

How one Rich House Poor House millionaire made her money – The Sun

Young men are swinging hard right in South Korea – Politico

This is why you don’t want to tell yourself stories – Ryan Holiday

“I needed to experience life in a coastal town to realise my mistake” – Next Avenue

And finally…“If your feet are in two buckets and the average temperature of the water is 90 degrees, you’re probably fine—unless one bucket is at 35 and the other is at 145 degrees. On average, you’re fine. Based on variation, though, you’re miserable.”
– Seth Godin, We Are All Weird

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“The world is changed. I feel it in the water. I feel it in the earth. I smell it in the air. Much that once was is lost, for none now live who remember it.”– Galadriel, The Fellowship of the Ring

Remember the days when we’d forgotten inflation existed? When earning money on cash was just a hazy memory of building society passbooks and logging into first-generation Internet savings accounts?

Yes I know that world was just three years ago. No need for Peter Jackson’s FX wizardry to bring 2021 to life. I’ve still got a jar of curry paste at the back of my fridge from then that needs finishing.

And yet… some people are talking like the environment has changed forever.

Rates and yields are up and will stay that way. Cash is king, bonds are bullshit – and don’t talk to me about mortgage rates.

If that’s you, then buckle up!

US inflation is falling faster than expected – after nearly a year of false dawns – and the Federal Reserve will begin to cut rates soon. Almost certainly in September I reckon, especially after its latest minutes cited the Fed’s political independence. That preemptive reminder smacks to me of starting a rate hiking cycle on the cusp of the US elections.

Back home UK inflation is already on target at 2%. Yes, some price pressure remains – particularly in services – but I don’t believe that’ll stop the Bank of England cutting. Probably in August.

It’s got a green light now the Fed looks like it’s sharpening its axe. And the ECB has already done its first interest rate cut for five years.

Rate expectationsWhat will happen when the all-important US Federal Reserve starts cutting interest rates?

Well, this is investing and you know the score…

…it depends!

One or two cuts won’t change much. In theory they should be more or less priced-in.

The ructions we saw over the last couple of years as rates soared were because they went much higher – and more quickly – than investors expected, as inflation proved stickier than was anticipated:

Source: Bank of England

I warned rising interest rates would have ramifications in February 2022. Just a few months later I was urging you to stress test your mortgage payments.

Good stuff and I’d argue I was modestly ahead of most commentators out there. Many Monevator readers also shrugged at the idea of rates rising. Nothing to see here!

Which was fair enough really, because I certainly wasn’t screaming about the bond crash we actually saw in 2022.

Nor did I predict, obviously, the turbo-charging factor of somebody thinking it’d be a good idea to hand Liz Truss the levers of power for a few weeks that year.

In fact if you weren’t humbled by how inflation, rates, bonds, and equities moved between 2022 and 2024 then you either weren’t paying attention, or else you earn seven-figures at an investment bank, got it all wrong too, but you’re not paid for feeling humble.

What goes up can come downAnyway here we are on the cusp of rate changes once more. Things shouldn’t be as dramatic as exiting the near-zero rate era, however.

Inflation looks mostly tamed, barring unforeseen ‘events’. Rates will be cut – and the Fed in particular usually keeps cutting for a while once it gets started.

But I don’t think we should expect US rates to fall much below 3% in the foreseeable future, from 5.5%.

UK rates may well not get much lower than 4%, from today’s 5.25%.

What do I know, though? In fact what does anyone know?

Well, the shape of the yield curve does give us a clue that rates aren’t expected to head much below 4%. In fact it suggests they’ll need to rise again in a few years:

Source: Bank of England

However long-term rates aren’t under a central bank’s control. Yes its short-term rate stance influences expectations. But a bunch of other macroeconomic variables are more influential.

Besides, as always anything can happen.

The graph above charts forward yields for the next 40 years. But five years is a long time in the markets these days. Five months sometimes.

So with all these offerings to the anti-hubris forces duly tossed onto the sacrificial altar of prevarication, let’s consider how a few rate cuts could shake things up.

Interest on cash savingsWe could have a big debate about whether central banks set interest rates or whether they basically follow market rates, which in turn are largely driven by inflation and economic prospects.

I’m inclined to think a bit of both, especially since quantitative easing arrived. But there’s no denying that at the sharpest end for commercial banks, central bank policy rates are strongly influential.

Long story short: once the Bank of England starts cutting rates and likely beforehand – basically right now – the best rate you’ll get on easy-access cash will fall. (Bonuses, teasers, and gimmicks aside).

We’ll probably have a grace period where we can lock in higher rates on longer-term savings though. And as always when to fix will be a guessing game.

It’s probably futile to try too hard to outwit the money markets. Spend your energy instead hunting for the best rates that suit your time horizon whenever you actually have the cash to hand.

Whatever you do don’t leave cash languishing in low-rate current accounts for years! Even with inflation back to normal levels.

Mortgage rates and house pricesSitting right alongside cash savings in another in-tray marked No Shit Sherlock are mortgage rates.

Yes, mortgage rates are determined by market swap rates, not the Bank of England’s Bank Rate.

And also yes, if the Bank of England is cutting interest rates then it will very likely to be doing so in an environment where yields – including swap rates – are softening across the waterfront.

But whatever the drivers, mortgage rates will probably fall as Bank Rate falls, at least a bit.

That lower mortgage rates are coming is suggested by the BOE’s forward curve for overnight swaps:

Source: Bank of England, yesterday.

Five-year fixed-rate mortgages have already sported lower rates than two-year fixes for some time. (Usually you’d expect longer fixes to be pricier, due to inflation and interest rate risk, and various market forces.)

How far could mortgage rates fall when the rate cutting begins? That remains to be seen.

Much of it will already be priced in, as per the yield curve above.

I’d love the chance to fix my mortgage for five years at 2% again. But I don’t fancy my chances.

Back to buy-to-let?When mortgage rates spiked in 2022, it revealed just how stretched house prices had become. Particularly in London, the South East, and certain other hotspots around the country.

Together with tax changes finally reaching their apogee, higher rates also ruined the economics for sensible buy-to-let landlords.

But if mortgage rates fall a lot, then the opposite could be true.

Housing will become more attractive again, and prices will rise. Landlords will resume their bidding against first-time buyers.

I’m not saying it’s right or desirable for house prices to rise like this. And I suppose if Labour really does encourage 1.5 million new homes to be built then this could dampen things.

At the same time though, building on this scale will require loads more well-paid bricklayers, electricians, plumbers, and so on. And they’ll all want somewhere to live…

BondsCentral bank interest rate decisions do not control bond yields. They are only directly influential at the very short end, where overnight cash and cash-like securities compete with the lowest duration bonds.

However even this limited effect does influence yields along the curve, to some extent.

More importantly, interest rate moves are usually reflective of how market rates are moving anyway.

I mean we all saw how the interest rate hikes of 2022 to 2023 coincided with the smashing of the bond market.

But if you weren’t paying attention, here’s a reminder, with reference to iShares’ core UK gilt ETF (ticker: IGLT):

Source: Google Finance

Quite the speedy crash to suffer in anything you hold a lot of – let alone what most people considered to be the safety-first bulwark of their portfolio.

We’ve written a lot about why this happened and what it means. (And also whether we should invest differently with these lessons learned going forward).

And my co-blogger The Accumulator has also written extensively about how and why bonds of particular ‘duration’ respond to changes in yields.

Check out our bond archives for a refresher.

The point I’m here to make today though is that the same maths that drove bond prices down when yields rose as inflation ran rampant will do the opposite if yields go into reverse.

Bond duration maths doesn’t just tell us how much bonds will fall with lower yields. It also tells us how they will rise.

Again, I’m not going to repeat all our previous articles here. Suffice it to say that with an effective duration of around 8, the iShares ETF above could see a return (with income) of over 20% if its (constituents’) yield was to fall by a couple of percent due to prolonged interest rate cutting.

Now as it happens, I do not expect yields to fall by 2% across the board for gilts.

And the crash in the graph above reflects a historic move from near-zero to 4-5%. The reverse isn’t likely to be repeated.

But some kind of notable capital gain is likely if and when rates move down and stay down, presuming inflation remains subdued. That’s the main point to takeaway.

Do you feel lucky, punk?Indeed there are opportunities to get quite cute with bonds if you’re that way inclined.

A friend of mine has put a big wodge of his portfolio into one of the longest-dated UK gilts – an issue not due to mature until the 2060s. From memory the duration is around 20 or more.

And in doing so he also secured a yield-to-maturity of over 4%.

As my friend sees it, he’s locked in that 4% for the rest of his investing life assuming he holds until maturity. But he also effectively gets an ‘option’ on an economic depression until then.

His very long duration gilt would soar if rates were ever slashed back towards zero. And that could offset a lot of pain in his portfolio elsewhere in such circumstances.

On the other hand his holding will go down 20% if yields rise by just 1%. Not for widows and orphans!

For most Monevator readers the point is that it’s probably a bad time to throw gilts overboard.

Yes it would have been great not to own them in 2022 and 2023, with hindsight.

But that was then, this is now. Going forward government bonds offer a small but reasonable yield, as well as the potential to cushion your equity portfolio in a conventional tits-up stock market crash.

That’s not to be lightly discarded, unless perhaps you’re in your 20s or early 30s with many decades of saving and investing still ahead of you.

EquitiesThe $100 trillion question! How will equities perform when rates are cut?

In theory lower rates should be good for most companies.

This is partly for practical business reasons – debt becomes less costly to service, and growth capital is easier to source – but also theoretical.

Rate cuts could lead to analysts using a lower discount rate in their valuation sums. This mathematically boosts the potential value of future earnings, and hence the perceived ‘fair value’ of share prices.

Even firms that have benefited directly from the higher rate environment – High Street banks, say – could benefit if easier money staves off the threat of rising delinquencies in their loan books.

Remembering the fallenSome companies will do better than others, of course. And to the practical and theoretical drivers behind any such divergence we can also add market sentiment and animal spirits.

In theory, investors should have been ‘looking through’ the past couple of years of higher rates when they valued biotech growth stocks, say, or the holdings of specialist investment trusts.

Most of these assets are expected to be around for decades, if not indefinitely, after all.

High rates will cause the odd car crash, sure. What really matters for most investments when it comes to rates though is their level (and that of inflation) over the business cycle – or even the life of the company.

But in practice, traders gonna trade.

For instance, infrastructure and renewable energy trusts went from sky-high premiums of 20% or more just a couple of years ago – before rates rose – to discounts of about the same level at their recent lows.

That’s a 40% move in valuation versus net assets – effectively driven by vibes, not fundamentals.

Who says this won’t be at least partially reversed if rates fall a lot?

Yields on such trusts could start to look comparatively tempting again. Wealth managers with one eye on career risk might finally decide it’s safe to put them in clients’ portfolios once more.

Similar arguments can be made for small cap stocks and disruptive technology (outside of AI).

In fact most shares that had the misfortune during the last couple of years to not be US large caps touting a compelling AI story could have some legs in them.

Back out recent gains from the so-called Magnificent Seven and a few other AI-related plays – and perhaps the weight loss drug giants of Europe – and US and global returns would be much more muted.

However if input costs are now no longer going up and rates are coming down, then many companies around the world could look better value on paper than those tech giants. Barring an everything-changes AI singularity, anyway.

The subsequent market rotation away from mega-cap growth could fuel a broader rally for such stocks.

I just read that nVidia fell 5% with the US inflation surprise yesterday. At the same time US small caps spiked 3% higher. Early moves aren’t always right, but it’s pretty suggestive.

Or something weird could happen and the global stock market could crash 30%.

Because that could always happen. Never forget it.

AnnuitiesI’m no expert on annuities. However all things being equal I’d expect a lower interest rate environment to reduce the annual income you’re offered in exchange for your pension pot.

Annuity amounts have soared since the lows of December 2021. We’re talking payout rates 30% to 80% or more higher now than back then, depending on your age and what annuity you went for.

That is a gigantic move for a payment that is fixed for life. A 60-year old might have been promised a little over £4,000 every year for a level rate annuity in late 2021.

Today they’d get over £6,000 annually for life for the same £100,000.

As stated, I doubt we’ll see interest rates near-0% again (though never say never). But yields across the market will likely come down to some extent. And it usually pays not to be too greedy.

Irreversibly swapping capital for an annuity is a terrifying prospect for me. But it may be the simplest and best thing to do to secure an income in many circumstances, at least with some portion of one’s capital.

Stay alert, and seek advice if you need it for sure.

To conclude at the beginningTo repeat myself, nobody knows with certainty the forward path of interest rates.

It’s true people are paid millions to put other people’s billions behind their views of where rates will go.

And various yield curves give us a clue as to how these bets are shaping up, too.

But none of this future is nailed-on, and such predictions are frequently confounded. Again, compare market expectations for rates in late 2021 with where we were by mid-2023 for a textbook example.

If rates fall a lot, then it would be very good for bonds and potentially for equities.

As I say, many people have a ‘cash is king‘ attitude at the moment. It usually takes a few years of big gains from markets and titchy returns from cash accounts to change that.

On the other hand, starting valuations for equities are far from on the floor. The US already looks positively peaky. We’d need to see earnings really take off for US markets to keep pulling ahead.

A lot will depend on why rates are cut – if they do fall very low – as much as the absolute level they reach. And again, how much the pace of rate cuts and the level they settle at comes as a surprise to markets.

If rates go down because inflation is quiescent despite a strong global economy then we’re golden.

But if rates are ultimately slashed in the face of a big slowdown and rising unemployment, then that would be much better for bonds than for most equities.

As ever, a typical person will do best to diversify their portfolios passively and try not to be too cunning.

But as always, others of us will ask where’s the fun in that?

Either way we’ll be here on Monevator throughout the cycle – trying not to humblebrag too much when our warnings prove prescient whilst guiltily disclaiming our human failings.

TLDR: maybe it’s a good time to lock-in a high rate on your cash on deposit, but also to be a bit more optimistic if you’re remortgaging.

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It’s been a slow and steady quarter for the Slow & Steady portfolio. Our model passive investing loadout has risen just 1% over the last three months.

Still, we’ve now had three quarters of growth on the trot – and that has certainly put the colour back into our assets.

Here are the numbers, in Right-o-vision:

The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,264 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts in the Monevator vaults.

Last quarter’s gainers:

Emerging markets: 5.4%
UK equity: 3.7%
Developed World, ex-UK: 2.5%. (The US led the charge, Europe barely stirred, and Japan was a dead weight)

Downers? Global small cap and global property both lost almost 3% each, while UK gilts slipped back 1%.

At least government bonds are up 4% on a one-year view. Their performance has been a horror show across the portfolio’s 13 years of existence though, thanks mostly to their 2022 rout.

America the beautifulThe recovery in the S&S over the past year has been decidedly lop-sided. It’s been driven mostly by our Developed World fund, where performance has leant heavily on a chunky US engine.

The US component is up around 27%. The UK, Europe, Japan, and Emerging markets have only returned about 13%.

Quite a gap – and enough to make you wish you had the gift of clairvoyance.

Don’t look back Blame summer whimsy, but I’ve done something you should never do. I’ve gone back to the portfolio’s original members1 to check on their performance.

It’s a form of mental torture. Like any act of hindsight it invites you to imagine a parallel reality where you were an all-knowing genius who could divine the best course in advance.

Below are our starter funds’ cumulative nominal returns from January 2011 until now – absent all our rebalancing, drip-fed contributions, and the asset allocation changes we made along the way:

ETF data and charts from JustETF. Returns include dividends but not inflation.

Yee haw! Don’t mind me, I’m lying in the gutter staring at the stars (and stripes). La! La! La! America!

Bigger and betterJust how exceptional has America been? I find it easier to gauge performance using annualised returns:

US: 14.9%
Europe: 7.4%
Japan: 6.8%
UK 6.2%
Pacific ex Japan 5.3%
Emerging markets 3%
Gilts 1.5%

Remember: the average historical return for equities is 8% while government bonds have weighed in at 4%. (Those are nominal returns, before fund fees).

By this light every asset has been sub-par over the life of the Slow & Steady except the US. It alone has dragged the overall portfolio return up to a respectable level. Gilts and emerging markets have actually lost money, assuming average inflation of 3%.

Just think about how China has grown since 2011 – yet emerging markets have been terrible. Buying into the obvious growth story does not necessarily translate into shareholder profits.

Something to keep in mind if you’re tempted by an AI-focussed ETF today.

Crystal ballsNow let’s really twist the knife and revisit every asset class I might have plausibly chosen back in 2011:

I did consider a tech holding at the time. But it felt like the sector was already covered by the US – and later the World tracker. All true, and yet the 100% tech fund still delivered a thumping annualised return of 20%, compared to ‘just’ 14.8% for the US and 11.6% for the MSCI World.

Tech was another obvious growth story back in 2011. Everyone was hot for Facebook. But there were also lots of warnings that the sector was overvalued and outsized returns could prove hard to realise.

As things played out the warnings proved prescient for China, but not for tech.

Oh well. To be honest I wouldn’t have allocated more than an additional 5% to tech anyway, given its presence in the core US fund.

Key tech-awayBeyond the top three funds – all driven by Big Tech – everything else in the historical Could, Shoulda, Woulda rearview mirror was an also-ran.

Cash is the worst performer with an annualised return of 0.81%. That makes it a massive loser after 3% inflation.

Funnily enough, the 2.65% brought home by index-linked gilts means they’re doing a reasonable job of tracking long-term inflation – after negative yields and fund fees have taken a bite.

Linkers also tracked well ahead of gilts over this period.

Commodity returns were awful. Just 1.82% vs a nominal historical average of 7.5%.

Gold’s 5.4% annualised initially feels like nothing special but is actually spectacular in comparison to the other defensive asset classes on the menu.

Remember though, the point of defensive asset classes is less their long-term returns – though we still want those to be positive – and more what they do when equities sputter.

On the growth side, commercial property (5.6%) and the high-yielding Global Select Dividends were pretty ‘meh’ compared to a vanilla global tracker.

What does this prove?If you went all-in on the Nasdaq over a decade ago and ditched this diversification nonsense then congratulations.

Did you just get lucky? On the equity side, there were good reasons in 2011 not to overweight the US – or even the tech sector. They were punts I certainly wasn’t qualified to make.

Lars Kroijer summed up the dilemma in his excellent post Why a total world equity index tracker is the only index fund you need, writing:

If you are overweight or underweight one country compared to its fraction of the world equity markets, then you are effectively saying that a dollar invested in the underweight country is less clever/informed than a dollar invested in the country that you allocate more to.

You would therefore be claiming to see an advantage from allocating differently from how the multi-trillion dollar international financial markets have allocated.

But you are not in a position to do that unless you have edge.

And we agreed we don’t have edge…

Everything I’ve learned about investing in the intervening years only confirms the wisdom of Lars’ words.

It’s fun to look back for hindsight wisdom sometimes.

But it’s more sensible to look forward with humility.

New transactionsEvery quarter we throw £1,264 of fresh meat at the market wolves and hope they roll over and let us tickle their tums. Our stake/steak is split between our portfolio’s seven funds, according to our predetermined asset allocation.

We rebalance using Larry Swedroe’s 5/25 rule. That hasn’t been activated this quarter, so the trades play out as follows:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

New purchase: £63.20

Buy 0.232 units @ £272.59

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%

Fund identifier: GB00B59G4Q73

New purchase: £467.68

Buy 0.705 units @ £663.53

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

New purchase: £63.20

Buy 0.152 units @ £416.84

Target allocation: 5%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.19%

Fund identifier: GB00B84DY642

New purchase: £101.12

Buy 50.883 units @ £1.98

Target allocation: 8%

Global property

iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.18%

Fund identifier: GB00B5BFJG71

New purchase: £63.20

Buy 28.757 units @ £2.20

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £316

Buy 2.384 units @ £132.55

Target allocation: 25%

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £189.60

Buy 179.546 units @ £1.056

Dividends reinvested: £64.15 (Buy another 60.75 units)

Target allocation: 15%

New investment contribution = £1,264

Trading cost = £0

Take a look at our broker comparison table for your best investment account options. InvestEngine is currently cheapest if you’re happy to invest only in ETFs. Or learn more about choosing the cheapest stocks and shares ISA for your circumstances.

Average portfolio OCF = 0.16%

If this all seems too complicated check out our best multi-asset fund picks. These include all-in-one diversified portfolios, such as the Vanguard LifeStrategy funds.

Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? Our piece on portfolio tracking shows you how.

Learn more about why we think most people are best choosing passive vs active investing.

Take it steady,

The Accumulator

I’ve looked at the same sub-asset classes though not the same funds we used. That’s because it’s much easier to chart on justETF than Morningstar. As a sanity check I’ve also sampled the original funds. The results are much the same.

The post The Slow and Steady passive portfolio update: Q2 2024 appeared first on Monevator.

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What caught my eye this week.

The Tories are out after the worst run in British politics since King John.

Labour has won a landslide in terms of seats, but the magnitude has more in common with hacking credit card points than an overwhelming mandate from the people.

Taxes are at their highest level for 70 years. Brexit has taken 4-5% off annual GDP in perpetuity1. That’s left roughly a £40bn shortfall in annual state revenues that could be fixing the NHS or raising income tax thresholds, depending on how you roll. Instead the new government has little room to move.

The Tories have left us poorer economically and culturally, with our birthright to live and work in Europe traded away after a botched attempt to appease a fringe – ultimately gifting seats in Parliament to a populist you wouldn’t trust to run a Banana Republic. Strategic geniuses, these Eton lads.

This time things really can only get better. Except unlike in the 1990s, it’s now more akin to when you come around from a heart attack and a machine is faintly beeping in the background.

Grow for itI’m not expecting miracles. I’m barely expecting anything. Just not shooting ourselves in the foot for a few years would be nice.

The best hope for Labour – and more importantly the country – is that stability and sanity at the top, plus some judicious low-cost tweaks to planning and policy – might unlock capital spending and investment.

Many indicators are already turning favourable – notably interest rates and inflation – and Sunak and Hunt’s relatively sensible fag-end innings deserves some credit for that. But there’s a mountain to climb.

With most tax rises ruled out, it’s possible the new chancellor will squeeze a bit more from the wealthy.

And honestly, when you compare the huge asset boom of the low-rate decades with real wages that have gone nowhere since 2008, is that really so unreasonable?

Business as usualOf course that doesn’t mean anyone wants to pay more taxes personally. There’s always someone richer or less deserving to foot the bill.

So while I wish Sir Keir Starmer and Rachel Reeves the very best, Monevator will continue to highlight how taxes reduce your returns, the best ways to use your pension, and we’ll urge you to fill your ISAs.

Some may see something contradictory or hypocritical here. But it’s not our job to help the government plug the financial holes left gaping by the Brexit-y right-wing Tories. You don’t come to us to learn how to leave a tip for HMRC, any more than you’d read the Shooting Times for hints on veganism.

Of course we all hope the tax take rises because the economy gets going and lifts all boats. And after ten years in fairyland railing against EU bureaucrats, cold young men on boats, and people who live in Islington, maybe MPs can focus again on Britain’s real problems, starting with growth and productivity.

It won’t be easy to concentrate though, given the circus that will be unfolding on the right.

My hope is that the Conservatives will move back towards the centre. Genuinely! Despite what some readers think, I’m no left-wing tribalist and I voted for David Cameron back in 2010.

My despair at the Tories was all about what they became at their worst, not what they can represent at their best.

Where was the gracious Rishi Sunak – who gave two excellent speeches after losing – during the actual campaign? Hiding from Barry Blimp and his own party members I imagine. Fixing the right looks like an even harder task than Starmer faced in purging the Corbynistas from the left.

As for Labour and the new government, I want a mostly technocratic first-term that leaves us arguing the toss about tweaks to the ISA regime or child benefit.

More boring, please!

Have a great weekend.

From MonevatorFIRE-side chat: Actively achieved – Monevator

From the archive-ator: ETFs versus index funds – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Tax windfall continues for the Irish economy – BBC

Build more homes to cut rents says Rightmove, as latter hits new record… – T.I.M.

…so can Labour deliver on its 1.5m new homes promise? – This Is Money

How Britain’s falling birth rate is creating alarm in the economy – Guardian

Bitcoin below $57,000 as Mt Gox begins moving billions in BTC – The Block

Greece pushes ‘growth-orientated’ six-day working week – Guardian

Portugal brings back tax breaks for digital nomads – Fortune

Zoopla: home prices are still 8% overvalued but will be fair value by end of year – T.I.M.

London houseboat owners being priced out by rising mooring fees – Guardian

We’re in the midst of the longest-ever US bond bear market (by far) – Bilello

Election section mini-specialWhat the Labour government means for your money… – Which

…and another take on the same topic – This Is Money

Biggest-ever gap between votes and seats hits Reform and Greens – BBC

Brexit backlash: Britons now regret their populist revolt… – WSJ

… and why Starmer should play prosecutor on Brexit [Search result] – FT

Products and servicesThe big High Street banks are cutting mortgage rates again – This Is Money

No-deposit mortgages enable tenants to buy the home they rent – Guardian

Is it worth opening a Junior ISA? – Which

Sign-up to Trading 212 via our affiliate link to claim your free share and cashback. T&Cs apply – Trading 212

Does broker insurance really make an investing platform safer? – Banker on Wheels

The best packaged bank accounts – Be Clever With Your Cash

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Why is Nationwide closing branches on Tuesday and Thursday? – This Is Money

Homes for sale under £350,000 for first-time buyers, in pictures – Guardian

Comment and opinionThe drawbacks to aged-based asset allocation – Oblivious Investor

Should you put your state pension into a SIPP? [Search result] – FT

We live in a society – Money With Katie

The tediousness of running a General Investment Account – Simple Living in Somerset

How does inflation impact retirement? – Of Dollars and Data

Can we normalise ‘phased retirement’? – Morningstar

Being Jack Bogle’s apprentice – Humble Dollar

Not all predictions are created equal – Behavioural Investment

The optimal portfolio for the next decade [Search result] – FT

A painful confession: we all get old – Humble Dollar

“I’m retired and regret my frugal retirement” – Yahoo Finance

Novel US ETFs mini-special(All US, but interesting – and likely to come to the UK eventually)

Monetising loss aversion for fun and profit – Paul Kedrosky

Boomer candy: sweet treats or investment headaches? – Morningstar

Stone Ridge aims at retirement market with ‘longevity income’ ETFs – FT

Naughty corner: Active anticsGMO’s latest asset class real return forecasts – GMO

The risk of a replay of the lost decade in US stocks [Search result] – FT

US small cap returns: relatively bad, absolutely fine – Acadian

The superior returns of cyclical stocks – Klement on Investing

Steve Ballmer richer than Bill Gates via the time-honoured strategy of not diversifying – Sherwood

The shareholder supremacy – Where’s Your Ed At?

Kindle book bargainsThe Hidden Half by Michael Blastland – £0.99 on Kindle

How to Own the World by Andrew Hallam – £0.99 on Kindle

Never Split the Difference by Chris Voss – £0.99 on Kindle

Bejiing Rules: China’s Quest for Global Influence by Bethany Allen – £0.99 on Kindle

Environmental factorsIt’s 2024 and drought is optional – Asterix

We can’t comprehend the solar revolution [Podcast] – Full Disclosure via Apple

Water firms could be sued over sewage after ruling – BBC

Let China pay the cost of solar and EVs – Econbrowser [h/t Abnormal Returns]

The complex rise of somewhat eco-friendly viscose – Guardian

An estuary smothered by a thousand logs – Hakai

Robot overlord roundupRelated: using AI to animate old photos [Video] – Science girl via X

AI drives 48% increase in Google emissions – BBC

Off our beatWhy more Britons are making the great move north [Search result] – FT

The fastest data in the world – BBC

A WFH ‘culture war’ has broken out across Europe – Fortune

Are you allowed to shoot down an intrusive drone? – This Is Money

The enthralling and emotional inside story of a house clearance – Guardian

Should lawmakers worry more about Temu and Shein than TikTok? – Sherwood

One man’s lifelong search for fragments of Britain’s Jurassic past – Guardian

Exercise for aging people: minimise risk while maximising potential [Podcast] – Peter Attia

And finally…“Being democratic is not enough, a majority cannot turn what is wrong into right. In order to be considered truly free, countries must also have a deep love of liberty and an abiding respect for the rule of law.”
– Margaret Thatcher

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Per the OBR and Goldman Sachs.

The post Weekend reading: The hangover appeared first on Monevator.

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Long-time Monevator reader and commenter HariSeldon brings an unusual angle to our FIRE1 chat this month, with his early focus on investment trusts and an active approach that’s more unusual these days. A varied employment history tops-off a fascinating – but, be warned, very lengthy – FIRE-side chat. Enjoy!

A place by the FIREHello! How do you feel about taking stock of your financial life today?

I find myself approaching state pension age in a few months and receiving my first guaranteed regular income in over 40 years, in the form of a full state pension. It’s a surprisingly long time to have relied on either self-employment or investment income since going FIRE in 2007!

How old are you?

I’m 65, and Mrs Hari is 59 and also retired. We’ve been married for 38 years.

Do you have any dependents?

We have a 37-year-old daughter – a medical professional who has done well, and is a very independent and confident individual who gets things done.

Whereabouts do you live, and what’s it like there?

We are on the Dorset / Hampshire border and have been there for 13 years. Previously we lived and worked in Cornwall for more than 25 years.

Where we are now is a great area to live in. There’s easy access to the coast, a large city nearby, and beautiful countryside. And for England a pretty good climate.

Whilst Cornwall is a very dramatic and beautiful county, the climate can be rather wet and windy. There were a lot of deprived areas, disquiet at ‘incomers’, and generally a glass-half-empty approach to life. We found Dorset a refreshing change.

When do you consider you achieved financial independence?

I achieved Financial Independence in late 2007, having just turned 49. But I didn’t feel I had reached Financial Independence immediately before that.

In the summer of 2007, I realised that my work-life balance had slowly and inexorably tipped over into all work. That was unsustainable.

It creeps along very slowly until work dominates life and intrudes into the home, weekends, and holidays.

Running a business where you are responsible for employees’ livelihoods can create a situation where there is no apparent exit because a business sale or wind down appears very difficult to achieve. Financial Independence is always ‘in a few years’.

Inevitably, when something is unsustainable, it must stop.

An attempt to pull back and delegate responsibility was an abject failure. So after exploring a variety of options, I marketed my business for a quick sale. This resulted in a sale to a customer.

The nature of the industry – precision engineering – meaning its value was low. But the proceeds were enough that I had reached some form of FI. The ‘RE’ part followed almost immediately.

Planning an exit had seemed almost impossible, despite my giving it much thought for years. Yet it was all done within three months. Difficulties included ensuring the remaining employees had a livelihood, winding down the workload, and disposing of everything accumulated in a large workshop.

Oddly, I had rediscovered the ability to make significant life choices and then do it.

Tell people your decision and take action immediately. Once that is decided, you can handle what appear to be insurmountable problems.

So the retired early part came at the same time?

Yes, I retired immediately. With no income, I worked part-time for the new owners for three months to assist with the handover. It was a surprisingly busy time post-FI, in a good way – a weight had been lifted off my shoulders. Mrs Hari continued to work part-time.

I remained busy until one day, around a year after retiring, I was bored. So I set up a micro property maintenance business, limiting myself to two or three days a week. It was surprisingly satisfying doing odd jobs and meeting people. As an aside, I knew several middle-aged men doing something similar who had been bank managers, GPs, and so on.

My turnover was around £10,000 per year. After expenses and materials it gave useful pocket money.

Having time is an incredible gift to yourself and your family. By removing the pressure to get things done quickly, I also almost accidentally found I’d taken up professional photography. Something I’d liked to have considered as a career as a teenager.

I soon had a mini business that I could move from Cornwall to Dorset in 2011.

Photography sounds competitive! What sort of work were you doing?

Predominantly weddings, and some commercial and property photography. The advent of digital photography changed the industry, and I found the combination of technical, artistic, and people skills required very interesting.

However the economics were not great and with the incredible quality results from mobile phones of recent years it proved a poor business model.

My photography business began to fade in 2016. Covid then ended wedding photography for me. However, I do still do some property photography.

Again, the financial impact is very low. It might well be viewed as a hobby that pays for expensive equipment!

Assets: a seven-figure start to FIRECan you give us an idea of your balance sheet when you sold the business?

My liquid investments at the time of FI in late 2007 were £700,000.

This was invested almost 100% in equities (with a minimal cash float) plus a minority stake in the premises used by my old business that was now leased to the acquirer of the business for seven years (our stake was valued at £80k) and a deferred defined benefits police pension (transfer value £40k).

The plan was to live off the natural yield of the portfolio. I estimated the income at £28,000.

We also owned our home outright (£400k) for a grand total of £1.2m. (In today’s money: £1.9m)

What came next?

In early 2008, we decided to downsize to a smaller new build home in Truro for around £225,000.

To help finance the move with minimal disruption, I asked the bank for a loan facility. I had a sale lined up on our present house, but banks seem to struggle to lend to people with assets but without an income.

The ever-so-helpful bank manager suggested I put down the income from my previous company! It was not trading at that point and was scheduled for liquidation a few weeks later. Yet the partial trading year was sufficient to obtain a Homeowner Equity drawdown loan account facility of £225,000 for five years at 0.75% over the base – or 6% at that time.

A quick visit to the development site saw builders laying tiles outside our new home. We then went for a holiday in the Far East to celebrate FIRE.

Now if this were a film, the train would be roaring along the line, coming round a blind bend, the engine driver stoking the fire and not bothering to look out – but the viewer can see a bridge across the canyon has collapsed and disaster is about to happen.

From August 2007 to April 2008, I’d stopped following the investment world. Then, on the 17 April, returning to the UK from the Far East, I began to notice things again.

Here in the movie, the train driver looks up. He slams on the brakes as he realises he is going too fast, but he’s still unaware of the danger ahead…

Our house sale was apparently proceeding, but the other side had made no enquiries. Sure enough, after an initial denial, the buyer had ‘paused’ the purchase, concerned over house prices.

Meanwhile I visited the site of our new development and found it deserted. The last paving tile we had seen laid was the last. A busy site had been engineered for our benefit.

Yikes – what did you do?

We withdrew from the house sale and the purchase. Both parties to our sale and purchase had breached good faith.

The developer ultimately went under. And while the houses were finished – in 2015 – the quality was reduced. Prices are still below 2008.

With hindsight, today we know the Global Financial Crisis is well underway. Back then I also knew there was a problem.

Incidentally, in the summer of 2008 we still had that unused Home Equity Loan facility. It seemed foolish not to make use of it.

And thankfully, rather than use as leverage for the portfolio – which would have been catching a falling knife – we used it to provide the same opportunity for our daughter to buy a starter property that I’d had.

This eventually worked out very well for her. We believe in enabling rather than gifting – this way does not destroy her achievements.

What did you do when you realised the GFC was underway in April 2008?

I’m unsure whether the term Sequence of Returns Risk was generally known back then. But I was well aware of the risk of dwindling investment values if I made withdrawals.

So I resolved to make no net sales.

Unfortunately, I had very little in cash or bonds. The tax bills from the sale of the business had taken virtually all our liquid cash.

But I did have the rental income from our share of the factory and some regular cash flows from the deferred sales of the business. This kept us afloat for a further two years.

And your portfolio?

The portfolio was initially a mixture of investment trusts. Some were what I termed ‘distinctively managed’ trusts like Lindsell Train, Caledonia, Finsbury Growth, Lowland, and RIT Capital Partners. The others were equity income trusts.

I’d decided in March 2007 that natural income was a great idea. While I could use income trusts, why not also hold individual shares, inspired by the HYP High Yield Portfolio (HYP) then espoused on the Motley Fool forums?

A bad idea as things turned out. I had a lot of financials in my portfolio of 35-40 shares, and the capital loss was 17% on £214,000 when I unloaded the HYP in April 2008. (Individual returns ranged from -90% to +30%).

So much for the ‘no tinkering’ rule popular in those days…

Out of interest, in 2016 I reviewed what would have happened to my HYP portfolio if instead of selling in April 2008 I’d left it alone until then. I found the original capital value was a mere 8% higher than in 2008, and dividend income in cash terms just 4% up. The portfolio yield was 4.7%.

By comparison, the City of London trust would have been up by 31%, and dividends in cash terms were 31% higher. Its yield was around 4.2% per annum.

My actual portfolio rose by 122% over the period and yielded 3%. In cash terms, this was 33% higher than the HYP.

The lesson? Others may have a better experience, but holding individual company shares was not for me.

But you kept the investment trusts?

Yes, having disposed of the HYP, I still had the original portfolio of UK equity income and global trusts, plus a UK index-tracking ETF and UK Dividend ETF.

Subsequently, I sold the ETFs at NAV to buy deeply discounted investment trusts in 2009.

Throughout I retained a 100% equity portfolio, reinvesting all dividends. By 2010, Vanguard had arrived, and I added a World Index fund plus a Vanguard UK Equity Income Index fund.

Then in 2012 – after 22 years of investing – I finally added a fund exposed to the US! My portfolio was around 50% Index funds by then, but there was still significant exposure to the UK and equity income.

It was still more than 90% in shares.

It seems a challenging start to investing…

My investment portfolio was £700k at the time of FI in late 2007. By the market bottom in March 2009, it had fallen below £400k. That was uncomfortable…but the portfolio recovered to £777k by April 2011. It was ahead in real terms by April 2012.

By 2014, my investment policy defaulted to mainly using index funds.

However occasionally opportunities appear, and my active side still comes into play. In such circumstances, investment trusts provide opportunities to fine-tune a portfolio.

Background reading: family mattersWhere did you grow up, and did any family members go the financial independence route?

I grew up in a pleasant small town between Stratford and Birmingham. My father ran a precision engineering company, though neither myself nor my siblings had any exposure to the business.

In 1970, whilst good at maths, I failed the 11 plus and was doomed to the Secondary Modern. However I was ‘saved’ by the threat of comprehensive schools. Parents at the grammar school withdrew children to send them to private schools, and I was promoted in the playoffs.

Around this time my father, 48, was getting tired of running his engineering business and sold it to a customer. So he reached FI in 1972, though he continued working for the newly enlarged business.

So two FIRE tales in one!

My siblings both retired in their 50s, too…

Where did your father put his investments in those days?

My father was initially advised to invest in UK stocks.

Monevator has reported on the 74% stock market crash between 1972 and 1974. It was another time of political turmoil, ultra-high inflation, and severe recessions… Well, my father panicked, sold out, and avoided investing from then on.

My father was a keen yachtsman. While on a summer holiday trip to the Isles of Sicily, bad weather forced us to shelter in Falmouth for several days before returning to the Solent.

That Christmas I was surprised to find we were staying in a rural bungalow that my parents had purchased when bored while we took shelter in Falmouth. Even more so in Easter 1974, when we moved there so he could keep his yacht nearby!

How did this affect you?

It was a shock to the system. This was at the end of year 10 for me. My new local comprehensive school was huge – more pupils in my year than the whole of my grammar school – and more socially diverse.

That grammar school must have given me a less-than-glowing reference. I found myself in bottom-tier groups, even for maths where I was competent. But my education was to be saved again by the comprehensive school system – and my parents’ abrupt relocation.

So much happens that is pure luck. You can take advantage, but can’t create it.

Before being confirmed for my place in the school diploma or possible CSE exam entry maths class, I was given 30 minutes to attempt a CSE paper. (CSE exams were aimed at the less academic.)

I did well and I was bumped up a set, then another, then another. We had an excellent maths teacher, and I subsequently studied maths at Oxford.

Then a very influential English teacher, a missionary expelled from Uganda – he assured us it was a personal expulsion by Idi Amin – arrived for our final year of English Literature and Language. With him came the possibility of sitting O-levels!

This teacher provided valuable insights into many fields, including investing.

At that time, English Literature required the study of numerous novels, Shakespeare, and poetry. You faced a choice of exam questions.

My teacher reduced the field of study to the minimum number of books and plays, eliminating poetry so we would have no choice of questions. Then, just before the exams, he handed out a well-written four-page summary of each book and play on the basis that most of us probably had not read the books but should be able to manage four sides on each, read carefully and repeated.

The result was excellent exam results.

The investing lesson?

That a narrow but deep study of a topic can be very effective! An interesting investment book by Jim Slater, The Zulu Principle, explores this topic.

The second point to ensure success was the realisation that the exam marking process was largely negative. There were far more opportunities to lose marks than gain them.

So keep it very simple, and ensure spelling and grammar are correct.

And yes – another excellent investment book, The Losers Game, by Charles Ellis, explores this principle of minimising mistakes, costs, and friction.

When did you first think about FIRE?

When I was 17 and before the Oxford entry process, I considered becoming a police detective. Varied work, something exciting and useful, topped off by a ⅔ inflation-linked pension at 50.

At a time of high inflation, most people at 65 had little time or energy left for leisure. So retiring at 50 appealed. And the concept of FIRE had been accepted.

Mathematics at Oxford was rather boring, though being a student at Oxford was great fun and a proper education. I got a good grounding in programming simply by walking into the computer department as if I belonged.

I was on the wrong course, but it was a good education. You learn confidence and how to mix with people.

What did you do after that?

The career prospects of being a mathematician then looked dull. I reverted to Plan A and became a police detective in west London.

I had previously been on a residential course for potential graduate recruits, including a shift with frontline officers in a city area. Coincidentally, I was stationed there a year later on that same shift group.

I avoided the graduate entry route as there was little chance of getting the experience to become a working detective.

What was your attitude to money?

My spending was high, and I was very ‘efficient’ with my balance sheet.

A regular job for life gave me a good credit score. I followed the government’s example, running a deficit, which allowed me to borrow the following year’s income effectively and enjoy life!

But everything changed one Tuesday in 1983 when I woke up with a good idea: buy a house.

A quick visit to Abbey National showed that having no savings, an overdraft, credit card debts, personal loans, and so on were seemingly the right qualifications for a mortgage. I had been juggling debt for years without default, so I was a good customer for a loan provider.

I visited an estate agent and found houses cost around twice my borrowing capability of £16,000. My salary was around £6,000. The solution was obvious: I needed someone to buy with me. So I viewed the house, took the brochure to a single friend, and explained the grand plan.

Back to the building society, and they provided a 100%+ loan. An insurance policy covered the lack of deposit. They coincidentally would provide this and pop it onto the mortgage – and it only seemed reasonable they should take a chunky commission.

Finding a solicitor was not difficult in our line of work. Take a credit cash advance to pay the fees – job done in one day.

I thoroughly enjoyed being a police officer. Life in CID was interesting; a mix of The Sweeney and Life on Mars. But the drinking culture was ingrained. I couldn’t see how alcohol dependency, ill-health, and broken relationships could be avoided if I stayed. So it was time to move on, and I resigned, intending to travel to the US to see what opportunities presented.

Leaving the police just under a year after the house purchase, the house was sold for £39,000. A profit of £3.5k each.

Nice work if you can get it…

Yes, why was it so easy to buy a house then? Well the mortgage insurance indemnity guarantee fell out of favour, meaning large deposits were required. And as for prices…

On a serious note, some may say the ‘boomers’ had it all. Free education and maintenance grants and so on.

But on the other hand, relative wages were very low. We saw stagflation, high unemployment, high interest rates, industries collapsing, and constant strikes. More medical conditions were untreatable. Terrorist bombings were common. Road accidents saw more injuries and death by an order of magnitude. The outlook was grim in the ’70s and early ’80s – people looked back to the ’60s!

There are advantages to the current era. I would take it over then on balance. It was not better or worse back then, but it was different.

It’s like the outlook for moving overseas. If you focus on one area only, you see clear advantages but ignore the downsides. Judged overall, the comparison is closer.

What did you do after quitting?

On leaving the police, I popped down to Cornwall to visit my parents. They had reappeared on the scene, having sailed off when I left school to go to the Caribbean and the USA.

My father had worked in the US for three years as a precision machinist. This qualified him for a US old -age pension, now having a total of ten years of employment in the US.

It proved an excellent investment as he lived to 99. My mother, at 98, is still collecting his pension.

To fill the gap between the ages of 58 and 65, he rented a small unit in Cornwall. He purchased some new machine tools with his remaining capital, and set up as a jobbing toolmaker.

But he had no joy in finding employees. So he suggested I join him for a year or two. Doing so, I’d gain the requisite skills to provide a ready source of well-paid employment anywhere in the US.

Why not? It was odd that despite him having owned and run a good-sized precision machine engineering company in the Midlands, I’d only been in his factory on a handful of occasions.

How was your new career in engineering?

I took to it well. The business grew and shrank with the economic climate. We specialised in the most challenging one-offs and high-precision medical, aerospace, and oil industry research – tooling and designing and building special-purpose machines.

But it was not a scalable business. Very few people are trained to a high standard. Modern machine tools are expensive new but relatively cheap for old machines, which encourages high employment and low productivity. We moved between employing two to nine people in the business, and outsourced where possible. High profitability and high turnover were inversely correlated with the business headcount. But it all provided an income to fund investment and FIRE.

In the mid-1990s, I considered buy-to-let, but I didn’t have the time for it. In hindsight, with properties priced from £40,000, we should have used the engineering business to finance BTL and dropped the metal cutting!

What did your wife think about your FIRE hopes?

Mrs Hari came onto the scene in 1985 and played a significant supporting role.

She helped the business, developed new skills after college courses, worked part-time in two different roles, and used her wages to fund a Save As You Earn scheme for many years.

We were both on board with FIRE, avoiding wasteful spending to build a better future.

The FI Journey: 1990-2007The first five years of self-employment did not provide much opportunity to accumulate money.

But we did buy a rural cottage in 1984 for £23,500 – using the equity from our previous property as a deposit – and by 1990, we’d saved up £2,000. Equity investment was about to commence.

Two factors allowed the shift to accumulation.

Firstly, getting out of debt on selling my first house in 1984 changed our spending decision hurdle from “Why not?” to “Why?” When you suddenly have no debt, there is a reluctance to go back.

The second important factor in my investing was my first and ‘best’ investment – an Abbey Life Property Unit fund. I was sold this plan by a very agreeable guy, an ex-policeman, recommended by colleagues. It was £20 per month starting in 1983.

In 1985, I was reading about soaring stock markets and rising property investments, yet my investment was worth less than I’d paid for it. I carefully studied the paperwork, bid / offer spreads, and the investment management fees. And the big one – a substantial part of the first two years’ payments had gone to that ‘nice man’. All these charges would compound.

The lessons learned here were many.

Firstly, to recognise a mistake, be honest with yourself, and stop digging when you are in a hole.

Take a slight loss immediately if you have made a mistake, or the reason for the purchase has changed.

Charges matter a lot.

And buy an investment – don’t get sold a product.

You were learning the hard way…

An education was necessary, but there were very few books then. And financial advisors have very different incentives to their customers.

The weekend editions of The Times and The Daily Telegraph included valuable articles. But there were also many advertisements for unit trusts and articles supporting expensive products.

The privatisations in the mid-1980s created an interest in equities for me though.

What were your first investments to achieve FIRE?

Investment trusts were the ‘hidden’ secret weapon for the private investor back then. Information from the AIC (the investment trust trade association) and articles from the papers opened the door.

The education process was long-winded – writing requests for details of various trusts and savings schemes. The AIC produced a monthly data booklet (chargeable…) that provided information similar to Trustnet today. The FT Weekend edition was added to the mix, along with investment books.

By comparison, one cannot overstate the importance of online blogs – and reader comments – with the likes of Monevator that we have now.

My initial investment was £250 and £25 per month into eight investment trusts, made after the invasion of Kuwait. It seemed like a good time to start, as markets were down.

My original eight were Foreign and Colonial (cost: 71p split-adjusted), TR City of London (96p), Dunedin Income Growth, Drayton Far Eastern, Fleming Universal (European), Govett Oriental, GT Japan, and Murray Smaller Markets.

Only three survive under the same name. One – the global generalist Foreign and Colonial – is the spiritual predecessor of today’s world index funds.

I found investing fascinating. Not simply making more money but trying to master something that constantly changes, evolves, and does unexpected things.

What was your investing style in those days?

I developed my style in the early 1990s. I preferred investment trusts to unit trusts/OEICs. UK equity income and global generalist investment trusts were the outstanding performers of that period – right up to my reaching FI in 2007.

As for individual stocks… after mixed results, I extensively studied Company Refs (financial stats available in the late 1990s on a CD). I carefully picked five stocks: FKI, Polypipe, First Bus, Carlton Communications, and Chloride.

The result was 9% over six months, which was acceptable. However, my equity income trusts and Foreign & Colonial returned around 20% over this period!

One of my five stock picks did very well, one did badly, and the three in the middle averaged a slight loss.

My conclusion was: I’m a rubbish stock picker, don’t do it.

The markets have a good idea of a share’s value. Still, enthusiasm and pessimism about a sector, individual share, or region can distort that market valuation.

But you pushed on with investment trusts…

Yes I have owned well over 100 investment trusts and read many annual reports.

In hindsight, I could have just bought Foreign and Colonial, done nothing else, and achieved acceptable results!

However, my tactical asset allocation trading has added value overall. My calculations suggest I returned 12% p.a. against 10% for Foreign & Colonial.

I broadly divided the portfolio into two collections of investment trusts: UK equity income, and global and regional investment trusts.

It’s interesting I held no US-orientated investments, outside of global trusts. I felt they were expensive in the 1990s and unattractive in the 2000s. My notes from summer 2000 show that I considered adding US exposure. With hindsight not doing so was correct, as 2000-2010 was negative for the US market.

Along the way, I tried conventional leverage and investment trust ‘warrants’. The results were neither here nor there.

I also tried a star manager or two, which did not end well!

Inevitably, one wonders how hard can stock picking be? The answer is ‘very hard’.

Do you try to take advantage of market conditions?

I’ve made tactical asset allocation moves away from my default portfolio periodically. I will give two examples.

When the Brexit Vote was announced in February 2016, I believed it would be disruptive in the short-term but things would settle when it was rejected. I thought the pound would come under pressure and the uncertainty would harm UK equities. So I sold all UK equities and reduced exposure to sterling. This worked out very well. It became the default portfolio after Brexit.

An example where you anticipate the problem but get it wrong because of failing to think through the second-order effects came in late 2021.

I believed inflation was coming and interest rates would rise. My solution was to shorten the duration of bond holdings and seek ‘alternative’ investment trusts, including those that provided high income from inflation-protected sources, such as wind power and solar.

However I failed to anticipate how quickly interest rates would rise, the emerging fears these trusts would struggle in the future with refinancing, and that previously relatively high levels of income would become uncompetitive compared to conventional bonds.

I bailed out quickly when I realised I had made a mistake.

Photo by HariSeldon. A home near the seaside fits most picture postcard ideas of retirement.

Investing: walked on the wild sideWhat kind of investor are you now?

I default to a passive bond and equity portfolio. But I’m prepared to make significant changes if the market mood is overly optimistic or pessimistic, or if I see an anomaly.

My equity holdings now default to 80% developed world equity indexes. I allocate the remaining 20% on a discretionary basis to emerging markets, smaller companies, and factor and regional ETFs.

Bonds are far more attractive now than for many years. I prefer government bonds from the UK and the US. Currency exposure is across sterling and unhedged dollars, split between inflation-protected and conventional nominal bonds. The holdings are either in funds or held directly.

Bonds have known characteristics so you can make informed judgements. This appeals to my inner mathematician.

Any other big mistakes on your investing journey?

We find an investing style or approach that works well for a long time, and when things change slowly, we are reluctant to let go and instead assume that it will mean revert.

But sometimes it is different this time.

UK equity income provided fabulous returns in the 1990s and did well overall in the first ten years since the millennium. But it has since faded. There are other examples: value, small caps, and star fund managers are especially prone to this failing.

I was far too slow to appreciate the changes taking place and to let go of prior successes.

Secondly, I took the 100% equity approach because I thought it would likely win in the long term. I anticipated a long investing timescale – but it was still painful immediately after FIRE during the GFC.

Howard Marks once said: “Never forget the six-foot man who drowned crossing the stream that was five-feet deep on average.”

Lately I’ve seen numerous comments about investing 100% in equities, NASDAQ, S&P500, and so on.

It’s worked great recently. But disappointment could be just around the corner.

What was your best investment?

I’ve shared that my initial investment was a mistake, but it encouraged me to delve deeper into investing.

One of my most satisfying investments was buying an investment trust in the 1990s focused on European privatisations. Themed funds often arrive too late after a profitable opportunity has been popularised. But this trust was being closed and liquidated when it became clear no opportunities were left to exploit. The discount to the underlying assets had increased significantly.

In this case, the market was mistaken. Most of the trust’s assets were government bonds, so the remaining stock assets were priced at a considerable discount.

It all worked out well financially and was very satisfying personally.

What are the biggest lessons you have learnt about investing?

The first is paraphrasing a film quote: “What is it with you investors? You can’t make the right decision until you’ve tried all the wrong ones.”

The most straightforward, least expensive route to achieving financial goals is correct for most investors. But the temptation is to add complexity.

The second is that over time, it becomes challenging to decide whether you have demonstrated a degree of skill or been lucky.

The last is the similarity of Schrodinger’s Cat to the paradox of what the investing past teaches us about the future.

Knowledge of the past gives us insights into the future. Yet things constantly change and evolve. Both statements can be true simultaneously.

What has been your overall return?

Around 12% but lower over the last few years.

In 2017, ten years after FIRE, the portfolio capital was ahead by 7% p.a. in real terms after ten years of living expenses.

The figure for 2024 is 4.5% real growth after living expenses. Inflation and Covid were detrimental to recent performance!

How much have you been able to fill your ISA and pension contributions?

We have both maximised ISA contributions. We had some funds in the earlier PEPs and made modest contributions to SIPPS.

In 2014, I transferred my deferred police pension to a SIPP. I received a transfer value of £97k instead of a pension of £3,350 p.a. payable in 2018.

My police pension benefited from limited inflation increases, capped at 1.6%, to break even. At the time, it was judged we needed to make a return of 2.2%, and my actual portfolio performance has been 10%

To what extent did tax incentives and shelters influence you?

ISAs were very helpful in the accumulation and de-accumulation stages. Pensions were less valuable for us, as for most of my working life the tax reclaimed would go to the partnership as a whole, yet income from the pension was taxed in later life.

Also at that time there was a lack of flexibility. And when we eventually incorporated, we were still paying tax at the basic rate.

So whilst we made some SIPP contributions, ISAs were preferred.

How often do you check or tweak your investments?

I make strategic moves infrequently, but when I do, they result in substantial trading over a short period.

Two hundred transactions a year would be typical.

Earning: On the caseWhat is – or was – your annual income?

Our income was drawn from a partnership during the building FI phase, which complicated matters.

Initially, my income was comparable to that of a police constable, rising to that of an inspector over 12 years.

The last couple of years were better and equivalent to a chief superintendent’s – but without their pension contributions!

Today’s tally: making it countWhat is your net worth?

Our current net worth is more than £3m. Our equity and bond portfolio is around £2.5m. The remainder is our home and industrial property.

Around 95% of our portfolio is tax-sheltered. Predominantly in ISAs, with the remainder in SIPPs.

Our home is very much a home, not an investment. We designed it to suit us, with one bedroom to maximise the living space.

Our previous, larger home had three unused bedrooms and less living space. It made sense to set that house free for someone who needed the bedrooms.

What does your spending look like?

Our annual spending averages around £65,000 but it is very volatile. For example, we travel extensively and prepay holidays. We changed cars and bought several expensive E-bikes over the last few years.

On an annual basis, spending peaked at £140,000 in 2020 but was minus £70,000 in 2022!

We’d bought a new motorhome in 2020 and used this for UK travel when Covid restrictions allowed. We sold it for a £3,000 gain in 2022. Nothing clever by us, just the effect of a 45% price hike in less than two years. A vivid illustration of inflation caused by shortages and unusual demand.

Accounting for spending does raise some questions as to the timing of purchases. If I pay for a holiday in 2025 or 2024, do I account for it in 2024 or 2025? If I buy E-bikes in 2023, do I account for them in 2023 or over a more extended period?

I’ve opted to record the money spent in a particular year, but I keep an eye on spending over a rolling three-year and five-year basis.

If your spending is manageable – in our case, 2% of our net worth – there is no problem.

Over 17 years our spending has risen although the base level of the expenditure is around the same in real terms. We now spend far more on travelling.

Do you budget or structure your spending?

Our spending is very ad hoc, and with very little regular income we sell assets from our unsheltered portfolio. While this unsheltered portfolio has survived 17 years of spending and funding ISA SIPP contributions, it will likely run out fairly soon.

There are a lot of books, articles, videos and discussions on the Internet on how to determine a spending rate and how to manage the details, natural income versus a fixed percentage, and so on.

It’s a very interesting challenge. By comparison, accumulating money is easy. Do it month in, month out.

De-accumulation is very complex with so many uncertainties. Living Off Your Money by Michael McClung is excellent on this.

I have always documented my investment process in great detail. It’s essential to be honest with yourself about your ability – or lack of it – and to improve the process.

I documented and compared seven investment strategies. But I have not rigidly followed a process regarding spending and de-accumulation strategies.

A lot of people are overly concerned about the minutiae. Many are likely to have more assets and income than they need, and FIRE advocates will naturally be more cautious.

Of course there is a sizeable part of the wider public who are underfunded. For them how to draw an income from a defined contribution pension will be a problem.

What percentage of your income did you save over the years?

We initially saved surplus income over our living costs – around 25%. But as earnings improved, we raised our living standards by less than the increase in income.

Our savings ratio was enhanced to around 40%, and of course, without excessive lifestyle inflation, the target for FIRE becomes more achievable.

The first 14 years of investing saw an average inflow of £12k per year. It was substantially higher in the last three years.

What’s the secret to saving more money?

We do not define ourselves by the house we live in, the car we drive, the restaurants we go to, or conspicuous spending. We spend freely on what matters to us, travel a lot, and enjoy our E-bikes.

Like Mr Money Mustache we think the Tesla Model Y is great! And we have too many Apple products.

We are very conscious when spending on less important things. For instance, we can cook far better than most restaurants. So why go there other than for social gatherings?

Do you have any hints about spending less?

Ramit Sethi expresses our style of living as ‘living your rich life’. He has a podcast and book, I Will Teach You to Be Rich, and also on Netflix, ‘How to Get Rich.’ It’s a great place to start.

Spend generously on what matters to you and economise on the rest.

One of the easiest ways to reduce spending is to avoid regular subscriptions and direct debits. [Um, except Monevator membership of course – The Investor]. Only schedule essential regular payments, and control the rest manually.

Wealth: lasting the distanceHave you changed how you invest as you move to full retirement?

I saw a comment from @ZXSpectrum48K on Monevator that caused me to stop and think about my investing approach:

“This is something that seems to get lost. In investment, winning most of the time is the default position. It’s understanding how not to fail that is hard.”

This is similar to Warren Buffett’s quote regarding Long Term Capital Management’s massive failure in 1998:

“They are not bad people at all. But to make money they didn’t have and didn’t need, they risked what they did have and did need. That is foolish. That is just plain foolish”

After 17 years, I have a shorter investment timescale than in 2007, but it could still be extended. Now is the right time to secure a future income stream. Government bonds are the appropriate method.

I reject annuities because they remove the possibility of adapting to the unforeseen and are a single point of failure.

In contrast, because of their recent poor performance bonds are now quite attractive. If I focus on how not to fail, then a 30% allocation of my equity/bond portfolio to bonds is around £750,000.

Taking everything into account, these bonds could last me 25 years.

Realistically, the equity portfolio should still provide growth over the longer term. They can refill the bond portfolio as and when.

I could secure higher future income streams by taking more risk now, but will it make a real difference? We could spend more, but why do so? We can do what we wish now and purchase everything we both need and – less importantly – want.

While we have theoretically been de-accumulating for 17 years, in practice, we are still accumulating. That is unlikely to change. Given that the general investment account is now almost empty, we must draw from the ISAs and SIPPs.

I will likely make ad hoc withdrawals from the bond holdings. However, if equities appear ‘expensive,’ I may make a judgment call.

I am simplifying my investment approach. This encourages me to default to a rules-based approach to the investment and de-accumulation processes. As an aside, the book Noise by Daniel Kahneman provides an insight into our behavioural flaws that jeopardise the decision-making process.

My ad hoc withdrawals to fund my lifestyle worked out well. Still, when I look at them retrospectively, they were a rational method of providing the necessary cash flow and funding every few months. They would coincide with a need to fund ISAs, an opportunity to rebalance portfolios, and so on.

Now I am creating guidelines to continue the process, to make better decisions and efficiently use our funds.

The best part of following your rules is that you can break them when you have to! There will still be occasions when Mr Market offers opportunities.

What would you say to Monevator readers pursuing financial freedom?

Financial freedom is brilliant. It gives you options about using your resources, time, and energy. That is incredibly valuable.

What is your attitude towards charity and inheritance?

We will likely die with significant assets. These will be passed on to our daughter and family after some charitable bequests.

We will not attempt to game inheritance tax. We have been fortunate to spend our retirement in an environment that allows us to live off investments at meagre rates of taxation. The concept of catching up with our liabilities to the broader world when you’re dead is good with me.

Final thoughts on FIRECan you recommend other favourite resources for anyone chasing the FIRE dream?

Before the widespread adoption of the internet, there were few resources concerning FIRE.

Your Money or Your Life by Vicki Robins and Joe Dominguez was inspirational – a book we came across in the mid 1990s. It was good to know we weren’t alone in our quest for a life not dictated by the need to earn more money.

At that time, ‘downshifting’ was the term used rather than FIRE. Downshifting is perhaps a better objective because it implies seeking a balance between earning money and a simpler lifestyle, with no need for the Retirement Police. It’s your choice.

On the practical / investment side, the internet is the best and worst resource for anyone chasing FIRE. There is so much material out there, and it is probably sensible not to overdose. Work it out in your mind, and then save and invest regularly. We all tend to overthink it.

Finally, I’d recommend The Four Pillars of Investing by William Bernstein. This new edition, published in 2023, is superb – the culmination of experience and wisdom.

This month’s chat really resonated with me, thanks to the early focus on investment trusts, active investing, and his experimental approach to investing. How about you? Questions and reflections welcome, but please remember @HariSeldon is a reader sharing his story, not a battle-hardened blogger like me. Constructive feedback welcome. Personal attacks will be deleted. See our other FIRE studies.

Financial Independence Retire Early.

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What caught our eye this week.

Hello campers, TA here – standing in for TI, who’s off on his annual hols this week. That means topping up his monitor tan in some seedy foreign hotel instead of his seedy London lair. Ah well, a change is as good as rest as they say.

Right, with that piece of libel out of the way, I understand there’s a big event coming up on 4 July that simply cannot be ignored. That’s right, my assault on the Bitchfield pie-eating record. Oh, and this news just in: there’s a General Election on, too.

So as reluctant as I am to spend all day fighting fires in the comments section, I can’t rightfully ignore the political earthquake incoming.

Personally, I chart a wavy political line: weaving around the traffic cones of the centre ground.

I’ll happily borrow my opinions and remedies from the sane of the centre-left and centre-right. My vote goes to whoever I think will best govern in the interests of the whole country.

In 2010, I felt Labour could do with a spell in opposition. They needed time to think again.

So here we are in 2024 and we’re faced with a choice: more of the same or time for a change?

As ever, it’s Red vs Blue.

But governments shouldn’t be judged like football teams … “I’m Accrington Stanley until I die,” or whatever.

Governments should be judged like football managers: on their track record.

Why as citizens would we offer politicians our unconditional support?

Either they put the country on a sound footing and create the necessary conditions for prosperity, or we turf them out.

It’s the only leverage we have. If you’ve done a bad job, you have to go. And, my god, have any of the country’s problems appreciably improved over the last 14 years?

Low productivity
Economic competitiveness
Public services: NHS, social care, education, welfare
Housing
National debt
Immigration (interpret this according to your political taste)
Regional imbalances
Environmental protections

How about the two big promises of the last election: Brexit and Levelling Up?

Whatever you think of those two issues, it’s telling that the Conservatives aren’t shouting about their achievements on either count.

They haven’t got a vision beyond staying in power: witness ad hoc policy gimmicks like National Service. Tories were pooh-poohing that idea only weeks before the election was called.

They’re afraid to take difficult decisions to solve the country’s problems: hence the lack of progress on planning reform or social care.

And now they’re laying traps for the next Government by ruling out every tax rise they can think of. The objective being what? To keep the country in a mess until we fall back into their arms? Love it. Essentially, they’re saying: “If we can’t have you, nobody can.”

This from the people who gaslit us with ‘fiscal drag’ – raising the UK tax burden to its highest level since 1950, while simultaneously claiming they’re cutting taxes because they’ve knocked a few quid off National Insurance.

Not to mention the chaos of four prime ministers in five years – at least one of whom was manifestly unfit for office.

Casting a vote for this lot again is like going back to a bad boyfriend who says it’ll be different this time.

You may doubt Labour. “All politicians are the same,” is the cop-out defence I keep hearing. Well, let’s find out shall we?

The ire of the electorate should be biblical. Not because ‘beating the Tories’ is an inherently good thing. But because all politicians need to know that if they screw us around, they’re out.

That if they spend their time spinning and lying and fudging and faction-fighting instead of mending and sorting then they’re goners.

Remember how Boris Johnson’s 80-seat majority was meant to be unassailable? He was being talked about as a two-term prime minister because Labour needed an impossible swing to overturn their historic 2019 defeat.

Thankfully those political assumptions are in the shredder. Unquestioned party loyalty is breaking down. Tribalism is dissolving.

So, if Labour get in, they’re on notice. The electorate is volatile and vengeful.

That’s how it should be.

Some may still be stuck in the trenches, unable to overcome their fear of the Red team. But in truth, neither of our two main parties are radical. They’re usually only elected when the moderates are in charge.

Can things only get better? Definitely not. But tribalism doesn’t help us. It’s the political equivalent of auto-renewing your subscription. You will be taken advantage of.

So it’s time to switch supplier. I’m not expecting massively better service just because I’ve moved from EDF to E.ON or whoever. But it’s the only way to keep them both in line. Hence, I say:

Vote tactically
Vote on record
Do not reward failure

Have a great weekend.

From MonevatorThe Minimum Pension Age trap – Monevator

The perils of leveraging your mortgage to invest – Monevator [Members]

From the archive-ator: The floor and upside retirement strategy – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK economic growth revised upwards – BBC

Labour won’t end tax-free cash for pensioners – Evening Standard via MSN

UK disposable income growth lags Europe but poorer households outpace richer ones – BBC

When a wealth tax goes wrong – Telegraph via MSN

Ex-Fujitsu engineer changed witness statements at behest of Post Office – Guardian

Productivity resurgence in the North – Business Live via MSN

SpaceX tender offer values company at $210 billion – Bloomberg

Top scientists turning down UK jobs due to visa costs – Guardian

The desert data boom – Sherwood

Election section mini-specialGeneral Election poll-of-polls – Electoral Calculus

Tactical voting recommendations – Best for Britain

The economic challenges our politicians won’t talk about [Podcast] – Institute for Fiscal Studies

Reform activist makes racist comments about Sunak – Guardian

Macron looks to be in deep merde – The Economist

Democrats / Free World panics over Biden debate debacle [Search result] – FT

Mad elections [Podcast] – The Rest is History

Products and servicesBest savings accounts beating inflation – Yahoo Finance

Time to lock savings up before interest rates fall? – This Is Money

Sign-up to Trading 212 via our affiliate link to claim your free share and cashback. T&Cs apply – Trading 212

Best travel insurance – Which

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

eBay seller’s tax guide – Yahoo Finance

Beautiful homes faintly connected to politicians, in pictures – Guardian

Comment and opinionThe happiest and unhappiest nations on Earth – Our World In Data

The seven laws of personal finance – Scott Burns

Why you need to stop hoarding cash – Cautiously Optimistic

Spendthrifts vs tightwads (which are you?) – Morningstar

Persuading elderly parents to downsize: how not to do it [Search result] – FT

Is Nvidia a good stock? – Bloomberg

The small cap premium is dead. No! It’s only resting – A Wealth of Common Sense

Can US stocks keep outperforming? – Morningstar

Five retirement regrets and how to avoid them – Which

Five things an investor shouldn’t care about – Safal Niveshak

The cost of following England at the Euros (possibly the most joyless article I’ve ever read. Had to share!) – Yahoo Finance

Why European stocks have lagged US stocks – Albert Bridge Capital

The World’s top retailers by revenue – Visual Capitalist

Empty inside: the eerie feeling of abandoned mansions – Yahoo Finance

Naughty corner: Active anticsCancelled! TA is in charge this week. Say three Hail Mary’s and read Passive vs active investing as penance for even thinking about timing the market.

Kindle book bargainsA Man for All Markets by Edward O. Thorpe – £0.99 on Kindle

Doughnut Economics by Kate Raworth – £0.99 on Kindle

Taxtopia by The Rebel Accountant – £0.99 on Kindle

The $100 Startup by Chris Guillebeau – £0.99 on Kindle

Environmental factorsHow global companies are rowing back on green targets [Search result] – FT

How to avert mass extinction – Guardian

Futuristic Saudi city, The Line, cut short (absolute shocker) – BBC

BP doubles down on fossil fuels (absolute shocker #2) – This Is Money via MSN

Robot overlord roundupBill Gates thinks AI will be net good vs climate change (presumably because it’ll kill us all?) – Guardian

What happens if humanity’s AGI dreams come true? [Podcast] – 80,000 Hours

Overthrowing our tech overlords – Noema

I’m sorry Robo-Master, I didn’t mean it when I said you’d kill us all [Grovels, sobs].

Sex click-bait! [New section]The tyranny of the female-orgasm industrial complex – Atlantic

Can 25% of people orgasm from tickling? – Guardian

Better read these fast before TI returns to crush my awesome new editorial initiative.

Off our beatGlasto in pictures! – BBC

How to choose between competing theories (send to the conspiracy theorist in your life) – Clearer Thinking

The loneliness of the tennis player who isn’t quite good enough (or how the dream dies) – Guardian

Why the West is not to blame for Putin invading Ukraine (spoiler alert: Putin is to blame) – Institute for the Study of War

Late bloomers: those who succeed later in life – Atlantic

How to think about differences in ability between groups – Clearer Thinking

German viral comedy-rap sensation (instant antidote to election blues) – YouTube

The correct way to hang toilet paper (this will change your life. Not for the better, obviously) – Unilad

And finally…“Don’t aim at success. The more you aim at it and make it a target, the more you are going to miss it. For success, like happiness, cannot be pursued; it must ensue, and it only does so as the unintended side effect of one’s personal dedication to a cause greater than oneself or as the by-product of one’s surrender to a person other than oneself.”
– Viktor E. Frankl, Man’s Search for Meaning

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Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist

The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future

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I believe – Finumus here – that Financial Independence, Retire Early (FIRE) types give leveraging your mortgage to invest in equities an undeserved free pass.

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The normal minimum pension age (NMPA) is increasing from age 55 to 57 on 6 April 2028. Some people’s pensions protect them from the increase but the benefit can be lost if you transfer out.

Yet others could be caught out by a weird time-glitch.

The legislation as written will allow some to access their pension at age 55, but then lock them out again because they won’t be 57 when the pension age rises!

This piece of bureaucratic madness could affect over one million people according to former pensions minister, Steve Webb, who sounded the alarm in This Is Money.

It’s yet another pensions minefield and – if you’re not following the Department for Work and Pensions award-winning communications campaign – you might not know what’s going on. [Sarcasm is the lowest form of wit, y’know – Ed]

In this post we’ll cover who’s liable to lose access to their pension, and how to tell if your scheme offers a Protected Pension Age (PPA) of 55 or 56.1

Now you see it, now you don’tUp to 5 April 2028 most people can tap into their pension from age 55.

Overnight, from 6 April 2028 the minimum pension age rises to 57.

Critically, there’s no transitional arrangement in place.

So if you’re not 57 on 6 April 2028, you will generally not be able to access your pension. Even if you were doing so because you were over-55 before that date!

In the case of someone born on 5 April 1973, they will have precisely 24 hours to enjoy their pension before it closes for another two years.

If that’s you, I recommend using a pension provider famed for their speedy customer service.

You might think such a ludicrous situation would be cleared up. But currently this is the state-of play – despite warnings from both within and without government.

Anyone born after 6 April 1971 but before 6 April 1973 is stuck in this bizarro world loophole.

The obvious solution is to allow anyone who started accessing their pension before the magic date to carry on as they were.

But that isn’t happening.

The law as it stands simply snaps shut your pension pot again until you’re age 57.

What does the Government say?The Treasury referenced the problem in a July 2021 paper:

The Government also acknowledges the importance of establishing a clear position on the transitional arrangements. For example, members who do not have a PPA and have reached age 55 but not age 57 by 6 April 2028 and for whom a transitional issue may arise.

The Government will provide further advice on the proposed transitional arrangements and provisions in due course.

No such advice has been published. The change in the NMPA was written into law by the Finance Act 2022.

Since then, silence.

What does HMRC say?Essentially: “Nothing to do with us, guv.”

If you search around the issue, you’ll find this query on the HMRC Community Forums where someone asks if they’ll be stopped taking their pension.

Three HMRC respondents duck the question by either linking to information that doesn’t help or offering a bureaucratic dead-bat:

Sorry, we cannot comment on future events as legislation may change.

What do others say?Some pension providers are flagging the problem.

Fidelity says:

As you’ll be 55 before 6 April 2028 you’ll be able to take your pension benefits at any time from your 55th birthday up to 6 April 2028.

It’s currently unclear whether you’ll have to stop taking pension payments after 6 April 2028 (such as regular pension drawdown payments) until you reach the age of 57.

While government-backed financial educator Money Helper cautions:

People born between 6 April 1971 and 5 April 1973 may be caught in a transitional phase, possibly accessing their pensions at 55, then losing access from 6 April 2028 until they reach age 57.

This is definitely a thingI’m personally caught up in this. And I must admit I’d assumed some kindly government fixer would close the loophole.

It just seems nuts. But there’s a reason why political satire has such a rich tradition.

And now there’s less than four years to go. The planning window is perilously short if nobody does anything about this.

One option is to take enough cash out of your pension to cover the period when it’s padlocked again.

A 5 April 1973 baby will need to withdraw an extra two years of cash to get them through the tax years 2028-29 and 2029-30.

That’s likely to mean a big tax hit, unless you use your tax-free cash.

Check out this piece on the pension drawdown rules to understand how to use phased drawdown to take the tax-free cash you need without overwhelming your ISA allowance.

The article also covers the emergency tax issues associated with drawdown and the disadvantages of taking uncrystallised funds pension lump sum (UFPLS) payments.

Personally, I’m not keen on incinerating tax-free cash that can be used to grow your future tax-free space in ISAs, if left invested. Especially as it seems likely that taxes will rise in the future.

But everyone has their own priorities. Some may decide to take the tax hit at 20% but use tax-free cash to avoid tipping over the higher thresholds, for example.

Is your pension age protected?Some pensions can be accessed at age 55 even after the 6 April 2028 NMPA rise.

This Protected Pension Age (PPA) benefit applies to:

A pension scheme that gave its members the unqualified right to take benefits at age 55 under their scheme rules on 11 February 2021.
You also had to be a member of the scheme before 4 November 2021, or in the midst of a transfer.
An ‘unqualified right’ means that you do not need the consent of anyone else (for example, trustees or scheme administrators) to take your pension benefits.

It’s best to check the status of your pensions directly with the scheme administrators.

I didn’t think any of my pensions qualified. But then I discovered that Fidelity’s SIPP offers a PPA of 55, providing you held it before 4 November 2021.

Stick or twistYou can lose your PPA if you transfer your pension. A new provider doesn’t have to honour your protection, so check that they will if retiring at 55 sounds nice.

But there’s a twist:

Money transferred from your protected scheme is ring-fenced once it hits your new pension.
Only that money benefits from your PPA in the future.
The rest of your pot (including ongoing tax relief, employer contributions and investment growth) will only be available from age 57.

But there’s… a twist within the twist!

The above rules apply if you arrange your transfer as an individual in a move known as – wait for it – an individual transfer.

But under a block transfer your past and future contributions qualify for the PPA even if the new scheme doesn’t offer any such protection.

(Ever get the impression that HMRC is run by the puzzle-loving fiend, The Celestial Toymaker?)

A block transfer involves two or more members of a pension scheme transferring to the same new scheme at the same time.

Alright, I feel like I’m addressing an ever dwindling proportion of the population with each passing sentence, so let’s finish this bit up.

Money transferred from a non-qualifying pension doesn’t magically gain protection if you shift it to a qualifying scheme. Nice try.

Apparently a pension in drawdown can transfer without the loss of your PPA. But please double-check as I only found one single source making that claim.

Minimum pension age rising to age 58 and beyond?The original government plan was to tether the NMPA to the State Pension Age. The idea being that your private pensions could be ransacked no more than ten years before the State Pension.

However, this link wasn’t included in the Finance Act 2022. Perhaps it’ll be legislated for by a future Parliament. Perhaps it’s gone to the Happy Policy Unit in the Sky.

Either way, it’s not a thing for now.

What a stateWell, it’s great to see that the Government has learned the lessons of their last failure to properly inform people of looming pension changes. [Second sarcasm violation! You’re on a final warning – Ed]

I get that the time-limited pension issue only affects a thin slice of the population. But it could have quite a serious impact on those it does catch – especially as many people’s pension plans are touch-and-go anyway.

Moreover, I’m quite pessimistic about the chances of anyone bothering to solve the problem. I have a feeling it may not be the top priority of the incoming government – whoever that may be. [Fired! – Ed]

There’s one final takeaway here for anyone who’s made it this far down the page. [Hmm, still here? – Ed]

The government machine is continually screwing things up and often finds it easier to move the goalposts than to properly fix them.

So if you’re planning for the long-term, make allowances. Make your plans as generous as possible with as much wiggle room as a pair of Victorian football shorts.

Take it steady,

The Accumulator

Only a few schemes explicitly offer a PPA of 56. So we’ll just refer to a PPA of age 55 for the rest of the article.

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What caught my eye this week.

Bosses continue to ask their staff to get back into the office more. And workers continue to reply by email from their laptops: “Yeah, maybe not…”

You don’t need to look hard for evidence. My local gym – located in a business park – is dead on a Friday, for example. Or check out the slump in rail season ticket sales in the UK:

Source: Mail Online

The Mail Online reports (my bold):

There were 60.3m passenger journeys made using season tickets in the latest quarter of January to March 2024. This was a 3 per cent increase on the 58.7m journeys made in the same quarter last year.

But season tickets made up 15 per cent of total ticket sales in the latest quarter, which was less than the 16 per cent in the previous year and down 24 percentage points from 39 per cent four years ago.

I’m sure the cost-of-living crisis won’t have helped, either, when five out of the most popular season tickets into London now cost over £5,000.

The dearest is £7,150 a year!

Paying that kind of money to sit on a train for as much as an hour or more – only to work less efficiently in an office when you get there?

No thanks. I can easily see why people are choosing to re-wire their work lifestyles instead.

So can plenty of others – it has been a bountiful week for coverage of the ongoing hybrid work reconfiguration:

- Invested in the WFH argument? Home in on the evidence – FT
- The benefits of hybrid working [Research] – Nature
- Inside Dell, workers rebel against return-to-office order – Semafor
- How to be happier at work – A Wealth of Common Sense
- Bosses are having the hardest time adjusting to hybrid work – CBNC
- Cultures of destruction are destroying workplaces – Psychology Today

Best wishes to a fellow finance bloggerI was saddened to learn this week that US personal finance writer Jonathan Clements has received a very unfortunate medical diagnosis.

A well-known financial columnist in the US, Jonathan has more recently put his heart and soul into his own personal finance website, Humble Dollar.

I’ve never met Jonathan. But I’ve read his articles and most of those of his contributors for many years. I link to Humble Dollar almost every week, and have especially enjoyed watching Jonathan deftly triangulate his site to find its own unique voice and niche.

I’ve also learned from reading how Jonathan’s thoughts have evolved with respect to his own post-work life and retirement. Which of course only makes his sudden medical challenges the more poignant.

Both myself and TA homed in on the same section of Jonathan’s article about his cancer diagnosis:

The cliché is true: Something like this makes you truly appreciate life.

Despite those bucket-list items, I find my greatest joy comes from small, inexpensive daily pleasures: that first cup of coffee, exercise, friends and family, a good meal, writing and editing, smiles from strangers, the sunshine on my face. If we can keep life’s less admirable emotions at bay, the world is a wonderful place.

We send Jonathan our very best wishes for his treatment and journey.

And everybody please enjoy this sunny weekend.

From MonevatorBlind Date for Investors – Monevator

FIRE pioneers are finding the path for everyone – Monevator

From the archive-ator: The cautionary tale – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Inflation falls to lowest level in almost three years – BBC

Natwest to takeover most of Sainsbury’s Bank – Which

Queues for first council housing in Somerset for 30 years – BBC

Hargreaves Lansdown ‘willing to recommend’ £5.4bn CVC-led takeover – CityAM

Revolut seeks $40+bn valuation in employee share sale – FT via Yahoo Finance

Bank of New York rebranding cuts ties to a fading Wall Street era [Search result] – FT

Octopus Energy to repay £3bn Bulb cash to taxman – This Is Money

Barcelona to ban apartment rentals to tourists to cut housing costs – Guardian

Private equity firms have amassed $1tn in ‘carry’ fees as taxation debate mounts [Search result] – FT

Investment in UK is lowest in G7 for third year in a row, new data shows – IPPR

The election section mini-specialPressure on Labour and Tories as tax gap hits £40bn – Guardian

Brexit and the election: ‘Guitar exports used to take 48 hours – now it’s three weeks’ – BBC

The manifestos and your finances – Guardian

Reform and the Green Party’s more radical tax ideas – This Is Money

Electing betting claims put focus on who knew what and when – BBC

Products and servicesThe best buy-to-let mortgages for landlords – This Is Money

St James’s Place under scrutiny: what do its customers say? [Search result] – FT

Sign-up to Trading 212 via our affiliate link to claim your free share and cashback. T&Cs apply – Trading 212

Is it cheaper to rent or own a home? – Which

Santander’s bank switch offer: get £175 + £15 – Be Clever With Your Cash

Get £100 worth of free trades when you open an II SIPP account before 30 June. Capital at risk. T&Cs apply. New customers only – Interactive Investor

10 ways wedding guests can save money – Which

Credit card debt hits UK mortgage affordability [Search result] – FT

Open an account with InvestEngine via our link and get up to £50 when you invest at least £100. T&Cs apply. Capital at risk – InvestEngine

Skinny homes for sale, in pictures – Guardian

Comment and opinionQuiet compounding – Morgan Housel

Go big early – Humble Dollar

How to get started with FatFIRE – Fire v London

The stock market will crash! – Darius Foroux

“I ask men if they have a pension plan before I seriously date them” – Business Insider

Roger Federer versus the stock market – A Wealth of Common Sense

‘Will I ever retire?’: millennials wonder what’s on the other side of middle age – Guardian

Why stocks are the greatest asset class – Of Dollars and Data

Six myths about working in retirement – Which

We suffer more often in imagination than in reality – Life After The Daily Grind

Just asking questions – Money With Katie

Don’t beat up your opponents too badly while smiling – Financial Samurai

Geriatric millionaires: why Boomers keep getting wealthier – Guardian

How the English clergy popularised discounted cashflow analysis – MIT [h/t Abnormal Returns]

Naughty corner: Active anticsLessons from the Warren Buffett way – Flyover Stocks

Why front-page news can mislead investors – Morningstar

Six charts that explain why US stocks are going up… – Tker

…and why you should consider small caps on valuation grounds – CFA Institute

Hedge fund talent schools are looking for the perfect trader – Bloomberg via Yahoo

Why corporate bonds are so hot right now [Search result] – FT

Betting with a weak hand – Behavioural Investment

Millionaire exodus mini-specialRecord 9,500 millionaires expected to leave the U.K. this year – Fortune

Wealthy foreigners step up plans to leave UK as taxes increase [Search result] – FT

Kindle book bargainsA Man for All Markets by Edward O. Thorpe – £0.99 on Kindle

Doughnut Economics by Kate Raworth – £0.99 on Kindle

Taxtopia by The Rebel Accountant – £0.99 on Kindle

The $100 Startup by Chris Guillebeau – £0.99 on Kindle

Environmental factorsA wild place in Cheshire that should not be bulldozed – Guardian

‘You’ll never find an insurer saying, “I don’t believe in climate change”’ [Search result] – FT

Iberian lynx no longer endangered after numbers improve in Spain and Portugal – Guardian

Global renewable energy capacity through time [Infographic] – Visual Capitalist

The climate is the economy – Slate

Robot overlord roundupAI took their jobs. Now they get paid to make it sound more human – BBC

The Goldilocks zone – Not Boring

Apple is smart to go second on AI – Professor Galloway

Better than Google – Seth Godin

AI cameras used at London stations to detect passengers’ emotions – Standard

Off our beatThe rise in DINKs, SINKs, DINKWADs, KIPPERs and more… – Forbes

…although more young people are becoming NEETs, too – Yahoo Finance

The world is running out of soldiers – Vox

Some scientists think extreme heat is why people keep disappearing in Greece – CNN

Japan’s abandoned houses wipe $25bn off nearby property – Nikkei Asia

The scammy ads fuelling app gaming – Sherwood

What Frank Lloyd Wright tells us about late bloomers [Search result] – FT

Is moving like an animal the secret to good health? – Guardian

And finally…“It was always the becoming he dreamed of, never the being.”
– F. Scott Fitzgerald, This Side of Paradise

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Nearly 20 years ago, Channel 4 unleashed the TV comedy Nathan Barley – to the general disinterest of almost everyone.

The six-episode series saw the eponymous Barley navigating the hipster enclaves of East London on a child’s bicycle, as he attempted to become a ‘self-facilitating media node’.

Nathan Barley – an early work from Black Mirror creator Charlie Brooker – found a few cult fans.

But it confused everyone else.

I suspect you had to occupy a specific youthful London media bubble to truly get all the references. Of the 700,000 viewers that Nathan Barley did manage to attract, I’d guess 650,000 or so were there to laugh at the creative swearing.

There are other reasons why the show bombed. Parodying Internet culture seemed passé in the hiatus between the Dotcom crash and YouTube and Facebook. Almost nobody back then shared their life online in video the way Barley did. East London’s Shoreditch already seemed ‘over’ if you were a hipster who’d arrived in the early 1990s. And Barley’s ‘Rise of the Idiots’ theme perhaps seemed frivolous while a Western war raged in the Middle East.

Watch Nathan Barley now though and it’s a vision of our everyday:

The idiots won, obviously.

People do the funniest thingsIf you’re under 30 then, you might not find Nathan Barley very funny for a different reason. Which is that its world and characters no longer seem strange at all.

It’s hard to believe, but everyone glued to their mobile phones in Nathan Barley were meant to be laughed at. Its ubiquitous mobiles seemed over the top in 2005. This was two years before the first iPhone, remember.

Today my website analytics tell me more than half of you will be reading this on a smartphone.

We’re all Nathan Barley now.

Pouring cold water on the FIRE pioneersA lot can change in a couple of decades to turn the peculiar into a prophecy.

And I suspect a similar transformation of social norms will happen with FIRE1 over the next 20 years.

FIRE broke out of its Internet backwater a few years ago. Since then we’ve probably seen as many writers deriding it as actually investigating how FIRE practitioners look to achieve financial independence.

True, Charlie Brooker hasn’t yet created a drama starring Mr Money Mustache battling the Internet Retirement Police.

But FIRE’s critics regularly smirk at those of us who…

Want to quit boring jobs to pursue our passions – “These precious snowflakes don’t realise that life is meant to be hard graft!”

Aim to live off saved assets rather than work – “Madness! Who’d let their well-being depend on the whims of Wall Street?”

Target a 4% safe withdrawal rate – “Nobody knows when the stock market will crash! Future returns aren’t guaranteed! How can FIRE followers call any withdrawal rate ‘safe’?”

Study life expectancy forecasts to figure out how long our money will last – “Bit morbid, isn’t it? My dad didn’t think about any of this. He just did his job for as long as he could.”

Put something other than work on a pedestal – “Nobody cares about your watercolour paintings, salsa dancing, or your trip to Choquequirao.”

Pursue unrealistic financial goals – “FIRE might make sense for a few richly-paid tech and finance bros. But most people have zero chance of becoming financially independent.”

I could go on. You often hear healthcare cost concerns in the US, for example. Others argue it’s selfish to spend your kids’ inheritance on your living expenses.

FIRE pioneers are mapping out our futureMost of these complaints have some basis in reality. Few would deny it’s hard to amass a sufficient wodge to make FIRE work. Nor to husband your precious pot to go the distance.

Heck, these challenges are what keeps Monevator in content.

From exploring how to max out a big pension to portfolio diversification to the rebranded Sustainable Withdrawal Rate, these are frontier lands, with hostiles as likely to be around the next corner as a nugget of gold.

However I’d suggest many of these issues are simply being run into by FIRE pioneers first, rather than by them uniquely.

We’re all in it togetherConsider the big trends in personal finance and demographics facing today’s workers:

End of Defined Benefit pension schemes for most of us – Many a FIRE critics’ attack vector has zeroed in on the unseemliness of thinking about your future retirement income – early or otherwise – in your 20s and 30s. But FIRE pioneers are only getting their heads around this ahead of the rest of the population. Paternalistic company pensions are almost a relic of history.

Pension freedoms and the ‘pots for life’ talk – Ditto wondering how best to invest your pension, drawdown an income, or manage your money to make it last. Today’s pensioners often hit these questions without giving them any thought beforehand. Future pensioners who’ve hung around geeky FIRE locales debating the 4% rule should be better at managing their own money.

Increased longevity and (potentially) longer retirements – Someone retiring early at 45 clearly needs a good handle on how long they’re likely to live. Otherwise, their retirement funds are liable to flatline before they do. But with today’s 65-year olds already set to live on average into their late 80s (and newborn girls having a life expectancy of 90) a 45-year old retiree has more in common with a 60-year old retiree than not.

Longer and more flexible working lives – I don’t personally believe it’s best for most people to fully retire in their 40s say. Increased longevity is one reason. Hence my fellow flexi-FIRE types reinventing the rules of work and retirement to suit their lifestyles probably won’t seem so unusual in 20 years’ time. By then everybody will be at it.

Shorter job tenures, more job hopping – Older generations saw restructuring, offshoring, and outsourcing destroy the notion of a job for life. Now younger generations are job hopping faster than ever. FIRE seekers aim to max their income – and savings – so they can potentially opt-out ASAP. They chase the best opportunities rather traditional career paths. Seems prescient.

Interest rates and inflation – Macroeconomics matters long-term and – disasters notwithstanding – that long-term is coming for more people. High inflation, say, wasn’t such a risk when you only expected a fixed annuity to see you through a ten-year-long retirement. But just ask anyone under-75 with a fixed income how they feel about the 30%-plus inflation we’ve endured over the past few years. Ever more of us will become money geeks in order to understand these risks.

Less family support, more going it alone – Some deride FIRE singletons or couples who have no kids. “Easy mode!” they cry. But fertility rates across the wealthy world have more than halved since 1960. More people than ever have no children at all. This doesn’t just make FIRE more realistic for them (according to the critics’ own terms). It also means no kids to help look after them later, which means yet more DIY-ing through the challenges of old age.

Of course a lot of other things could happen over the next 20 years too. Even if we dodge a nuclear or climate-related catastrophe, there’s the potential of AI coming for our jobs.

Even so, I struggle to think of a future in which the world looks more like that of a salaryman in Surbiton in the 1970s than a FIRE pioneer on a laptop in 2024.

No one is a prophet in their own landIn literature and philosophy you often find that those best able to criticise a topic are also the ones most capable of seeing to the very heart of their target.

For example while it’s hardly flawless, you won’t find a better foreshadowing of capitalist consumer culture than Karl Marx’s Das Kapital.

Perhaps it takes an external perspective to see the broadest trends. Whereas those actually living the lifestyle of tomorrow are just getting on with it.

Nathan Barley filmed himself ‘pranking’ his hapless co-workers because it was witless fun, not because he anticipated YouTube clickbait. He was on the money in trying to be a ‘media node’. His problem was he got there before Instagram and TikTok birthed the influencer economy.

When I think about FIRE today, I see something similar going on. FIRE’s tenets offer an early glimpse of a widespread future.

Those of us pursuing financial independence might think we’re outsiders seeking a very different path to the masses.

But it seems probable to me that the questions FIRE pioneers are attempting to answer will soon be asked by almost everyone. We’re just ahead of the crowd.

Financial Independence Early Retirement

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Younger readers may want to watch this YouTube taster before forging into what follows. Because we all need more 30-year-old cultural references in our media diet, right? On the other hand, anyone short of time or sleep may want to sit this one out altogether. No offence taken!

Blind Date for Investors: an unreality TV show*Perky theme tune and cheesy TV voiceover*: Hello lolly-lovers and welcome to another episode of Blind Date for Investors. Yes it’s the show that plays Cupid to the cash-strapped. That finds stranded assets a home to be biased about. That has sexier returns than Ann Summers after Valentine’s Day. Now please give a big round of applause for your glamorous host, Scylla Black!

Glamorous Scylla Black: Oh thank you! Thank you my lovelies. Alright settle down. Yes that includes you at the back waving your SIPP application form! Better luck next time poppet. Because we’ve already lined up a very special investor for this evening’s show! applause A young lady with bright prospects and a savings rate to die for! gasps Well to dine out for anyway. Ladies and gentleman, please give a lovely Blind Date for Investors welcome to tonight’s fortune hunter!

*perky theme tune plays again then camera pans to Scylla with contestant*

Scylla: Hello my lovely – please tell us who you are and where you’re from.

Investor: My name is Jane and I’m from Croydon!

crowd applauds

Scylla: Crikey I haven’t heard such applause about Croydon since that one time I was on a train that pulled out of Croydon station. Well anyway how are you doing Jane? Nervous? Cash burning a hole in your pocket? raises eyebrows, crowd applauds Looking for a partner for life?

Investor Jane: Hi Scylla! I’m just so excited to be here! I’ve been dreaming of a seven-figure fortune ever since I saw Cinderella as a little girl!

Scylla: And what little girl wouldn’t, poppet? Her figure! Her shoes! The handbags! The panda poo face masks!

Jane: nervous laugh Well, that’s all lovely but what I’m really looking for is financial independence! I want a contestant who can bring some FIRE into my life.

*crowd cheers and applauds*

The contendersScylla: FIRE eh? We have a hot one in tonight folks! Better get the fire extinguishers ready… Okay Jane, let’s meet the three gorgeous prospects who are looking to win you over.

*Curtain draws back on the other side of a screen from Jane to reveal three investment strategies – um, somehow incarnated as ruddy young men in their 20s. Crowd applauds, rightly enough at such wizardry*

Scylla: I know audience, aren’t they gorgeous? puts a hand on Jane’s shoulder Jane love, I’ve taken a peek at our prospects and you are in for a treat! Honestly, if I wasn’t wedded to my annuity I’d be compounding with them myself.

Crowd: Oooo!

Jane: Um…

Scylla: Don’t worry, don’t worry – they are all yours doll. Okay, so let’s get started. Number one, please tell us who you are and where you’ve come from.

1: Hi Scylla, my name is Ian and I’m from Cambridge!

crowd applauds

Scylla: Hello Ian! Not the most exciting name ever but we’ll let that slide in the pursuit of financial bliss. So Ian love, why do you think you’re the one for our Jane?

Ian #1: Well Scylla I may not be the most exciting strategy here tonight, but I’m proven to be the most reliable. Together Jane and I could ride out the volatility, diversify our assets, and enjoy many happy returns.

crowd applauds

Scylla: I see. Well as I always say to my husband I love a humble man – and he has a lot to be humble about. Right, let’s hear from our next contender. Number two, who are you?

2: Hello? Hello is this thing on? Oh right. Yes… I’m Chris and I’m from, well, Halifax.

Scylla: Welcome Chris! You sound a bit nervous chuck. Don’t get out much?

Chris #2: Hah, um, well no. I tend to just hang around in the background doing my thing.

Scylla: I see – but I’m not sure Jane is looking for an air-conditioning unit Chris. What else have you got to offer?

Chris #2: Reliability Scylla. I am rock-solid and I will never let Jane down. I mean, provided she doesn’t get carried away and tries to keep too much of me in one place. Even I have my limits, you know.

Scylla: Intriguing Chris. Some might say scintillating. Not me, but hey – there’s someone out there for everyone. Okay let’s turn to our last contestant. What have you got for me number three?

3: Oh I’ve got the lot Scylla! My name is Abel and I’m from London!

*Abel jumps off his stool and does ten press-ups. Crowd goes crazy*

Scylla: Oo-hoo! I see we have a live wire in tonight. Clearly you’re not shy of selling yourself love so I’m almost scared to ask – but why should Jane pick you?

Abel #3: Have you ever felt the pump of double-digit returns Scylla? Why should Jane trudge along with Ian or Chris – no offence lads – when she could be off to the races with me? By the time we’re done Jane, your ISAs will be so stuffed the regulators will be calling for a change in the law.

*crowd cheers and applauds*

Scylla: Alright, calm down. This is a family show. Not my family mind, my kids are too busy TokTik-ing to follow their old mam’s career. Ungrateful ingrates. Anyway let’s get tonight’s matchmaking underway!

*perky theme tune*

Question one: Me and volatilityScylla: Alright Jane I can see you’re excited to get going. So what’s your first question going to be?

Jane: Well Scylla, my friends all make fun of me at the fairground because I go wobbly on the rides. So contestants, if we went on a date to Alton Towers what would you do to steady my nerves?

Scylla: Good question Jane. Sensible. Not sure you needed to appear on national TV to deliver such a downer but let’s see what Number One says. Ian, how will stop Jane feeling nauseous when things go bumpy in a bad way?

Ian #1: Well the thing with riding the rollercoaster Scylla, is that for all the ups and downs, at the end of the journey you’re back to where you started and ready to climb to greater heights next time. And with my strategy – regularly investing across diversified index funds – we’ll hold hands and ride out the volatility. Maybe we’ll even distract ourselves with some candy floss on the way.

One cheer because they let The Accumulator in tonight. Polite claps from the rest of the audience

Scylla: Hmm, some fans in tonight. Not many but a few. Okay, just one. Anyway same question to number two.

Chris #2: Jane, I couldn’t agree with you more. Life is full of uncertainty but you can sleep at night with my strategy – cash kept in a high interest savings account – and save your excitement for elsewhere. Personally I get my thrills from doing Sudoku puzzles. But I hear Wordle is all the rage now–

Abel #3: –sorry to butt-in Scylla but I can’t believe my ears. Jane, you’re a young woman going places and you’re contemplating bedding down with these two corpses? I don’t think so. With my active investing strategy we’ll shoot for the moon and who cares if we hit a few bumps along our way? Pick me Jane and you’ll be getting a very different kind of sleepless night!

Jumps out of his seat and does 20 sit-ups. Crowd goes crazy

Scylla: Alright calm down, we’ve still got two more questions to go. Well Jane, we’ve got a feisty Number Three but – holds back excited Jane – no love get back into your stool, you’ve got to deliver all your questions before you can take a peek! What are you gonna ask next poppet?

A question of costJane: Wow! I know which contestant is revving up my returns already Scylla! But fair enough, here’s my second question. I love a bargain and I’m always looking to save a penny. If I decide to invest your way, how will you help me to save even more? Let’s start with Number Two.

Chris #2: Jane, I don’t like to blow my own trumpet or toot my own horn–

Abel #3: –too right, nobody wants to see that mate…

crowd laughs and cheers

Chris #2: Ahem, I believe this is my allocated slot Number Three. Alright so as I was saying, I’m not a boaster like a certain other strategy around here, but when it comes to keeping costs low you can’t beat a cash savings account. Because there are no costs! And if we tuck ourselves up together inside a cash ISA then you’ll get to keep all that lovely interest for yourself. Which will leave more money for us to spend on date night with a two-for-one meal deal from M&S!

Abel #3: Excuse me while I yawn myself into a coma.

Chris #2: splutter

Scylla: Please, let’s keep it civil! My tricky ticker can’t take all this aggression. Okay Number Three, better out than in I suppose. How will you help Jane with her cost question?

Abel #3: I won’t Scylla!

Scylla: Eh?

Jane: Eh?

Abel #3: I refute the whole premise of this inquiry and instead I’d like to put to you rummages in a briefcase, pulls out some paper this colourful graph showing a big slope going up and to the right with lots of other curves going down into the abyss, printed against the backdrop of a bright balloon floating across the Serengeti. Jane, when you’re gawping at this lot do you really think you’ll care about my 1.25% in annual charges plus a 10% performance fee over a 6% hurdle on top of a wide-range of undisclosed transaction costs and taxes that legally I have to include here in small print? Of course you won’t. Again, that’s a photo of the Serengeti, Jane. The Serengeti!

Jane: I love lions and zebras! Scylla can we stop now? I’ve made my choice.

Scylla: I’m right with you love but unfortunately we have to plough on to the bitter end. We haven’t even heard yet from Ian and his pensive investing into intense funds thing.

Ian #1: Thank you Scylla – though you mean passive investing into index funds. And my correction is important, because while I admit my funds aren’t intense, they are intensely cost-competitive! laughs to himself, looks out at audience, audience shrugs although one person guffaws Oh this is ridiculous. Scylla, Number Three makes all these promises but he has no evidence to back it up. Whereas I’m here to tell you that the vast majority of active strategies like his fail to beat the market over the long-term. Jane, you say you want a seven-figure sum to achieve FIRE, but if you go with Number Three then it’ll be you that is paying for his sports car–

Abel #3: –Jane, Jane, sure but it’ll be you and me both in that sports car babe!

Ian #1: Yeah right. Far more likely you’ll underperform me and then shoot off with your profits in your Aston Martin to leave poor Jane in the lurch. Cad! Bounder!

Abel #3: Boooorringgg…

Chris #2: I’m still here, you know. I’m much more interesting than you think!

Ian #1 and Abel #3 together: Pffft!

Many (/some) happy returnsJane: Oh Scylla. Who should I believe?

Scylla: It’s every girl’s dilemma pet. We’ve all read our Jane Austen and our Tim Hale. But remember you still have one question left. Better make it a good one.

Jane: Alright calm down Janey, deep breaths…Scylla my last question is this…Everyone wants to believe in happy ever after once they make an investment. So my question to each contestant is what can I expect if I commit to you? Let’s start with Number Two, Chris from Halifax.

Chris #2: I’m very glad you asked Jane because my returns have been attracting quite a bit of attention of late. How does 5.2% tax-free in a cash ISA sound to you? Remember this is with zero risk.

Jane: Well that does sound very nice.

Ian #1: Scylla, if I may? I don’t believe Number Two is telling us the whole story. He’s misleading Jane by not bringing inflation into the picture.

Abel #3: Yeah not to mention he can’t usually get it up like this. crowd cackles Returns from cash were barely above the horizontal for a decade!

Scylla: Hmm, fair points. What have you go to say for yourself Number Two?

Chris #2: Yes, well, it’s true interest rates were near-zero for a long time but that was then and this is now. Also like I said nobody ever lost money with me!

Ian #1: Well perhaps not in nominal terms but what about after inflation? Why don’t you share your real returns?

Chris #2: Ahem. Well. After inflation, UK investors have enjoyed a mumble mumble mumble

Scylla: Eh? Speak up love!

Chris #2: Alright, fine, yes in real terms cash has lost about 1% over the past 20 years. But over the past 150-odd years you’ve made 0.9% a year! That’s not too shabby I’m sure you’ll agree.

Jane: Oh dear, that’s no good – I don’t want to achieve FIRE on my 150th birthday.

Chris #2: weeps

Jane: What about you Number One. Can you promise me any better?

Ian #1: Well, no promises Jane, that’s charlatan talk. But esteemed financial writer The Accumulator on the Monevating website one audience member cheers tells us UK shares have delivered more than 5% a year after inflation for the past 50 years. And only a little less over the past 20 years!

Jane: But I don’t want to own only UK shares. There’s more to life than GB News, Ian.

Ian #1: Quite right, and you shouldn’t just own equities either. But happily The Accumulator also estimated expected returns from a diversified portfolio of index funds across various equities and bonds, and he found you can look forward to over 3% a year for the long-term. Remember, this is after inflation. A much prettier picture than the 1% from Number Two, I think you’ll agree?

Chris #2: Sure, sure – if you don’t mind waking up one day to find a quarter of your portfolio has been evaporated by a simultaneous bond and equity crash.

Ian #1: Well that’s an exaggeration–

Abel #3: –YAAAAAWWWWN! Sorry Scylla, apologies Jane. But why are we listening to these two bozos debate the difference between 1% and 3%? I’ve found more loose change down the back of my sofa. Jane, have ever heard of Warren Buffett? Or George Soros?

Jane: Yes I have.

Abel #3: Yeah well those guys didn’t get out of bed for 1%–

Ian #1: –I’m projecting 3%–

Abel #3: –whatever mate! It’s a rounding error compared to the 20% annual returns that Warren Buffett puts up. And George Soros did 30%!

Chris #2: Excuse me Number Three, I know I’m dull but I must have missed your name?

Abel #3: Huh? It’s Abel! Abel Active.

Ian #2: I see. So it’s not Warren. Nor, it seems, George.

Abel #3: Um, no? Like I said it’s Abel–

Chris #1: –ah, I see where you’re going Number Two. Yeah Abel, instead of quoting the returns from Buffett or Soros maybe you could tell us what returns YOU have achieved over the past ten years? Specifically, did your active investing antics beat the market?

Scylla: That’s a good point Mr Fancy Pants. Never mind the 20% earned by some old duffer in Omaha. What our Jane needs to know is whether your expensive active funds did the business?

Abel #3: Well… Okay no, we lagged the market by 2% a year. But it has been a very unusual period with incredible distortion from Central Banks! And we prudently positioned our portfolio for the global pandemic at the bottom in March 2020, meaning our investors were safely protected from checks notes um stock markets then near-doubling as they bounced back over the following 12 months.

Jane: Yikes!

Abel #3: We didn’t do as badly as some Jane! Besides, have you seen my sports car?

Decision timeScylla: Well Jane it’s time to make your mind up! I know it’s a lot to take in – I just met my Harry in a motorway services station lavatory and I’ve never regretted it. Ho hum, simpler times! But let’s have a recap.

*Music. Cheesy voice returns and intones: So Jane, will you pick Number One, with his diversified assets that will really put a return in your portfolio? Our will you pick Number Two, who has gone from nought to 5.2% faster than you can say “yeah but inflation peaked at 11% in 2022”? Or will it be Number Three, who idolises Warren Buffett but whose own portfolio is as limp as a salad buffet? Jane, the decision is yours!*

Jane: Oh dear, when you put it like that.

Scylla: I know love… and we started off with such high hopes.

Jane: Can I pick Bitcoin?

Scylla: …

Music theme as the credits roll

The end. Thanks for making it this far. It seemed like a fun idea when I started. Maybe add your favourite investing chat-up lines in the comments?

*Kerfuffle. The Accumulator bursts in*

The Accumulator: Okay that’s enough. You’re fired!

The Investor: Sorry old bean. Wrong show!

The post Blind Date for Investors appeared first on Monevator.

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What caught my eye this week.

The best news this week from the election dog and pony show is that Labour will not reinstate the recently-scrapped Lifetime Allowance for Pensions (LTA).

According to the BBC:

Labour has dropped a plan to reintroduce a cap on how much people are allowed to save into their pensions before paying tax.

Under the pensions lifetime allowance, pension pots over £1.07m faced an annual tax of £40,000 on average.

The cap was scrapped in April but Shadow chancellor Rachel Reeves had vowed to bring it back, saying it could raise £800m a year.

However, her party has now reversed the decision ahead of the release of its manifesto on Thursday, reportedly because the cap would add uncertainty for savers and be complex to reintroduce.

Of course the BBC momentarily gets the LTA wrong – it’s not a cap on savings made, but rather on the total size of your pot before additional taxation kicks in – but that’s all in the rich tradition of confusion about this cursed legislation.

A lifetime of muddleWhen Chancellor Jeremy Hunt first announced he’d abolish the LTA from April 2024, Reeves called it: “the wrong priority, at the wrong time, for the wrong people”.

But the LTA itself was a cumbersome shape-shifting bundle of contradictions, which surely did the pension regime more harm than anything it sort to redress.

Even in death it’s a pain in the arse. Last month the FT reported thousands of investors with large pension pots were in limbo due to sloppy legislation:

Though the Conservatives scrapped the lifetime allowance in April, errors in the legislation affected people who relied on the enhanced protection arrangements giving them the right to take out more than £375,000 in tax free lump sums.

In April, HMRC advised those savers to consider delaying their retirement plans until the rules were corrected.

Fortunately Labour now says it won’t add to this confusion.

A welcome dose of common sense which we could do with by the truckload after the fantasy politics of the past eight years.

Seven-figure sticker shockIndeed, it’d be nice to think Labour’s change of heart marks a new era of pension stability.

But I wouldn’t bet the farm.

Many Labour supporters will still take umbrage at the seven-figure pension pots being ‘favoured’ by the scrapping of the LTA. They won’t think too hard about what size of pots would be required to deliver some of the public sector’s defined benefit pensions either.

So something may yet be done in the quest for ‘fairness’.

In reality, pension income is taxed. Those enjoying a very large pension income – whether from the private sector or the state – will be paying higher rates of tax anyway.

Possibly enough to neuter much of the tax deferral benefit of pensions.

Death is not the endWhere I do find the pension regime too generous is in pensions’ transformation into a vehicle for bypassing inheritance taxes.

Those who die before they reach 75 can pass on a pension free of income tax for beneficiaries. The latter can be heirs who did nothing to earn that money. And here I deploy my usual argument that I’d rather tax them than working people.

With all parties promising us wonderful things funded on the back of ‘closing tax loopholes’ – loopholes apparently left wide open by a cash-strapped State for many years, but there you go – maybe that’s where Labour will look instead?

For now though, the end of uncertainty about the end of the LTA is good news – if a mouthful – and good politics.

Have a great weekend!

From MonevatorIs it time to ditch index-linked bond funds? – Monevator

You don’t have to go nuclear on the idea of working for a living – Monevator

From the archive-ator: How to construct your own asset allocation – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

LSE to boost retail offer with PrimaryBid deal – Sky

UK mortgage arrears hit an eight-year high – FT Advisor

Wales has the worst rate of economic activity – BBC

London house building craters, UK pipeline lowest since records began – CityAM

Thailand is seeking digital nomads – Sky

Post-Brexit ‘mess’ as Italian driver’s lorry held for 55 hours at UK border post – Guardian

Britain’s economic growth has been flattered by a booming population [PDF] – Resolution Foundation

Election selection mini-specialMoney aspects of the manifestos – Labour, Tory, Lib Dem, Others

There’s a huge Brexit-shaped hole in this election – Guardian

How the Tories learnt to love taxing the rich – This Is Money

Lib Dems pledge to rejoin EU’s single market in manifesto ‘to save the NHS’ – Sky

SNP’s Stephen Flynn attacks Labour’s North Sea energy plans – BBC

Even Surrey’s middle classes are angry with the Tories – Guardian

Do the parties’ spending promises stack up? – CityAM

Products and servicesGet cheap tickets by filling empty seats at shows – Be Clever With You Cash

Co-operative Bank launches a new £150 switch deal – Which

Sign-up to Trading 212 via our affiliate link to claim your free share and cashback. T&Cs apply – Trading 212

Is a five-year fixed mortgage now the best option? – This Is Money

185,000+ savers penalised when accessing Lifetime ISA access – This Is Money

Open an account with InvestEngine via our link and get up to £50 when you invest at least £100. T&Cs apply. Capital at risk – InvestEngine

How to switch bank accounts again and again – Be Clever With Your Cash

PrettyLittleThings faces backlash after scrapping free returns – BBC

Where the average house price buys the most square feet – This Is Money

Homes for sale for cyclists, in pictures – Guardian

Comment and opinionWealth and money are two different things – Darius Foroux

Does it make more sense to rent or buy in the UK? [Search result] – FT

Young women are telling each other to ‘date rich’. How terrifyingly retro – Guardian

The cost of living: then and now – Getting Minted

Why you’re probably not missing out on hedge funds – Humble Dollar

Champagne wishes and caviar dreams – Josh Brown

Father time is undefeated – Abnormal Returns

Horseshoes and hand grenades – Fortunes & Frictions

What is enough? [Podcast] – The Long Game via Apple

TIPS and your portfolio [US but interesting] – Morningstar

US market concentration mini-specialTop 10 companies in S&P 500 now make up a record-high 35% of index – Apollo

More: how worrisome is US stock market concentration? – Cullen Roche

Tech -> Big tech -> Huge tech – Sherwood

200 years of market concentration – Global Financial Data

Naughty corner: active anticsAre Diageo shares a buy after their 35% decline? – UK Dividend Stocks

Private equity is being overwhelmed by too many rich people – Semafor

The man whose podcast helped him start a $100m hedge fund – efinancialcareers

How often is too often? – Investment Talk

Kindle book bargainsA Man for All Markets by Edward O. Thorpe – £0.99 on Kindle

Doughnut Economics by Kate Raworth – £0.99 on Kindle

Taxtopia by The Rebel Accountant – £0.99 on Kindle

The $100 Startup by Chris Guillebeau – £0.99 on Kindle

Environmental factorsThe unsustainable hype around ESG [Search result, bait-and-switch headline] – FT

In ever-hotter US cities, air-con is no longer enough – Guardian

A ‘halo effect’ drives demand for sustainable and impact investments – Alpha Architect

What is the opposite of oil drilling? – The New Yorker

How parakeets escaped and made Britain their home – Guardian

Robot overlord roundupMusic just changed forever – Persuasion

Apple’s AI moment arrives… – Platformer

…with its artificial approach to ‘Apple Intelligence’ – SpyGlass

Situational Awareness… [PDF, on imminent AGI] – Leopold Aschenbrenner

…and a rebuttal of sorts [Video] – Sabine Hossenfelder via YouTube

Off our beatThe big British bamboo crisis – Guardian

40 years on: The Battle of Orgreave remembered – BBC

A month without a smartphone – Collab Fund

‘I used to run a popular newsletter. Then things started getting weird’ – Slate

Russian propagandists’ hopes for America – Timothy Snyder

If you don’t see these movies now, you never will – Slate

Do who you are – Humble Dollar

China is losing the chip war – The Atlantic via MSN

Nobody knows what’s going on – Raptitude

Tributes to Michael Mosley: 1957-2024 – BBC

And finally…“Things that have never happened before happen all the time.”
– Morgan Housel, The Psychology of Money

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: The LTA is really dead appeared first on Monevator.

The Psychology of Money: Timeless lessons on wealth, greed, and happiness

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A veteran Monevator reader wrote to ask if I was going to take a victory lap, given that my co-blogger has gone back to work.

The reader was referring back to our 2019 FIRE debate. In it I’d argued that early retirement was probably the wrong goal for most people capable of achieving it.

Well I hope I’d not stoop to gloat, but then again I’m only human.

Perhaps what I’m doing today – republishing one of my favourite articles – is indeed a bit of a humblebrag? Who knows.

However my main concern when I heard The Accumulator was working again was for his mental health.

When TA reassured me that he was still of hearty and sound(ish) mind – it was just that chasing cows would be on hold for a while – I stood down my inquisition.

Also: when TA explained why this latest run in with The Man wasn’t as bad as his previous multi-decade workathon (which at times sounded like it might kill him) I was impressed when he went on to confide that I might have been right to suggest back in the day that he could consider jumping ship to a more bearable job sooner – even at the cost of FIRE later.

As TA said in his recent confession, his new work is fine. Enjoyable even, if hectic at times. Perhaps he could have found something similar a decade ago.

It’s not easy to change your mind. Three cheers for him for doing so.

We can work it outI’m never disappointed when a very early retiree goes back to work.

Not least because it happens so often we should think of it as the norm. But also because I admire their mental flexibility.

You achieved your early retirement goal? Great! Your Freedom Fund has now got your back.

But maybe you miss the office banter or feeling useful or difficult projects or simply a higher calibre of fun money.

Or maybe now that you can afford some judiciously selected finer things in life, you don’t feel the need to convince yourself you can do without.

Moreover – whisper it – maybe you also don’t consider it your moral imperative to generate some new sense of purpose to replace the ubiquitous 9-5 that everyone else leans on, as your critics would have you do.

You’ve discovered something about yourself – and then you go back to doing some kind of work.

Probably a bit different and less stressful. Ideally a bit more meaningful, however you define that.

Good for you.

My plan: Plan BAnyway, I checked our website traffic data. Most of you have never read my article on the FIRE-lite benefits of working for yourself and/or from home.

Of course since I published it in 2013, the pandemic has made ‘WFH’ commonplace – mandatory at times – which means the supermarkets aren’t so quiet on weekdays these days.

But otherwise I think my article holds up well. So I’ve left it untouched – original typos and all – to provide a new (old) perspective on how to make your way.

There are no perfect answers. For example, you’ll see me confess below that stepping off the career path (or the greasy pole, if you prefer) will probably cost me dear in lifetime earnings.

Ten years on, and with friends now routinely earning what still vaguely sound like footballer salaries to me (well into six-figures these days) that proved prescient.

Have I changed my mind then?

I have not. Perhaps I’m less mentally agile than TA, but I’m still pretty happy with the path I chose.

Job satisfaction smoothing is how my co-blogger dignified it in the comments on his recent post.

I did it (one of) my way(s)Unfortunately we never get to live our own counterfactuals.

I won’t get to enjoy life as a media tycoon. Maybe I would have loved it at the top?

Equally I didn’t burn out by my early 30s to do a PhD in Homes Under The Hammer. And I do think it’s possible too many years of rules, commutes, and office politics would have done that to me. I’m just not wired for it.

But you do you. Nowadays I believe that’s the best and only goal with this stuff.

Good luck – and enjoy the journey, whatever route you take.

You don’t have to go nuclear on working for a living(June 2013)

Today I woke up late and 10 miles from home. What a dirty stop-out, eh?

Not really. I visited a friend, the talk ran on and on, and I couldn’t be bothered to schlep back across London on the last tube home.

Instead we carried on until 2am (aided and abetted by a very nice montepulciano) and then it was spare room sofa-surfing for me.

My friend headed off to work early. I’m not sure exactly when he left, but given I had no intention of getting up at the ungodly hour I heard him go into the bathroom, it could well have still been dark.

I showered and strolled off to the train station much later, going crazy on the way and buying an outrageously expensive coffee from Starbucks, which I sipped lazily as I sauntered along in the sun.

It’s Thursday. What will my boss make of my attitude?

I can tell you he’s absolutely fine about it.

Because my boss is me.

The benefits of working from homeI often read retirement bloggers saying they quit work because they couldn’t take kowtowing to The Man anymore.

I understand – The Man sucks – but it’s not a good reason to quit working. Especially if you’re impoverishing yourself for the rest of your life to do so.

Many of the benefits of retirement are also benefits of working from home:

Day-to-day you’re in control of your schedule – this is near-priceless!
On an hourly basis it’s up to you what you do.
You don’t (often) have to work for anyone you don’t like.
You don’t (usually) have to do work that you don’t want to do.
No more four hour meetings listening to guff about business that nobody believes.
There’s much more time for chores in the week – popping on the washing during a screenbreak – without it eating into your evenings and weekends.
You can shop / visit the bank / go to the cinema / run around in the park without a shirt on when it’s quiet and most people are kowtowing to The Man.
You can still be in your pyjamas at midday if that’s you. Not my bag, but it seems to work for self-employed pharmaceutical vendors.

Most of these benefits are similar to those that people cite on retiring.

They don’t have to slog to the office every day. They don’t have to put up with petty politics. They can busy themselves in the garden when they want to, and they can take to the beach for that one sunny day in September.

All true of working from home.

Mercenary tacticsAnother non-nuclear option to get some control of your life back is to make your money as a freelancer or a contractor.

I know two people who work for 3-6 months then take the next six months off. I couldn’t – I’d be scared of coming home and finding my niche had been taken over by squatters – but one of them has been at it for years.

Less radically, my girlfriend does 6-8 week contracts, then has a week or two off.

She’s not in as much control of her time as I am, because she can’t decide exactly when her next gig should start and stop. But she’s better paid than me for it, and if she wants to take a Friday off, she can. She doesn’t have to ask anyone’s permission, provided it doesn’t derail her project.

A definition of being a genuine freelancer when it comes to HMRC is that you’re in control of your own time, which is important for both your client’s and your own tax status.

Handy, if anyone complains!

Working 5 to 9 (what a way to make a living)Now it’s true these options don’t give you the ultra-freedom of the fully retired.

To make my living working from home, I have to continue to excel for the clients I do work for. There’s no coasting.

I also put in the same 200 or so days of work that most people do (although I’m more productive than the majority, so I can work fewer hours if I like).

And do you want to know a secret?

In truth I do sometimes have to tip my hat to The Man or put up with silly decisions or hare-brained schemes, in order to take on an assignment that pays well or that keeps me on a great client’s books.

But working for myself, it’s never as annoying as in the Kafka-esque nightmare of a modern office – probably because you know you can reach for the ejector lever if you have to.

You also don’t need to have so many existential debates about what all that time spent at work is really worth, because you know what it’s worth.

Your hourly rate, minus tax.

Keeping up with the MicawbersI used to dream of early retirement, but having lived off my savings a few years ago for a while, I now know it’s not for me.

In fact I hope to always continue to earn some income, although in time it’ll be increasingly from projects like property redevelopment or self-owned micro-businesses.

Maybe this blog will even make me some real money, some day!

I believe there are several benefits to doing some paying work, versus a full-time earn-nothing retirement:

You have more money, so you can spend more, save more, and be generally less vulnerable.
It keeps you engaged with the world, with business, and with the young.
It helps you ward-off that grumpy them-against-us attitude.
In my (limited) experience, some people who retire actually do less fun things and become less healthy than those of the same age who keep working.
A certain amount of stress is good for you. (It’s called eustress!)

Clearly one can over-generalise. A few people become much more engaged when they retire, perhaps because they can throw themselves into hobbies or communities that they never previously had time for.

But many people find their circles drawing in, and their horizons narrow. I’ve seen it, and I’m sure you have to.

Equally, there are some great examples of people on the Web for whom early retirement is just the start of the adventure of making their fortune.

Mr Money Mustache is clearly having a ball – and making a packet – ever since he retired.

However his form of retirement is to me more financial freedom. I know he hates this sort of semantic quibbling, but for me he’s doing what I’m doing, only I do far more short bits of freelance, and he does far more bike rides between renovation projects and super-successful website creating.

Life beyond BransonThe point is there are far more ways to make a living than Reginald Perrin ever imagined.

If you truly know that the indignity of having to earn money is what you hate about the modern world, then making enough to quit is perfectly rational.

However if you hanker for the freedom to eat ice-cream in the park or to watch Wimbledon in work hours, or to put time into side-projects that the rat race shoves to the sidelines, then it’s worth figuring out if working from home or similar is a better way for you.

Beware! Like not going to university, working for yourself is an option that’s easy to get into but not so easy to make stick.

But for me the rewards have proved well worth it.

In fact, the only real downside is that the scope of your career is curtailed.

If you’re an expert in your field then you can still be part of exciting and/or lucrative projects, as a consultant or in some other part-time role.

This is true even at the highest level – the non-exec directors who make a packet attending a dozen company board meetings a year are in some ways the ultimate example of the lifestyle I’m describing.

But working as a contractor or a freelance, you’ll never feel the excitement of being at the heart of an Apple or a Virgin Atlantic or a Kath Kidston as they roll out across the world. Nor can you enjoy a vocation like heart surgery that inevitably ties you to your workplace.

Still, how many of us really enjoy any of that in our lives?

Exactly.

Clocking in at your nearest Wernham Hogg is hardly the stuff of dreams.

Good reads for your freedom plan:

Go it Alone by Geoff Burch
The $100 Startup by Chris Gillebeau
The 4-Hour Work Week by Tim Ferris
The World is Too Much With Us by William Wordsworth

The post You don’t have to go nuclear on working for a living appeared first on Monevator.

The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich

Go It Alone: The Streetwise Secrets of Self Employment

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Index-linked bond funds were meant to protect us from surging inflation, yet they failed their first serious test. Since CPI took off at the tail end of 2021, these products have been a bitter disappointment – like waterproof trousers that leak or wasp repellent that attracts the blighters like it’s made of sex pheromones.

We’ve previously explained exactly why index-linked bond funds didn’t work during the car crash markets of 2022.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post Is it time to ditch index-linked bond funds? [Members] appeared first on Monevator.

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What caught my eye this week.

How do you feel today? Happy? Sad? Despairing? Joyous?

Can’t believe there’s still a week to go until Euro 2024 kicks off to relieve the tedium of the same old, same old, soggy British spring?

Or dreading football on the telly 24/7?

Hmm… can I ask how old you are?

Age-appropriate emotionsFor as long as I can remember, posts about the happiness ‘smile curve’ have been a staple of personal finance blogs.

Perhaps it was because so many bloggers were in or approaching middle-age.

The smile curve theory, you see, came from research showing a person’s lifetime happiness followed a U-shaped curve.

You were happier when you were young and carefree. And you were happier again when you were old and grateful and didn’t give so many tosses anymore.

But in the middle? Loaded down by mortgage repayments, ungrateful children, and job stress?

Not so much.

No doubt the theory resonated in FIRE circles because it gave an extra reason for – and impetus to exit – the heads-down push through the suck to achieve financial freedom.

But – alas – it seems the smile curve has turned lop-sided.

Like this video about unhappinessIn The Global Loss of the U-Shaped Curve of Happiness, David Blanchflower and Alex Bryson tell us new research has…

…shown something astonishing and of global importance: the general contour of happiness across the age-span has changed around the world.

Young adults are now the least happy people, and this broad multinational change began sometime in the mid-2010s, right as Gen Z was entering this age-group.

I’ve linked to other takes on this trend before. It does seem to be well-established.

Of course this being 2024, every faction has a different theory as to why young people (especially young women) are so much more despairing:

Progressives blame structural inequalities and a greater awareness of dangerous prejudices such as racism and misogyny.
Traditionalists see an erosion of family values that’s left young people adrift with nothing to aim for but satisfying their own hedonistic ends.
Environmentalists point out the climate – and our future – is going to hell in a hand basket. Despair is rational.
Techno-sceptics warn that smartphones daily pipe a globe’s worth of desire and misery into eyeballs only meant for the surrounding 5km of savannah.
Older people think identity politics has given everyone a grudge.
Financially-minded Monevator readers might blame sky-high house prices and rents, or how taxes scythe away young people’s incomes even as more bungs go to pensioners.

There is something in all of it. But I do think smartphones should take most of the blame for the specific curve shift.

Some version of everything else was going on well before 2017, after all.

Thanks to smartphones and social media though, young people do appear to be much more aware of both the wider cruelties and injustices in the world, and also the roadblocks standing in their own way.

But of course they learn about most of it through polarised social media and 30-second videos. There’s little room for nuance.

To generalise: I’d say they’re more aware, but less informed.

Student grant philosophisingWhen I was in my early 20s, talking to the average person at a party about the sort of issues that everyone now has a gripe about usually earned you funny looks.

I know this because I read very widely for a science student – everything from business profiles to Marx to AdBusters magazine – and I actually was talking to people about the troubles of the world at parties.

And it usually went down about as well as you’d expect.

Obviously I like to think I was bit more intellectually sophisticated than the average 90’s kid pining for The Beach without wondering what it meant for the locals or the ecology.

But I suppose you could just see a posturing Rick from the Young Ones.

The point is though, it took some research to even know about much of the stuff in my all-faction complaint list above. You didn’t get a five-second hit when sitting on the loo.

Most people spent little time thinking about any of it, unless they happened to catch a late night documentary on the BBC.

Whereas today reminders are omnipresent.

And at the clear risk of sounding like a curmudgeonly old man, while I’m heartened young people now appreciate the world is a pretty screwed-up place, I wish they’d try harder to understand why.

Regular debates I’m having with a younger friend about the horror show in the Middle East come to mind. But it’s true of many things.

Younger people genuinely do seem to care more than most of my generation did at that age. And they at least say more of the right things about the world beyond their own desires.

But ask them what should be done about any of the issues and there’s often little substance there.

Walking back to happinessAt least 30 years ago the typical person was unhypocritical in not giving two hoots about, say, the plight of indigenous peoples in the Amazon basin.

There was a pure-hearted obliviousness to it.

Whereas now people see a TikTok video, they’re angry, but they seem to not explore what’s even feasible as a remedy – beyond waving their hands at capitalism, men, or wokery, depending on how they roll.

I suspect this blend of being constantly provoked but at the same time feeling it’s well beyond anyone’s control is even worse than when I was young and engaged myself.

And that this is what has pulled down the lefthand of the smile curve.

At least I got happier with time. I guess they will too. Perhaps you get immune to gloom? Or maybe you just get complacent.

Then again maybe it really is all because young people can’t see how they’ll ever afford a house – and yet they can’t follow the old escape route into sex, drugs, and rock-and-roll either because online dating is awful, they know the drugs don’t work, and today’s music is written by robots.

Gosh I feel old. But at least I’m happier than I was!

Apologies to anyone reading who is under-30. Despite my gripes above, you’re actually my second-favourite generation. (After my own Gen X, of course. Slackers forever.)

Please share your perspective below on the fashion for youthful angst. That way we can all learn together.

Have a great weekend!

From MonevatorFIRE update: third anniversary – Monevator

Buying the Great British boot sale – Monevator [Mogul members]

From the archive-ator: Cash is king, or cash is trash? – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Eurozone cuts interest rate for the first time in five years – BBC

Tribunal cases to rise as UK firms push back on home working – Guardian

Monzo makes first profit even as credit losses soar – Evening Standard

Computer-maker Raspberry Pi gears up for LSE float next week… – CityAM

…with Shein is tipped to file for a £50bn float this month – Sky

LSE pushes for big screen outside HQ to champion success [Search result] – FT

Baillie Gifford cancels all remaining sponsorships of literary festivals – Guardian

London’s Imperial beats Oxbridge to be named second best Uni in world – Yahoo

“Taxes paid in London fund ever more of Britain’s public spending. Twenty five years ago the English Midlands were net contributors to the Treasury. Now they are more dependent on fiscal transfers than Scotland…” – Tom Forth via X

Election section mini-specialTories promise tax cut for parents to ‘boost families’ financial security’… – Sky News

…but middle-classes face a 70% tax trap under the shake-up – Telegraph via MSN

Labour says it will make permanent Tory’s mortgage guarantee scheme – BBC

Statistics watchdog criticises Tory claim Labour would raise taxes by £2,000 – LBC

Can Labour’s GB Energy plan future-proof UK’s power generation sector? – Guardian

How the Lib Dem plan for free personal care would work – This Is Money

Taxes, NHS waiting lists, and small boats claims fact checked – BBC

Could a future government cap ISA savings at £100k? – This Is Money

Products and servicesThe DIY diehards who built 36 affordable homes from scratch – Guardian

Revolut seems to have a fraud complaints procedure problem – Which

People were queuing up to get the new King Charles banknotes – Guardian

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

The best ways to use Amex Reward points – Be Clever With Your Cash

Bank ‘super-ATMs’ to bring cash machines to stranded communities – Guardian

Sign-up to Trading 212 via our affiliate link to claim free fractional shares. T&Cs apply – Trading 212

Is the new Leon coffee subscription worth it? – Be Clever With Your Cash [bonus: Pret]

Homes for sale with wartime connections, in pictures – Guardian

Comment and opinionDon’t be a hero – Humble Dollar

Why we don’t have worry about index tracker dominance just yet – Financial Bodyguard

How high-tax Britain destroyed what it means to be rich – Telegraph via Y.F.

Is maximising credit card rewards worth it? – Of Dollars and Data

Decumulation, deliberations, and dilemmas – Simple Living in Somerset

You will never run out of money, because your rational – Financial Samurai

Savers blast UK government over state pension top-up ‘chaos’ – This Is Money

Dreaming of retiring abroad? It’s more difficult than you think [Search result] – FT

Setting the record straight on stocks for the long run – CFA Institute

Retirement thinking mini-specialThe psychology of retirement spending – Morningstar

“Why am I so afraid to accept it’s time to retire?” – Guardian

Rewiring the way we think about retirement [Podcast] – Humans vs Retirement

Naughty corner: Active anticsThe hunt for truly alternative investments [Search result] – FT

From ByteDance to SpaceX: valuing Scottish Mortgage’s private investments – Proactive

“Multi-strategy hedge funds are full of kids who know nothing about portfolio management” – eFinancial Careers

On the fence – Humble Dollar

Do mothers-in-law matter? – Klement on Investing

Kindle book bargainsA Man for All Markets by Edward O. Thorpe – £0.99 on Kindle

Doughnut Economics by Kate Raworth – £0.99 on Kindle

Taxtopia by The Rebel Accountant – £0.99 on Kindle

The $100 Startup by Chris Guillebeau – £0.99 on Kindle

Environmental factorsSix things to know about the new ‘anti-greenwashing’ rule – Which

Nature groups launch legal bid over wildlife loss – BBC

Global heat record broken for 12th straight month – Axios

Welsh nursery growing seagrass to save marine habitat – Guardian

Calls for investigation into ‘harmful’ scampi sourcing – BBC

‘An intergenerational crime against humanity’: what will it take for political leaders to start taking climate change seriously? – The Conversation

Robot overlord roundupBig tech has stopped growing. AI can’t solve that for them – Sherwood

How AI will unlock creativity for everyone – Om Malik

Inside Google DeepMind’s effort to understand its own creations – Semafor

Five ways AI can improve your dating life – The Conversation

How AI could roil the next economic crisis – Axios

Off our beatMystery as doctor finds live goldfish in garden – BBC

Russia is already trying to disrupt the 2024 Paris Olympic Games – Microsoft

Lazy work, good work – Morgan Housel

The Internet peaked with ‘the dress’ in 2015, and then it unraveled – Vox

Our nomadic life – Humble Dollar

Why is Hungary so small? – Uncharted Territories

Americans are thinking about immigration all wrong – The Atlantic via MSN

J Lo cancels… – The Leftsetz Letter

Why Lithuania is the best place in the world to be young – Guardian

Here’s what a Nobel Prize-winning scientist wants you to know about the Covid-19 vaccines and the future of RNA – CNN

Melissa Thompson’s recipes for a better barbecue [Search result] – FT

And finally…“The longer you can look back, the farther you can look forward.”
– Winston Churchill, Churchill: Walking With Destiny

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Last month we looked at how UK shares were cheap, unloved, and overdue some mean reversion.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post Buying the Great British boot sale [Members] appeared first on Monevator.

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I have a confession to make. I’ve unFIRE’d myself. For the last six months, I’ve taken on so many paid projects I’m effectively working full-time.

I’ve always done some work since declaring FIRE. Including Monevator, those side projects have kept me slaving over a hot laptop for two or three days a week.

I enjoyed a balance that:

Anchored my week
Made the freedom of my other days taste like ice-cream
Provided a trickle of pocket-money to blow guilt-free

But this is different. I returned to work because I needed the money. And this extra work is squeezing out time I’d prefer to spend on other things.

What happened? Did I miss my old 5.30am starts, back-to-back meetings, and ridiculous targets plucked out of the P&L owner’s backside?

NO!

Renovating the house happened. Doing up our money pit turned into a black hole of unforeseen expenses. A swirling vortex sucking in everything with a pound sign on it:

The war chest I’d initially set aside for the fix-uppery
All our extra pocket money
Then, finally, the bridging cash that was tiding me over until I could raid my SIPP

Cash and burnI don’t want to make it sound like I was an innocent victim in all of this.

Sorting the house could have been done more cheaply. Shortcuts could have been taken. We could have papered over many of the cracks and crossed our fingers. The final result could have been less ‘nice’.

Mrs Accumulator, for one, did not want me to burn the bridging cash.

But I argued for a different perspective:

This is our forever home.

We spend a lot of time in it.

We love it.

Our property is very old. It has a lot of problems we can resolve here and now (probably).

The interior is just dying for want of TLC.

So let’s just fix everything we can in a one-er. Let’s make it look the way we’d talked about on so many walks, late evenings, and envious Internet browses.

Let’s feel really good about living here for the rest of our lives.

And if we have to compromise anything, then let’s not compromise the house. Let’s compromise my FIRE status for a time. FIRE will keep. I can come back to it.

Mrs TA was not won over, but she reluctantly agreed. And she does love the final result. As do I.

So I think it was worth it. Even though I’m still feeling the heat of the backlash.

FIRE alarmPart of the heat came from The Investor. He gave me a proper grilling about my U-turn.

“Is FIRE not all it’s cracked up to be, then?”

“Are you secretly missing work?”

“Has inflation made a mockery of your numbers?”

Here’s how I feel about it:

Unretirement shouldn’t take more than a year of my life, if I’ve done my sums right. (That’s a sizeable ‘if’.)

Also, I’ve got something I really wanted out of it. A home I’m very happy with, and that I’m loving living in every day.

The work itself is fine. It’s not like my old job. No 5.30am starts, back-to-back meetings, or ridiculous targets. And I’m working for some very nice people. It’s been fun to meet them all. I enjoy working with them.

I choose my hours, I’m given all the autonomy I could ask for, and there’s no commute.

For all those reasons, this doesn’t feel like the grind I previously escaped from.

The problem with my old gig was that it took everything I had and I only felt like I lived in the holidays.

The current arrangement still means I can goof off whenever I like, as long as I get the job done.

Burning my bridgesI’m not pretending this is FIRE. It’s not. There’s only seven days in a week and I’ve lost the balance that FIRE gave me. But I should have recharged the savings account after 12 months, and I’ll be able to rebalance my life again.

For what it’s worth and to address TI’s main point, I’m not worried about inflation now that it’s subsiding. Our underlying portfolio can still support the income Mrs TA and I need.

The only hitch is it’s all locked up in SIPPs and I can’t personally touch mine for [checks watch] two years, a few months, some days, and 43 seconds.

Keep the faithSo there you go. That’s what happened.

I’d like to add that – when I was working towards FIRE – I got very disappointed whenever someone in the community went back to work. I suppose it made me worry that FIRE was a mirage.

I don’t think FIRE is a mirage. If you’re on the FIRE path then I say – loudly – “stick with it!”

I’ve gone off-piste for personal reasons related to my values and circumstances. I’d rather not have to, but I’ve temporarily sacrificed FIRE to achieve a goal that I hope will make me happy for decades to come. I think that’s a fair swap.

Take it steady,

The Accumulator

P.S. Our FIRE budget for 2023-24 was £27,600 for two. Actual spend minus one-off renovation costs: £26,200.

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What caught my eye this week.

A year ago, we added a membership service to Monevator. Our Mavens and Moguls memberships are basically two tiers of special members-only content, like you see with the wildly-popular SubStack newsletters.

I won’t deny I was nervous about launching this.

Yes, I’d spent nearly two decades collecting hundreds of ‘thank you’ emails from readers – vastly more than for any other work I’ve done – and I’d turned down lots of unsolicited offers of cash, whether to support the site, or to buy my co-blogger @TA some thermal socks.

But we’d been free forever. Moreover we’d spent those years urging readers to save reflexively and to spend wisely. Not to mention we were in a wicked cost-of-living crisis. Or that we needed this new business model to work to keep the lights on at Monevator Towers.

So I wondered if we’d be writing articles exclusively for my mum not to read twice a month.

Happily I needn’t have worried.

My mum still doesn’t read our Monevator member emails. But many hundreds of you do. Nobody has to sign-up to pay for content in a tough media world where everyone is now asking for subscriptions, but loads of you guys have.

After a year in which countless more independent websites have thrown in the towel, we’re still standing.

We can’t thank you enough! Every member is ensuring the future of Monevator.

Content to please youHappily I’ve enjoyed the content side of membership, too.

The Accumulator can nerd out even more so than usual – free from the tyranny of search engines – and Mavens has motivated him to start a new decumulation model portfolio just for members.

No small commitment given he’s been managing the original Slow & Steady for 15 years already.

Meanwhile, with Moguls I’ve been exploring some of the naughty active investing strands I originally started Monevator to pull on, before deciding to be responsible and to triple-down on highlighting passive investing into index funds as the best solution for most people.

My Moguls articles are far too long – the lengthiest over 5,000 words – and partly because of this the publishing schedule isn’t rock solid. But the feedback to my pieces, Mavens, and guest star contributions from Finumus have all been very heartening.

Frankly, a membership newsletter feels like blogging in the good old days.

There’s no thousands of daily spam comments and emails. The discussion threads are entirely positive and constructive. There are no trolls. And it’s so much nicer writing for real people happy to support you with a few quid a month than for search engines – let alone for AI training models threatening to do away with you altogether.

It’s tempting to make Monevator members-only and to switch off the free content. Life would be easier.

But then I remember why we actually wrote those 2,000-plus free articles in the first place. And also all those thank yous from people we (or let’s face it, mostly @TA) have helped into the world of investing.

The good vibes still far outweigh the frustrations.

Besides, I know that many of you who signed-up for membership are explicitly supporting us not only for yourselves but also to help us to get the sensible investing message to as many as possible.

Which is both incredibly generous and an executive order for us to keep at it.

Any other businessA couple of quick housekeeping reminders on membership, as it’s been a while.

Firstly, if you’re having any sort of log-in problems it will almost certainly be a cookies issue or because you’re using an ad-blocker.

The membership software needs to use cookies to tell you’re logged in. And there are no ads for members browsing the site anyway.

So far in every case enabling third-party cookies, deleting stored cookies, and/or disabling the ad-blocker for Monevator has solved any log-in problems.

Secondly, there are still a couple of dozen members who are not getting member emails. Some may prefer to read us on the website. But I’m sure others would rather be getting our content in their in-box.

The solution here seems to be to make sure you’re signed-up to our free emails. Use this link to ensure you are. If you’re still having problems then please let me know via our contact form. I can then get you manually re-added to the email list. GDPR regulations mean I need your explicit permission to do so.

Remember there are dedicated Mavens and Moguls article archives.

Finally, I’m thinking of adding a Discord discussion forum for Monevator member investing chat. Do you think you would use it? I’ve resisted calls to add a forum due to the admin headaches, but it might work with members.

Okay, thanks again everyone who signed up for – and renewed – their Monevator membership. You have made all the difference!

Have a great weekend.

From MonevatorHow tax can take a bite out of your returns – Monevator

From the archive-ator: Social care in later life is a black hole – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

House price growth in rural areas outstrips towns – Guardian

CMA investigates Nationwide’s takeover of Virgin Money – FT Adviser

Leasehold reforms come into force: what they mean – Which

Troubled SIPP provider falls into administration after complaints – FT Adviser

Blackrock’s $20bn ETF is world’s largest Bitcoin fund – Bloomberg via Yahoo

LinkedIn: Gen Z favours stability and holidays over pay – Yahoo Finance

Crypto exchange Gemini returns $2.2bn after 18 month freeze – CNBC

NHS patients to access trials of personalised cancer ‘vaccines’ – NHS

UK government sells back £1.24bn in Natwest shares – AJ Bell

When life forces your hand – A Wealth of Common Sense

Products and servicesNS&I quietly increases its interest rates – Telegraph via Yahoo Finance

Cheap and free things to do over half-term – Which

Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Travelling on Eurostar from the UK is about to become much trickier – Guardian

How credit reference agencies make you the product – Which

Pre-paid travel money cards are poor deal – This Is Money

Amex Preferred Rewards Gold credit card review – Be Clever With Your Cash

£5,000 the magic number to secure Nationwide’s £100 perk – This Is Money

Homes for sale with a kitchen garden, in pictures – Guardian

Election and money mini-specialWhat is the Tories’ triple-plus lock proposal for pensioners? – This Is Money

Income tax threshold squeeze to last until 2028 says Hunt – Guardian

Labour says it will push on with the British ISA… – CityAM

…but will it reinstate the pension lifetime allowance? – This Is Money

Tories: swap ‘rip-off’ degrees for apprenticeships – BBC & Guardian

Comment and opinionRemember the calamity of the great market tsunamis – Portfolio Charts

Home or away after FIRE? – Far and Wide

Life’s potholes – Humble Dollar

The history of the UK mortgage market and house prices [Podcast] – A.L.T.I.F.

The struggle is real: Uber edition – Contessa Capital

The lesson of Loki? Trade less – Tim Harford

Considering time and quality of life – Meaningful Money

Do you need alternative assets to get rich? – Of Dollars and Data

High core inflation is why consumers are so negative – Cullen Roche

What type of life do you actually want to live? [Podcast] – Morningstar

Why are so many stars forced to work after retirement age? – Guardian

Naughty corner: Active anticsThe Fed rate cut reflexivity paradox – Apollo

Is now the time to buy Japan? [Search result] – FT

The problem with concentrated funds – Behavioural Investment

Does diversity add value to asset management? – Alpha Architect

Fund manager pay depends on AuM, not performance – eFinancial Careers

Kindle book bargainsXXXXX by XX – £0.99 on Kindle

Environmental factorsEVs are cheaper to run than petrol cars, if you charge at home – This Is Money

Can heat pumps be installed in older properties? – Guardian

UK breakthrough could slash carbon emissions from cement – BBC

Buying Baja – Hakai

Robot overlord roundupChatbots as a force for good – BBC

Google to refine AI-made search summaries after bizarre results – Guardian

MIT’s Daron Acemoglu is not having all this AI hype [Search result] – FT

[On the other hand…] What mom wrought – Humble Dollar

AI helping find ‘world’s loneliest plant’ a partner – BBC

Klarna says GenAI is cutting marketing costs by $70mn annually – Reuters

The next wave of AI hype will be geopolitical [Search result] – FT

AI integration and modularisation [Nerdy] – Stratechery

Off our beatWhen matters as much as what – Raptitude

Trial results for new lung cancer drug are ‘off the charts’, say doctors – Guardian

Chasing Utopia, startup style – Noema

The mounting strains on global shipping [Search result] – FT

Let’s just admit it: the algorithms are broken – The Honest Broker

From the baby boom to the baby bust [Search result] – FT

What should you do with your stuff before you die? – The Walrus

And finally…“Unlike any other form of thought, daydreaming is its own reward.”
– Michael Pollan, A Place of My Own

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A Place of My Own: The Architecture of Daydreams

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Many Monevator readers rightly strive to shave tenths of a percent from the running cost of their portfolios. But some people – especially wealthier savers – ought to think even harder about tax-efficient investment.

That’s because the impact of paying taxes on share gains or dividends can dwarf all your cost-curbing in the long run.

Which is precisely why I bang on about mitigating your tax bill more than is entirely seemly.

Investment tax in the UK is a rich person’s problemIf you’re paying capital gains tax (CGT) on profits from share trades or on dividend income, you may be throwing away money.

For a minority of investors, regularly paying taxes on investments is inevitable. Perhaps they’re wealthy enough to have money leftover outside of their tax shelters, for example, yet not loaded enough to call on the UK’s legions of tax specialists to get creative.

But those lucky few aside, most of us can postpone, reduce, or even entirely avoid paying taxes on our investment gains by using ISAs and pensions.

We can also become knowledgeable about taxes on dividends and bond income, and hold our different assets in the most tax-efficient way.

If needed we can even judiciously manage our capital gains and losses every year on unsheltered assets, and defuse gains where possible. (Albeit the scope for the latter has been much reduced by the whittling away of the annual CGT allowance).

Like this, even if you can’t escape paying taxes on some of your investment returns, you might still try to delay the bulk until you’re retired, when you’ll probably be taxed at a lower rate.

How tax reduces your returnsHow big a deal is paying tax on investments anyway?

Let’s consider two investors, Canny Christine and Flamboyant Freddie.

(Sorry if these names are too cute. As members of the Financial Writer’s Union we’re officially required to pick kitschy sobriquets when illustrating long-term returns with an example.)

Let’s assume Christine and Freddie both inherit £10,000 each. Nothing to be sneezed at, certainly – though Freddie isn’t against shoving a crisp £10 of it up his nose in the right circs – but also not enough to see HMRC unleash a plainclothes officer and a tax evasion detector van. (Not that we’ll be suggesting anything dodgy, of course.)

Now, when it comes to tax Flamboyant Freddie can’t be bothered to know.

Freddie thinks ISAs and pensions are for people who buy Tupperware in bulk from mail order catalogues. He regularly turns over his shares in a no-cost share trading app. He boasts about his wins to his friends who put up with him because he’s always good for a pint.

Freddie is my kind of drinking buddy, but he’s not my kind of investor.

Enter Canny Christine.

Christine uses ISAs from day one. She can easily put the whole £10,000 into a shares ISA right away, meaning her investment is entirely protected from tax forever more. And so she does just that

What happens to their respective loot after 20 years?

Two decades laterEveryone’s tax situation is different. The rate of tax on dividend income and capital gains depends on how much you have and what you earn. There’s no point me doing specific calculations.

Tax rates change all the time, too.

So let’s simply and arbitrarily assume:

Our heroes each make 10% a year returns. We’ll ignore costs.
Freddie pays tax on his returns at a rate of 25% every year.
Canny Christine has no tax to pay.

Here’s how their money compounds over 20 years:

| Year | Freddie(taxed) | Christine(no tax) | | 0 | £10,000 | £10,000 | | 1 | £10,750 | £11,000 | | 2 | £11,556 | £12,100 | | 3 | £12,423 | £13,310 | | 4 | £13,355 | £14,641 | | 5 | £14,356 | £16,105 | | 6 | £15,433 | £17,716 | | 7 | £16,590 | £19,487 | | 8 | £17,835 | £21,436 | | 9 | £19,172 | £23,579 | | 10 | £20,610 | £25,937 | | 11 | £22,156 | £28,531 | | 12 | £23,818 | £31,384 | | 13 | £25,604 | £34,523 | | 14 | £27,524 | £37,975 | | 15 | £29,589 | £41,772 | | 16 | £31,808 | £45,950 | | 17 | £34,194 | £50,545 | | 18 | £36,758 | £55,599 | | 19 | £39,515 | £61,159 | | 20 | £42,479 | £67,275 |

(Note: You can also envisage this by comparing annual returns of 7.5% and 10% using a compound interest calculator).

Paying taxes on gains every year makes a stunning difference:

After 20 years, Freddie’s pot is worth £42,479. He feels pretty good about quadrupling his money, thank you very much.
But Canny Christine has £67,275!

Christine has an enormous 58% more money than Freddie. That’s entirely due to her prudence in sheltering her portfolio from tax.

Even if Christine’s returns were taxed in the end – maybe if you were modelling pensions not ISAs – and at the same rate as Freddie, she’s still ahead.

A 25% tax charge on Christine’s £57,275 investment gain takes her final pot down to £52,956.

By deferring her taxes and keeping her capital unmolested to grow until Year 20, she’s left with very nearly 20% more money in her pot than Freddie.

Tax-efficient investment in practiceThis theoretical example isn’t over-burdened with realism.

In reality, returns from investment – and hence whether and how you’re taxed – won’t be smooth.

Most investors will invest far more than £10,000 over their lifetimes. So capital gains tax and dividend tax will become more of an issue as portfolios grow.

An investor’s personal tax profile will also change over time. Not least due to investment gains and dividends if they invest large amounts of money outside of tax-efficient investment shelters! But also because they’ll probably earn an increasing income at work.

Most salary earners who are canny enough to start investing in their 20s will end up as higher-rate taxpayers. And tax rates than might seem trivial as a basic-rate payer, such as dividend tax, ramp up with your salary.

Gimme shelterSo don’t get obsessed about the details above. Again, everyone’s exact tax profile and financial journey will be different.

Instead focus on the takeaways:

Paying tax on dividends or share gains can take a big chunk out of your returns.
Most of us can and should use ISAs or pensions. We might be able to shield all our investments from tax, or at least postpone taxes until retirement. (Part of your pension withdrawals will almost certainly be liable for income tax eventually, niche scenarios aside.)
Those with large sums invested outside of ISAs or SIPPs should read my articles on defusing capital gains and offsetting gains with losses to lessen the pain.
Big into your cash hoard? At the time of writing gilts can be more tax-efficient investments for higher-rate taxpayers, as opposed to relying on cash ISAs. Switching up could free more ISA space up for assets such as equities or higher-yielding bonds.
Think about the return on paying off your mortgage from a post-tax perspective. The ‘return’ of even cheap debt reduction may be higher than the taxed return from unsheltered cash.
Are you maxing out your ISA allowance and yet you can’t or don’t want to put more into a pension? Then think hard about which assets you should really must shelter, versus those better able to withstand taxation. Capital gains tax, for example, isn’t due until you sell an asset and book the gain. You might be able to buy and hold some kinds of investments – properties, companies, investment trusts – and defer capital gains for decades. (Note that accumulation funds are liable for tax on their income though).

Pensions are more tax-efficient investment wrappers than ISAsThe core tax benefits of ISAs and pensions are theoretically the same. But pensions do have a few perks that make them slightly more attractive from a tax perspective – crucially the tax-free lump sum, and for higher-earners the likelihood of paying a lower tax rate in retirement – at the cost of restrictions on accessing your money.

For my part, I use a mix of ISAs and pensions. But I’ve begun to favour the latter with new money as I’ve inched closer to the age when you can access a private pension, and also as the old pension constraints were loosened.

A tax-efficient investment strategy is not too taxingHopefully you think this is all perfectly obvious and you already use ISAs and pensions yourself.

Subscribe to Monevator if you’ve not yet done so. You clearly belong here!

However I do sometimes still hear people saying they don’t need a tax shelter – often flagging small initial sums or extra admin hassle as justification.

This is wrong-headed. If you’re going to be a successful investor, you need a tax-efficient investment strategy from day one. It will benefit you many decades down the line!

Note: I’ve updated this article from 2012 to reflect our shining modernity in 2024. But the reader comments on Monevator have been retained, and may reflect out-of-date tax law. Check the comment dates if you’re confused.

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What caught my eye this week.

Bad news! Not only are the machines now coming from our cushy brain-based desk jobs, but our best response will be to hug it out.

At least that’s one takeaway from a report in the Financial Times this week on what kinds of jobs have done well as workplaces have become ever more touchy-feely – and thus which will best survive any Artificial Intelligence takeover.

The FT article (no paywall) cites research showing that over the past 20 years:

…machines and global trade replaced rote tasks that could be coded and scripted, like punching holes in sheets of metal, routing telephone calls or transcribing doctor’s notes.

Work that was left catered to a narrow group of people with expertise and advanced training, such as doctors, software engineers or college professors, and armies of people who could do hands-on service work with little training, like manicurists, coffee baristas or bartenders.

This trend will continue as AI begins to climb the food chain. But the final outcome – as explored by the FT – remains an open question.

Will AI make our more mediocre workers more competent?

Or will it simply make more competent workers jobless?

Enter The MatrixI’ve been including AI links in Weekend Reading for a couple of years now. Rarely to any comment from readers!

Yet I continue to feature them because – like the environmental issues – I think AI is sure to be pivotal in how our future prosperity plays out. For good or ill, and potentially overwhelming our personal financial plans.

The rapid advance of AI since 2016 had been a little side-interest for me, which I discussed elsewhere on the Web and with nerdy friends in real-life.

I’d been an optimist, albeit I used to tease my chums that it’d soon do them out of a coding job (whilst also simultaneously being far too optimistic about the imminent arrival of self-driving cars.)

But the arrival of ChatGPT was a step-change. AI risks now looked existential. Both at the highest level – the Terminator scenario – and at the more prosaic end, where it might just do us all out of gainful employment.

True, as the AI researchers have basically told us (see The Atlantic link below) there’s not much we can do about it anyway.

The Large Language Models driving today’s advances in AI may cap out soon due to energy constraints, or they may be the seeds of a super-intelligence. But nobody can stop progress.

What we must all appreciate though is that something is happening.

It’s not hype. Or at least for sure the spending isn’t.

Ex MachinaAnyone who was around in the 1990s will remember how business suddenly got religion at the end of that decade about the Internet.

This is now happening with AI:

Source: TKer

And it’s not only talk, there’s massive spending behind it:

Source: TKer

I’ve been playing with a theory that one reason the so-called ‘hyper-scalers’ – basically the FAANGs that don’t make cars, so Amazon, Google, Facebook et al – and other US tech giants are so profitable despite their size, continued growth, and 2022-2023 layoffs, is because they have been first to deploy AI in force.

If that’s true it could be an ominous sign for workers – but positive for productivity and profit margins.

Recent results from Facebook (aka Meta) put hole in this thesis, however. The spending and investment is there. But management couldn’t point to much in the way of a return. Except perhaps the renewed lethality of its ad-targeting algorithms, despite Apple and Google having crimped the use of cookies.

Blade stunnerFor now the one company we can be sure is making unbelievable profits from AI is the chipmaker Nvidia:

Source: Axios

Which further begs the question of whether far from being overvalued, the US tech giants are still must-owns as AI rolls out across the corporate world.

If so, the silver lining to their dominance in the indices is most passive investors have a chunky exposure to them anyway. Global tracker ETFs are now about two-thirds in US stocks. And the US indices are heavily tech-orientated.

But should active investors try to up that allocation still further?

In thinking about this, it’s hard not to return to where I started: the Dotcom boom. Which of course ended in a bust.

John Reckenthaler of Morningstar had a similar thought. And so he went back to see what happened to a Dotcom enthusiast who went-all in on that tech boom in 1999.

Not surprisingly given the tech market meltdown that began scarcely 12 months later, the long-term results are not pretty. Bad, in fact, if you didn’t happen to buy and hold Amazon, as it was one of the few Dotcoms that ultimately delivered the goods.

Without Amazon you lagged the market, though you did beat inflation.

And yet the Internet has ended up all around us. It really did change our world.

Thematic investing is hard!

I wouldn’t want to be without exposure to tech stocks, given how everything is up in the air. Better I own the robots than someone else if they’re really coming for my job.

But beware being too human in your over-enthusiasm when it comes to your portfolio.

The game has barely begun and we don’t yet know who will win or lose. The Dotcom crash taught us that, at least.

Have a great weekend!

From MonevatorDoes gold improve portfolio returns? – Monevator [Members]

How a mortgage hedges against inflation – Monevator

From the archive-ator: How gold is taxed – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK inflation rate falls to lowest level in almost three years – BBC

Energy price cap will drop by 7% from July [to £1,568] – Ofgem

House prices are modestly rising, driven by 17% annual spike in new build values – T.I.M.

Hargreaves Lansdown rejects £4.7bn takeover approach – This Is Money

Judge: Craig Wright forged documents on ‘grand scale’ to support Bitcoin lie – Ars Technica

FCA boss threatens private equity with regulator clampdown – CityAM

Sunak says it’s 4th July, in the rain, against a subversive soundtrack [Iconic]– YouTube

Sir Jim Ratcliffe scolds Tories over handling of economy and immigration after Brexit – Sky

No, it’s not all the Tories’ fault… but Sunak and Hunt were too little, too late – Bloomberg

Products and servicesPay attention to catches as well as carrots when switching bank accounts – Guardian

Which energy firm offers the cheapest way to get a heat pump? – T.I.M.

How to get the most from second-hand charity shops – Which

Get £200 cashback with an Interactive Investor SIPP. New customers only. Minimum £15,000 account size. Terms apply – Interactive Investor

Nine out of ten savings accounts now beat inflation – This Is Money

Problems when transferring a cash ISA – Be Clever With Your Cash

Nationwide launches a trio of member deals worth up to £300 – Which

Transfer your ISA to InvestEngine by 31 May and you could get up to £2,500 as a cashback bonus (T&Cs apply. Capital at risk) – InvestEngine

Seven sneaky clauses in estate agent contracts that can cost you dear – This Is Money

Halifax Reward multiple account hack: worth up to £360 a year – Be Clever With Your Cash

Hidden homes in England and Wales for sale, in pictures – Guardian

Comment and opinionNo, the stock market is not rigged against the little guy – A.W.O.C.S.

The life hedge… – We’re Gonna Get Those Bastards

…is easier said than implemented [US, nerdy] – Random Roger

Checking out a fake Ray Dalio Instagram investing scam – Sherwood

An open letter to Vanguard’s new CEO – Echo Beach

If you look past the headlines, London is charging ahead – CityAM

Most of us have too much in bonds [Search result] – FT

Why we still believe in gold – Unherd

Are ‘fallen angel’ high-yield bonds the last free lunch in investing? – Morningstar

For love or money – Humble Dollar

Naughty corner: Active anticsFund manager warns putting £20k in the US now will [possibly!] lose you almost £8k – Trustnet

A deep dive into US inflation, interest rates, and the US economy – Calafia Beach Pundit

A tool for testing investor confidence – Behavioural Investment

When to use covered call options – Fortunes & Frictions

Valuing Close Brothers after the dividend suspension – UK Dividend Stocks

Meme stock mania has entered its postmodern phase [I’m editorialising!] – Sherwood

Kindle book bargainsBust?: Saving the Economy, Democracy, and Our Sanity by Robert Peston – £0.99 on Kindle

Number Go Up by Zeke Faux – £0.99 on Kindle

How to Own the World by Andrew Craig – £0.99 on Kindle

The Great Post Office Scandal by Nick Wallis – £0.99 on Kindle

Environmental factorsTaking the temperature of your green portfolio [Search result] – FT

The Himalayan village forced to relocate – BBC

‘Never-ending’ UK rain made 10 times more likely by climate crisis, study says – Guardian

So long triploids, hello creamy oysters – Hakai

Robot overlord roundupWe’ll need a universal basic income: AI ‘godfather’ – BBC

Google’s AI search results are already getting ads – The Verge

AI engineer pay hits $300,000 in the US – Sherwood

With the ScarJo rift, OpenAI just gave the entire game away – The Atlantic [h/t Abnormal Returns]

Perspective mini-specialHow much is a memory worth? – Mike Troxell

We are all surrounded by immense wealth – Raptitude

How to blow up your portfolio in six minutes – A Teachable Moment

My death odyssey – Humble Dollar

Off our beatThe ultimate life coach – Mr Money Mustache

How to cultivate taste in the age of algorithms – Behavioural Scientist

Trump scams the people who trust him – Slow Boring

Buying London is grotesque TV, but it reflects the capital’s property market – Guardian

The algorithmic radicalisation of Taylor Swift – The Atlantic via MSN

And finally…“Three simple rules – pay less, diversify more and be contrarian – will serve almost everyone well.”
– John Kay, The Long and the Short of It

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The UK inflation rate is down to 2.3% and the pound has stopped losing purchasing power like a proverbial drunken sailor on shore leave. This end to our run-in with runaway inflation is to be welcomed – but maybe with a wistful sigh from those of us who enjoyed seeing our mortgage inflation hedge in action.

Popular culture spent much of the 2010s debating how to survive the zombie apocalypse.

But it was actually inflation that rose from the dead to cause chaos:

Source: BBC

Nearly everything got more expensive. The government subsidised household energy bills just to keep the lights on!

Meanwhile the pace of the rise in interest rates due to this inflationary upsurge was shocking. In less than two years we went from nearly-free money to the official Bank Rate at 5.25% and a bond market rout.

Those who didn’t stress-test their mortgage have felt extra pain if they left it too late to get a cheap deal.

And those who retired into a terrible sequence of returns haven’t exactly been laughing, either.

When you really get down to itWe’re all potentially made poorer in real terms1 by inflation.

When £100 isn’t worth what it was three years ago, neither is £100,000 in your pension.

To have the equivalent spending power of £100,000 in January 2021, you’d today need £131,000.

In real terms, a typical UK private investor’s balanced portfolio is back to where it was in 2016, according to the consultants ARC:

Source: Trustnet

The benchmark here is ARC’s own ‘Steady Growth Private Client Index’, which it says is based on the most common risk profile run by discretionary managers. Something like an expensive-ish 60/40 portfolio I’d imagine. (The indices are proprietary and for clients only).

This Steady Growth Index has delivered a 4% real return since inception. But ARC calculates it must achieve an annual return of 7.3% above inflation for a decade, to get back to the real terms trend line.

Ouch! Come back money illusion, all is forgiven!

Still, it’s not all been bad news.

Crucially and as a direct result of the bond crash, expected returns from fixed income are now positive and arguably quite attractive. That’s augurs well for today’s retirees.

Wages have risen, too. As the cost-of-living crisis abates, most of us saving for retirement should be able to increase our pension contributions.

But make no mistake, inflation has done a number on your number. You’re probably going to need a bigger pot.

The mortgage inflation hedgeCoaxing my ambling donkey back around to the topic of today’s post, a key bit of good news for anyone with a lot of debt is that their debt is almost certainly no longer worth what it was a few years ago.

Specifically, if you had a big mortgage ten years ago then you may well still have a pretty big mortgage in nominal terms today.

But in real terms, its value is much diminished.

Caveats abound, naturally.

If you took out a big debt at a very high interest rate and didn’t pay it off, then it may have snowballed into an even bigger debt – even after inflation. Something like carrying a credit card balance that charges a double-digit interest rate that’s never paid off would fit this bill.

If you’ve had to refinance at much higher rates, that’s bad too. (Commercial property owners, I’m looking at you.)

However for a very long time, residential mortgage rates have flirted barely above the inflation rate – and lately well below it.

This has made the real terms cost of carrying mortgage debt roughly zilch, thanks to the very same value-eroding force – inflation – that’s been melting your purchasing power elsewhere.

Golden yearsThis was exactly why I badly wanted a mortgage in the post-financial crisis years.

Not just to buy my own home, but for the ability of debt to hedge against inflation.

Back in 2013 in a post titled Can you afford NOT to have a big cheap mortgage? I wrote:

…anyone who thinks a mortgage is bad news when inflation is running high is wrong.

An affordable mortgage secured on a real asset – a house – is an excellent thing to have at times of high inflation.

In 2013 inflation was headed towards 3%, which was enough to prompt my article that year. But even after that inflation spike proved short-lived, interest rates and mortgage rates continued to fall.

My fellow citizens were getting richer on free money. Meanwhile as a saver without any debt to my name, I was at risk of seeing my net worth being – relatively-speaking – financially-repressed away.

Long story short, I was itchy to get a mortgage – which I eventually did – for its inflation-hedging reasons almost as much as to buy my own home.

Down with debtHere’s how this mortgage inflation hedge bolsters your finances in real terms.

Real value of debt decreases: Inflation reduces the real value of debt. Even if the amount you owe stays the same in nominal terms. Over time your mortgage becomes worth less and it’s easier to pay off.

Asset appreciation: If you own a home, its value should rise with inflation over the long-term. (UK house prices have risen by more than 3% over inflation for many decades.) As the nominal value of your house and other assets goes up and the real value of your debt goes down, your real net worth grows.

Any mortgage offers these benefits versus inflation. But a fixed-rate mortgage is especially handy.

With a fixed-rate mortgage, your monthly payments remain constant over the mortgage term. That’s at least two years, often five years, and potentially ten years or more. (It’s for the life of the mortgage in the US.)

Even as inflation causes other prices, costs, and your wages to rise, your fixed-rate mortgage payments do not increase. This means in real terms the cost of your mortgage payments decreases as the value of money diminishes. Like this your mortgage becomes more affordable on a monthly basis.

Of course interest rates will likely rise in response to inflation. That puts upwards pressure on variable mortgage rates and makes remortgaging more expensive too. More on that in a moment.

Mortgages are not risk-free! But that doesn’t stop them being a hedge against inflation.

How the mortgage inflation hedge works in practiceSuppose you have a £300,000 repayment mortgage on a fixed interest rate of 3%. For simplicity’s sake we’ll assume you took out one of the new super-long term fixes, set to run for 30 years.

Your monthly payments will be £1,265. However if inflation averages 3% per year, the real value of this fixed payment will decrease. In 10 years, it would be just £941 in today’s money.

Meanwhile the value of your home will almost certainly increase, given enough time. The price could more than double in 24 years with just 3% annual appreciation due to inflation.

By then you’d have a £600,000 home and only £83,000 left on your mortgage – which will feel like about £41,000 in today’s terms. Your monthly payments in terms of today’s money would be barely £600.

Here’s one we made earlierWe can also consider the inflation spike of the past few years.

Inflation – as measured by the cost of goods and services – increased by 32% between January 2020 and April 2024.

Ignoring any repayments made to reduce the mortgage balance, a £300,000 debt in 2020 is worth around £227,000 in today’s money.

Inflation has effectively reduced the debt by £73,000 – in terms of 2020 money – for you.

Bluffer’s tip! Just in case you ever find yourself stuck in a lift with a professional economist, the technical term for this is ‘Inflation-Induced Debt Destruction’.

A slightly absurd example to make the pointIf this feels difficult to get your head around, let’s imagine extreme inflation of 900%.

We’ll say you’ve bought a £100,000 home with a £50,000 mortgage, for a 50% loan to value ratio.

Let’s also assume your house price keeps up with inflation, and we’ll ignore any mortgage repayments.

Your £100,000 home is worth £1m after 900% inflation. Your £50,000 mortgage is still £50,000 but it’s real terms value is now just £5,000.

The real value of the mortgage debt has fallen to a tenth of its original nominal value, even as the nominal value of the asset secured against it ten-bagged. Your loan to value ratio is now just 5%, because the house price rose with inflation but the mortgage balance didn’t budge. You are now rich in home equity!

Played out over several decades, this is exactly how your grandparent’s semi-detached house that they bought in their early 30s made them a modest fortune.

Other things to think aboutWhat would a Monevator article be without a bushel of yeah buts? (Besides about 1,000 words shorter…)

Interest rates: The efficacy of a mortgage as an inflation hedge depends on the interest rate environment. If you lock in a low fixed-rate just before a period of high inflation, you’ll benefit greatly. Take out a mortgage at a high rate when inflation is behaving itself and the benefits are less pronounced.

Variable-rate mortgages: With these, the interest rate on your loan will very probably increase during an inflationary spike. This can partly or totally negate the benefit of a mortgage as an inflation hedge.

The risk of remortgaging a fixed rate: As per the variable rate mortgage, only more of a tense psychological thriller with a shocking climax versus a variable rates’ slasher flic thrills. If you come off a cheap fixed rate deal and take out a much more expensive one, your debt pile is again growing more rapidly and costs more to service. And again your hedging is blunted. (Plus it feels awful.)

It’s the economy, stupid: Some readers have been shaking their heads throughout this article. What about the risk of not being able to pay your mortgage? Or of losing your job? High inflation usually coincides with other economic disruption that could render the strategy moot. All true. You could sell your house in a pinch – but if house prices have crashed in the chaos it might not solve the problem.

Your house isn’t the whole story: A recurring theme of my posts about mortgages (for example) is all this stuff is fungible. You have secured a mortgage on your home, but if you have investments elsewhere, then they are effectively being funded by the mortgage (because you could sell them to pay down your mortgage instead). And these assets could go up due to inflation in their own right, too. That may offset the pain of, say, stagnant house prices or higher mortgage payments.

Remember, a mortgage is just a way of funding a house purchase. People conflate choosing to run a mortgage with ‘gambling on property’. But once you’ve bought your home, the value of that asset – your house – will fluctuate, independently of how you funded it. Through this lens you’re ‘betting’ on house prices, but that’s regardless of whether you have a mortgage or not. What matters with respect to risk and the mortgage is whether you can afford to make your payments. Read my post about my interest-only mortgage to unpick this further.

Rents rise with inflation, too: UK rents have soared along with inflation over the past couple of years. In fact 2023 saw a record 9% hike. Paying off your mortgage and owning your own home will protect you from rising housing costs due to inflation and higher interest rates, obviously. But avoiding home ownership altogether to rent instead will not.

Deflation: In a scenario where money gets more valuable every year, you don’t want to owe it to anybody. Consider getting rid of your mortgage ASAP if you believe deflation is going to stick around!

Waking up to the real worldReading all this some of you may be thinking “no shit Sherlock”, as you roll your triple-levered pork belly futures into call options on GameStop to play the gamma of meme stock legend Roaring Kitty slowing down his rate of posting 1980’s callbacks on his reactivated social media account.

(Everyone else: it’s fine not to understand that sentence. It just means you’re well-balanced and normal).

It’s true that Monevator readers do bat high versus the general populace when it comes to this stuff.

But most normal citizens do not understand the beneficial impact of inflation on debt.

Earlier this year, The University of Chicago’s Booth School released: Households’ Response to the Wealth Effects of Inflation.

The paper found:

On average, households are well-informed about prevailing inflation and are concerned about its impact on their wealth; yet, while many households know about inflation eroding nominal assets, most are unaware of nominal-debt erosion.

Once they receive information on debt-erosion, households view nominal debt more positively and increase estimates of their real net wealth.

This isn’t just a matter of academic interest. The – um – interested academics found that decisions about spending and debt changed when households better understood the impact of inflation.

Admittedly the boffins looked at Germans. Fears about debt remain embedded in that national psyche. And muted house price growth and a strong rental sector mean Germans don’t grow up on a televisual diet of property porn.

Then again, the study looked at mostly better-educated Germans, a majority of whom had mortgages.

That barely a third realised how inflation benefits those with debts is telling – and a finding I’m sure would carry to the UK and beyond, too.

Mortgages, houses, and hedge rowsSumming up, having a sufficiently chunky mortgage can be an effective hedge against inflation because inflation reduces the real value of that debt.

What’s more, the money raised by the mortgage will typically be invested in assets that can go up with inflation, such as – duh – a house but also other real assets such shares.

The mortgage inflation hedge works best when interest rates are low relative to inflation.

And as always there are risks, particularly with variable-rate mortgages and the broader macro-economic backdrop.

Carrying a big interest-only mortgage was a good financial move for the past 15 years. What’s more, this looked very likely in advance, given how governments and Central Banks were behaving – though other outcomes were certainly possible.

We might have seen deflation, say, if we’d seen the 1930s-style playbook that some pundits now say should have been employed instead of Quantitative Easing, for instance. Or perhaps a global depression with an alternative universe pandemic. Both would have been bad for debt holders.

So we should beware hubris, carefully size whatever risks we take, and avoid going all-in on anything.

A mortgage is not for everyone, but…As we repeatedly stress on Monevator, one size never fits all.

Besides the financial issues, some people just hate the idea of having a mortgage. They don’t want a bank having a claim on their home or monthly mortgage payments stretching off to the far horizon.

Which is absolutely fair enough.

Paying off a mortgage will never be a bad financial move. Even if you’re rich, say, and all zero-ing your mortgage balance does for you is help you sleep at night, that’s still worth a lot.

But by the same token not having a mortgage often won’t be the best financial decision, given its relatively low cost versus other productive uses for the money.

Running a mortgage has other benefits beyond enabling you to buy a house. And inflation-hedging is prominent on that list.

Real terms means numbers after inflation is taken into account.

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Gold has had a phenomenal 24 years. Since the year 2000 this asset has scored an equity-like 7% real annualised return, and responded positively to virtually every notable stock market decline since the turn of the century.

In short, it’s proved to be a dream portfolio diversifier for over two decades now.

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What caught my eye this week.

One of the most dismaying aspects of the past decade’s political shift is seeing people who’ve thrived under ‘the system’ now shaking their fists at it.

From Donald Trump railing against corporations after presiding over several occasionally bankrupt ones, to the Chinese state turning on its most successful tech firms, to Barry Blimp and his friends criticising the elites from their exclusive spa and pool complex in Berkshire, hostility towards free market economics is everywhere. We see the consequences in rising US protectionism and the diminishment of Great Britain PLC and her citizens thanks to that vote.

It’s one thing to bemoan globalisation if you’re an artisanal farmer in Africa displaced by cheap calories from China, or a former industrial worker with now-redundant skills in Scunthorpe or Flint.

But well-to-do Brits decrying the shadowy forces of international trade that paid for their pensions? With zero evidence except a few half-baked statistics from fringe economists talking out of their Agas?

I’d take Citizen Smith over them any day.

Down with prosperity!Combine the increasing antipathy towards global trade on the right with the age-old hostility towards enterprise on the left, whiz it in a social media blender, and you get this:

We could quibble over Zitelmann’s definitions I’m sure. But you only need to spend 20 minutes on Twitter or to listen to certain popular populist politicians to know the anti-capitalism vibe is real.

Yet as Joachim Klement argued when he shared Zitelmann’s graph this week:

Capitalism is responsible for creating more wealth and progress than any other economic system ever invented. It has lifted more people out of poverty than all charitable efforts and aid organisations put together. It has taken us out of the Malthusian trap and increased agricultural productivity to a level where we can feed more than eight billion people on the planet, most of whom would have died of starvation or never been born without the financial means to develop modern agriculture. And it has provided the foundations on which health standards have increased so much that global life expectancy has more than doubled in the last 100 years.

Few would say everything is perfect. Certainly not me. Just look at the other graph in this week’s Weekend Reading below.

But most of our problems stem from political choices and voter selfishness, wishful thinking, or even outright incredulity, rather than unfixable issues with capitalism.

Capitalism provides a framework for incentives to work. But it’s up to governments and voters to decide the rules of the game, what to reward, and how to divvy up the proceeds.

Capitalism isn’t dead. But it needs to fix itself. More of us should learn how to be capitalists, and to understand the source of our wider prosperity.

Quant fund pioneer Jim Simons, who died this past week, once said: “I did a lot of math. I made a lot of money, and I gave almost all of it away.”

Not a bad template for the ideal capitalist. But many people might start with simply doing the maths.

Have a great weekend!

From MonevatorInflation hedges: what works and what doesn’t – Monevator

A question of trust – Monevator

From the archive-ator: holiday strategies to refresh a frugal soul – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

LSE boss says IPOs are on the way as Shein and Rasberry Pi ready floats – CityAM

Takeover interest in UK companies hits highest since 2018 [Search result] – FT

Reddit strikes deal with OpenAI to train LLPs on Reddit content – The Verge

Meme stock mania returns… – NBC via Yahoo Finance

…with this EV company rising 3,500% [!] in the week – Sherwood

US brothers arrested for stealing $25m in crypto in just 12 seconds – BBC

Brexit border IT outages delay import of perishable items to UK by up to 20 hours – Guardian

The percentage of US firms requiring workers-in-work is falling – Sherwood

Man told he is not British after 42 years in the UK – BBC

Why Britain is the world’s worst on homelessness [Search result] – FT

Products and servicesHigh Street banks start to cut the cost of fixed-rate mortgages again – Guardian

Santander has brought back its £175 bank switch deal – Which

Get £200 cashback with an Interactive Investor SIPP. New customers only. Minimum £15,000 account size. Terms apply – Interactive Investor

Owners of period properties spend twice as much on maintenance – This Is Money

Cheaper Spotify Basic plans launched – Be Clever With Your Cash

Santander’s very popular 5.2% easy account rate drops to 4.2% next week – This Is Money

Transfer your ISA to InvestEngine by 31 May and you could get up to £2,500 as a cashback bonus (T&Cs apply. Capital at risk) – InvestEngine

Why would it take 30 days for Companies House to remove a fraudulent address? – This Is Money

Over 6,000 UK bank branches closed since 2015 – Which

Deliveroo has hiked delivery costs for all customers – Be Clever With Your Cash

Flats for sale with outside space, in pictures – Guardian

Long-term mortgages mini-specialAre 25-year mortgages a thing of the past? – Guardian

‘Serious questions’ for lenders over surge in ultra-long mortgages – Sky

Should you run away from marathon mortgages? – Which

You probably won’t be paying a 40-year mortgage into old age – Simple Living in Somerset

Comment and opinion25-years old and with a 13.2% chance of living to 100. What to do? – Fidelity

Diversification is about decades – A Wealth of Common Sense

Happy conclusion – Humble Dollar

Three assets that might not diversify as well as you think… – Morningstar

…plus Bitcoin and gold won’t save you in the end times – Of Dollars and Data

An interview with Tyler from Portfolio Charts [Podcast] – Many Happy Returns

Understanding the inflation-protection of TIPS and similar bonds – Elm

Managing £1m property portfolios in an hour a month [Podcast] – The Property Podcast

Why active ETFs are better for fund managers than for you – Money Marketing

The long run is just a collection of short runs [Podcast] – Morgan Housel

Naughty corner: Active anticsPortfolio construction and the lower middle market – Permanent Equity

Starbucks’ digital dilemma – SatPost

BP and Shell go back to basics to boost shareholder returns [Search result] – FT

Small cap quality shares are currently good value – Verdad

Compounding made simple [Podcast] – Far From The Finishing Post via Apple

A deep dive into closed-end fund pricing versus NAVs – Acadian

Kindle book bargainsHow to Own the World by Andrew Craig – £0.99 on Kindle

The Great Post Office Scandal by Nick Wallis – £0.99 on Kindle

Number Go Up by Zeke Faux – £0.99 on Kindle

Chums: How a Tiny Caste of Oxford Tories Took Over the UK by Simon Kuper – £2.89 on Kindle

Environmental factorsBusinesses are struggling with reusable packaging – Guardian

Calpers to direct $25bn to green private market investments [Search result] – FT

Glimmer of hope for the mountain chicken frog which was once a national dish – BBC

Ancient trees reveal last summer was the hottest in past 2,000 years… – BBC

…despair is understandable, but stubborn optimism may be our only hope – Guardian

Robot overlord roundupOpenAI introduces GPT-4o and more for ChatGPT free users – Open AI

10 mildly mind-blowing examples of what the new ChatGPT can do… – via X

…meanwhile Google responds with an AI that can find lost spectacles – BBC

The great flattening – Stratechery

AI can replace stock analysts [Research] – SSRN

How AI turned a Ukrainian YouTuber into a Russian – BBC

Jim Simons RIPQuant investing pioneer and philanthropist James Simons dies at 86 – Reuters via Yahoo

Our man in East Setauket – Institutional Investor

The algorithm behind Jim Simons’s success – The Alchemy of Money

RIP to the man who beat the efficient market hypothesis – The Intrinsic Perspective

Off our beatJohann Hari and the new ‘miracle’ weight-loss drugs – Tim Ferris

Building embryos – Aeon

UFOs, God, and the edge of understanding – Vox

Suddenly there aren’t enough babies. Birth rates are crashing – WSJ

NASA Black Hole simulator takes viewers beyond the brink… [With video] – NASA

…while Google and Harvard unveil most detailed ever map of human brain – CNN

Steve Albini, 1962-2024: the engineer who shaped rock’s most visceral moments – NME

The 15 greatest video games magazines of all-time – Guardian

And finally…“Today’s economy is good at generating three things: wealth, the ability to show off wealth, and great envy for other people’s wealth.”
– Morgan Housel, Same As Ever

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Over on Monevator Moguls, we’ve been kicking the tyres on several investment trusts during the past year.

There was a big dislocation in the closed-end fund market when interest rates soared in 2022. Even the beloved ‘dividend heroes’ went cheap in the sales.

Elsewhere, infrastructure trusts that had previously traded on giddy 20% premiums to net assets (NAVs) fell to that level of discount. This 20% premium to 20% discount swing was independent of any move in their underlying assets. Some even reported rising NAVs!

Meanwhile you could drive a truck through the discounts on private equity and venture capital trusts. The most heavily-discounted traded at 40p on the (purported) £1 or less.

All told the average trust discount reached 19% last year – a level not seen since the financial crisis.

Even after a mini-rally, the average discount is still in double-digits.

Cheap for a reason(s)So, fill your boots, active investors?

Well perhaps – with all due caveats. And assuming you’re a naughty type who understands the risks and hassles as well as any potential rewards.

But should you decide to wade into this Sturm und Drang intent on bagging a bargain, your favourite investing platform/broker may have other ideas.

The reason why harkens back to why some investment trusts may have sold off quite so severely.

99 problems and a glitch ain’t oneThe woes of the investment trust sector is multi-factored if not omni-shambled.

The bear market of 2022 blew the trumpet on the start of the carnage as interest rates rose. The unloved UK market tossing everything into the bargain bin didn’t help either.

Investment trust discounts and premiums being buffeted around by supply, demand, and the emotional state of the market is nothing new.

But in this particular sell-off, trusts have also faced local turbulence that’s sent some into a tailspin.

For a start there’s the Consumer Duty regulations of 2023 that might make advisors more wary of exposing their clients to the extra complexities of investment trusts – and themselves to legal liability.

Wealth manager consolidation may also have forced the selling of certain trusts. It’s also left some trusts too small for the now-bigger managers to bother with.

Finally new-ish cost disclosure rules – derived from two pieces of legislation we retained after leaving the EU1 – seem to have been implemented in a particular obtuse way in the UK.

According to the investment trust industry, this has put trusts at an unfair disadvantage versus other kinds of funds.

How much?On the latter point, even the House of Lords has criticised the way the Financial Conduct Authority (FCA) has implemented the cost disclosure requirements.

The Financial Times neatly summarises the situation:

The way the FCA interprets these pieces of legislation compels investment trusts to report their costs in the same format as open-ended funds.

The result is that investment trusts look more expensive than they actually are.

[For instance, in the accounts of the Temple Bar investment Trust] the ongoing charge – an expression of the company’s management fees and operating expenses – is 0.56%.

But if you look at the Key Information Document, devised by regulators to help investors make more informed investment decisions, the annual ‘cost impact on return’ is 1.48%; and if you exit after five years you’ll pay £712 in total on an example investment of £10,000 […]

These metrics are fine for open-ended fund fees, which deduct management fees when the daily unit price is updated.

But for investment trusts, fees and costs simply reduce the net asset value that an investor has a stake in by owning shares. Investors will also pay broker trading and stamp duty fees to own those shares.

The investment trust industry says the onerous cost disclosure regime has put off both retail and professional advisors, which has further weakened demand and driven discounts even wider.

Please sir, can I have some more?The FCA acknowledges there’s a problem with cost disclosure. It’s apparently working on a long-term fix.

Indeed the potential for things to get better is another siren call that’s attracted me to the sector.

After all, one way to (try to) profit as an active investor is to head in the direction that everyone else is running from.

And if institutions are dumping assets for non-economic reasons then consider my interest piqued.

However to profit from any David vs Goliath heroics, we must be able to implement our cunning plans.

That is: we actually have to buy the things.

And that isn’t always easy when regulators and platforms are ‘protecting’ everyday investors from getting into some of the hairier trusts.

All’s fair in love and discounted investment trustsFor instance CityWire reported in April on how AJ Bell was restricting clients from buying shares in the investment trusts Chrysalis (ticker: CHRY; I hold) and Bluefield Solar Income (ticker: BSIF).

AJ Bell did this following ‘fail’ assessments in a fair value review conducted by its external consultant, 360 Fund Insight.

CityWire reports:

Investors could phone through a transaction and still pay the online charge of £5 rather than the normal phone fee of £25, a spokesperson for the firm said.

Customers of AJ Bell complained they had also been prevented from buying Digital 9 Infrastructure, Cordiant Digital Infrastructure, and Amedeo Air Four Plus after those too failed the assessment.

Investors are furious they are being prevented from buying closed-end funds trading on wide discounts that they regard as good value, and believe the low share prices offset any potential concerns over performance and costs.

And no wonder! What’s the point of enabling active investors to trade securities on your platform if you’re going to overrule their own assessment of value with one you prepared earlier?

I also don’t understand why clients could phone through orders, but not make the deals online? Perhaps a broker on the other end probes their suitability (or sanity). Better answers in the comments, please.

As for the ‘fair value’ issue though, this appears to be fallout from the Consumer Duty regulation I noted earlier.

Fair dealingPlatforms and brokers say Consumer Duty means they must alert customers who are at risk of poor returns and help them to make better decisions.

According to CityWire, price, performance, leverage and liquidity are all factors determining whether investment trusts are regarded as ‘fair value’.

However you don’t need to be Warren Buffett to understand those very same factors could make a trust potentially cheap, and be what’s attracted bargain hunters in the first place.

Moreover if I’ve got a longer time horizon than whoever sells me their shares – and/or if I’m happier to put up with liquidity issues or some other drawback – then my idea of ‘fair value’ may be legitimately different from a sellers’ – or even from a platform’s hired consultant.

The point of markets is that opinions differ. That is how we really do arrive at fair value.

It seems unlikely the legislation means to funnel everyone into a consensus-satisfying Nasdaq tracker fund – or whatever else is the winning investment du jour.

But a glib reading could suggest otherwise.

Set up to failAJ Bell is not alone in protecting investors from potential money-making opportunities. It’s happening all over the place.

For example the same CityWire article notes:

Hargreaves Lansdown has also restricted investors from buying Digital 9 Infrastructure, Cordiant Digital, and Amedeo Air Four Plus until they pass a questionnaire showing they have the understanding of ‘complex investments’.

While Cordiant and Amedeo are listed on the London Stock Exchange’s specialist fund segment, Digital 9 is not – though it is still viewed as ‘complex’.

Closer to home, Monevator Moguls member Mirror Man found a ‘Complex and Levered Product’ label being applied by Interactive Brokers to various investment trusts, hindering them from buying shares even in a giant trust like Brevan Howard’s £1.3bn BH Macro. (Ticker BHMG; I own).

In the Monevator comments, Mirror Man explained the platform won’t allow them to add to their existing holding of BH Macro, though it will let the shares be sold.

To buy more, Mirror Man must pass a test covering stuff such as ETNs, warrants, discount certificates, and leveraged ETFs, by answering questions like:

Assume a warrant on ABC share has a strike of EUR 40.00 and an exercise ratio of 0.1. The share is trading at EUR 45.00 and the warrant at EUR 0.70, resulting in a leverage of 6.4. If the share price were to increase to EUR 50.00 while the time value of the warrant remained constant, which of the following statements is true?

But I’m here to tell you nobody should need to be able to answer such questions to assess whether they should have money invested in BH Macro.

That’s because as a private investor, having such knowledge won’t help you judge the trust’s virtues – or otherwise.

What was the question again?BH Macro is essentially a black box from the outside when it comes to the complexities of its trading models (though it does disclose plenty of other information in regular updates to the market).

Its fees are high, too.

These are two very good reasons to be cautious before investing in this trust.

In contrast, understanding how warrants are priced won’t help you assess the pros and cons. No more than I need to know how a jet engine is serviced in order for me to book the best flight to New York.

More relevant questions would focus on customer-specific issues. They might assess your general investing know-how, your level of experience in terms of time and range of investments, your capacity to take losses – and, crucially, your willingness to sign away any liability should losses occur.

Many readers will be familiar with the ‘sophisticated investor’ assessments sometimes required when investing into unlisted companies. Those seem to me more fit for purpose.

It’s behind a sign-up wall, but CityWire published the answers to a Hargreaves Lansdown questionnaire concerning complex products. This test – or at least the portion CityWire shared – does at least seem more in the ‘sophisticated investor’ vein than esoterica about trading instruments.

Anyway Hargreaves reportedly pushed back, saying that investors being able to access a cheat sheet could provoke the ire of the FCA.

So CityWire removed them but it left the quiz up, with heavy hints about how to answer.

Who is protecting who?Why help Hargreaves’ customers get through their unasked-for homework?

I’d echo the CityWire journalists, who wrote:

We share the frustration of readers about the classification of some investment companies and trusts as ‘complex’, and the assumption that their investors need protecting.

The Financial Conduct Authority’s consumer duty rules require share-dealing platforms to flag ‘complex instruments’, which they can implement in their own way.

While Hargreaves requires you to pass the questionnaire, AJ Bell, Interactive Investor and Fidelity simply ask investors to certify that they are aware of the risks.

To my mind this cross-platform subjectivity is another unjustifiable aspect to the whole business.

It would be one thing if there were a centralised list of what trusts were in or out for retail investors. I’d still argue against such a mandate, but at least there’d be consistency.

But as things stand I can – and have – bought BH Macro on one of my platforms without any fuss, while arbitrarily Mirror Man cannot on theirs.

Does that seem right?

Of course being a person whose paranoia has me using half-a-dozen different platforms, I suppose in practice this ‘will they, won’t they?’ uncertainty works for me, compared to a blanket all-platform banning from on high.

That’s because I can usually find what I want with one of my brokers.

Nevertheless a simple approved list of trusts would be more logical. The current approach smacks of platforms playing chicken – if not arse-covering.

When you come at the king…Talking of illogical, last summer even saw Fidelity suspend investments into RIT Capital Partners (ticker: RCP, and yes I hold). This is the OG granddaddy of wealth-preserving investment trusts – hitherto seen as a prudent place for middle-aged duffers to park the proceeds from daddy’s estate sale.

True, RIT has struggled recently as the market has become wary about unlisted holdings. RIT has a chunky (and hitherto profitable) allocation to private companies, and its discount blew out to near-30%.

But again, should platforms be assessing the risks and rewards on offer with such a security? Let alone trying to assess via questionnaires whether their customers could do the job of investment trust employees should the latter come down with the lurgy?

As Mirror Man said in their comments: “I want my broker to provide me with a service (order execution), not masquerade as a financial regulator.”

As things stand it’s possible that by making it harder to invest in trusts, platforms are exacerbating the discounts, given that everyday retail investors are the natural buyers of a trust like RIT Capital.

Passive aggressiveIncidentally, any passive investors who made it this far might be thinking it’s all another reason they’re best out of active investments (which most will be).

Yet the very same regulations also prevent you from buying most US-listed ETFs on the UK platforms.

I know there are ways around this, such as if the ETF has issued a Key Information Document (KID).

Individuals who can declare themselves as professional investors can buy non-UCITS ETFs, too.

But again, anyone can happily buy thousands of other US assets – in ISAs and SIPPs even. Dodgy meme stocks are no problem. Is restricting access to (sometimes larger and cheaper) US ETFs really logical?

Happily it seems the regulator is having second thoughts about this one.

From ETF Stream:

ETFs domiciled in the US could be granted equivalence under the UK government’s Overseas Fund Regime in a move that would open the market to US-listed ETFs.

The Financial Conduct Authority launched a consultation with asset managers last December on how products should be recognised under the post-Brexit framework.

The UK government granted equivalence for all UCITS vehicles in the European Economic Area (EEA) in January, with US-listed ‘40 Act’ ETFs also being considered.

Any move would need to be approved by the UK Treasury deeming the regulatory regime for the overseas fund to be equivalent to the UK.

US-listed ETFs are not currently available for sale under EU law as they do not publish certain documents required by the European and Securities Markets Association.

Finally, potentially, a Brexit benefit!

It’d be a win-win for all of us.

Who’d be a regulator?Honestly I do have sympathy for the regulators – and for the platforms trying to keep up with them.

And I fully understand the push to make the financial services sector one where service is more for the benefit of customers than for employees.

The disinfecting sunlight cast upon high-fee financial advisors in recent months is overdue, for example.

On the other hand, regulators shouldn’t stop people who know what they’re doing – or who are willing to accept the consequences anyway – from spending their money as they see fit.

And I think the same should hold for over-zealous and/or over-cautious platforms interpreting how the regulatory wind is blowing.

Consider the FCA’s semi-reversal on Bitcoin ETFs – vehicles now running perfectly smoothly in the US.

The FCA’s revised position is:

These products would be available for professional investors, such as investment firms and credit institutions authorised or regulated to operate in financial markets only.

But is barring access to Bitcoin ETFs the best way to protect retail investors?

Think about the long history of crypto platforms being looted or otherwise falling over. The booms and busts of alt-coins. The legions of crypto grifters pumping and dumping daily across social media.

Not to mention the mishaps that can occur when people attempt self-custody of their own crypto assets – including sending millions of pounds worth of crypto to landfill.

There are even micro-cap Bitcoin miners listed on the AIM market which are freely available for trading.

You can have at all those, no problemo. But apparently only professionals can be trusted to put £1,000 into a bog-standard Bitcoin ETF.

The fault is in ourselvesRunning a blog about personal finance and investing, I see all the scammers and shysters.

Indeed I spend the best part of an hour every day wading through their spam in the Monevator comments and email.

Also, for better or worse our society has moved towards a compensation culture.

Many people now expect to be bailed-out when their decisions don’t work out – but left well alone when they do. It’s hard to square.

So regulators and platforms surely have a difficult time of it.

Still, given all the straight-up larceny around, I don’t see that restricting informed and hands-on investors from buying shares in legitimate companies should be any regulator’s top-priority.

Investment trusts have a duty as listed businesses to accurately report their activities to investors. All information properly required should be made available. And platforms should flag it where appropriate.

Fine – if we must have a checkbox with links to the downside and the risk of ruin then on our heads be it.

Companies shouldn’t lie to us or wantonly mis-sell products. Regulators can valuably tackle those issues.

But frankly, if after being given the relevant data somebody wants to invest their money with a legal but ‘reassuringly’ expensive high-fee advisor say – perhaps because they like glossy brochures and feeling special – then that’s their business as far as I’m concerned.

And given that, I obviously believe we should also be able to buy whatever (legal) securities we want.

Regulation versus prohibitionIf after being given the appropriate warnings I want to buy a triple-levered ETF shorting the Nasdaq then let me.

Just like if I want to buy a value pack of ten beers and 40 fags for the evening.

It’s not advisable, but it’s my choice.

I’m not making some specious point here about enabling UK investor’s money to ‘support the London Stock Exchange’ or ‘channeling money into productive investment’.

I just think it’s a matter of basic morality and freedom in a capitalist system.

Sure, have gatekeepers for mainstream products.

But don’t let them become wardens hampering the minority of us engaged investors who actually do our research – and who are ready to live with the consequences.

What do you say readers? How would you regulate if you were given the awkward chalice? Let us know in the comments below.

Mifid (Markets in Financial Instruments Directive) and PRIIPS (Packaged Retail Investment and Insurance-based Products

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Surging inflation is one of the nastiest, portfolio-crumbling threats investors face – not least because defending against it is as difficult as defeating dry rot. The last few years have taught us a great deal about what does and does not work, so here’s our updated guide on the best inflation hedges.

Note: All investment returns quoted in this article are annualised real returns.1

How to hedge against inflation There are three asset classes worth considering as inflation hedges:

Individual index-linked gilts
Broad commodities
Gold

A good inflation hedge should:

Respond quickly to high inflation, with correspondingly high nominal returns.
Work reliably across many different time periods, countries, and inflation regimes.
Deliver reasonable long-term returns over time.

Not a single asset class (including our three prospects above) comfortably fulfils our definition of a ‘good inflation hedge’. I’ll explain why below.

And so sadly there is no magic bullet answer to the question: “what is the best hedge against inflation?”

Taken together, the top inflation hedges resemble a ragtag crew of mercenary misfits. Sometimes they’ll come through for you: unleashing a spectacular display of inflation-busting pyrotechnics. Other times, they’ll fall on their face like a drunk, trousers round their ankles. An embarrassing mistake.

These complications mean we believe deliberate inflation-hedging is a less attractive option for early- to mid-stage accumulators than for near-retirees and decumulators.

When you’ve decades to go, concentrate on beating inflation over time with a strong dose of global equities. That makes more sense than hedging against a short-term risk.

As for near-retirees and decumulators, let’s consider which of the reputed inflation hedges you may want on your side.

Inflation hedge: index-linked giltsIf you buy individual index-linked gilts (not index-linked gilt funds or ETFs) then they will hedge against UK inflation provided you hold them until maturity.

For example, if you put £1,000 into the index-linked gilt UKGI 1.25 11/27 – and hold until maturity – then your £1,000 will grow in line with RPI, until your capital (or principal) is returned to you on the bond’s 22 November 2027 maturity date.

On top of that, if you reinvest your RPI-adjusted coupon (interest) payments into the bond, then you’ll approximately earn the current real yield of 0.11% per annum.

That is far from an awesome return. But it’s better than the negative rates inflation-linked bonds were earning until recently.

And at least you know that money invested on this basis will keep pace with inflation.

For Brits, this is the best inflation hedge you can buy in the sense that it will reliably protect your purchasing power against official inflation.

That’s because no other investment is index-linked to a UK inflation measure.

Caveats a go-goIf you sell your individual index-linked gilt2 before maturity then you may make a capital loss (or gain) due to price risk.

Price risk is the risk that the price of your bond drops as its real yield changes before maturity.

If bond yields spike hard and fast enough, then a linker’s price can fall so far that you’re not adequately compensated by the bond’s inflation-linking features.

But – and forgive me for going on about it – bond mechanics mean you can defuse any price risk simply by holding your bond to maturity. (You must also reinvest your coupons in a timely manner to earn the real yield on offer when you bought in, too.)

Price risk is the reason why inflation-linked funds and ETFs are not a guaranteed inflation hedge.

Bond managers typically sell their securities before maturity in order to maintain their fund’s target duration.

As interest rates took off in 2022, managers were therefore booking capital losses as prices fell in response to rising bond yields.

The longer your fund’s duration, the deeper your loss. Short-duration inflation-linked funds were less badly damaged, but they still didn’t keep up with inflation in 2022 and 2023.

For more on how to buy and use individual index-linked gilts, read up on how a rolling linker ladder works and learn how to build an index-linked gilt ladder.

If you maintain part of your portfolio as a ladder of individual index-linked gilts then you can sensibly leave your inflation-hedging efforts at that.

But…Vanguard points out that index-linked bonds aren’t likely to prop up the rest of your portfolio when the money-munching monster runs amok.

That’s because short-term index-linked bond yields are so slim, that our allocation can’t be expected to do much more than return your money with a few inflation-adjusted sprinkles on top.

(Note, Vanguard talks about US TIPS. But the same is true – perhaps more so – for inflation-linked gilts.)

More concretely, linkers fall short of our ‘deliver reasonable long-term returns’ criteria.

So let’s push on and look at the inflation-hedging properties of commodities.

Inflation hedge: commodities Numerous research papers point out that commodities sometimes deliver exceptional returns in the teeth of inflationary pressure.

It certainly makes sense that commodities should serve as some kind of inflation hedge, given that the cost of raw materials is often one of the booster rockets strapped to accelerating prices.

That said, most of the research examining the issue is problematic. Usually because the data doesn’t reflect investable commodity indexes, or is quite short-term, or is US-oriented, and so on.

Nonetheless, your heroic Monevator correspondent partially mitigated his own cost-of-living issues by spending time digging up relevant broad commodities data and plotting it against UK inflation – instead of blowing his cash on having a life. You’re welcome.

My conclusion?

Commodities are a partial inflation hedge.

The asset class has delivered spectacular returns at times as inflation begins to stir.

Often the lift-off in commodities presages escalating UK inflation further down the road.

But by the time headline rates are hurting our pockets, commodity prices are often tumbling back down again.

Over a one-year period, commodities are actually negatively correlated with UK inflation (1934 to 2022).

However, commodities outdid the other major asset classes when inflation was above-average (1934 to 2022).

Average annualised returns during inflationary episodes were:

Commodities: 4.5%
UK equities: 3.6%
Gold: 1.8%
Gilts: -2.2%
Cash: -1.9%

Meanwhile, the historic annualised real return of commodities was 4.5% (in GBP) across the entire time period from 1934 to 2022.

Thus an allocation to raw materials historically fulfilled the ‘deliver reasonable long-term returns’ part of the brief.

And they have generated extremely high, inflation-beating nominal returns at times.

But commodities cannot be said to work reliably as an inflation hedge. You can shape them around your portfolio like an armoured plate, but you can’t expect them to deflect every inflationary bullet.

Finally, the USP of commodities is also its biggest weakness.

Commodities are useful primarily because they’ve been historically negatively correlated with equities and bonds. And equities and bonds tend to fail together during bouts of galloping inflation.

But commodities can be a terrible drag when the commodity asset class suffers a bear market. The beating taken by commodities between 2008 to 2020 would have shaken the resolve of even the most fanatical inflation-phobe.

We recommend reading the recent Monevator commodities series and researching the asset class yourself before committing any cash.

Inflation hedge: goldThe case for gold as an inflation hedge is similar to – but weaker than for – commodities.

At best, gold’s performance can only be appropriately measured from 1968. That’s because it was caged by government regulation before then.

Monevator investigated the behaviour of gold versus UK inflation when we asked: is gold a good investment?

The long and the short of it is that gold is historically uncorrelated to inflation. You can’t rely on the yellow metal as an inflation hedge.

So why are we even talking about gold? Because it is also negatively correlated with equities and gilts. So occasionally the shiny stuff’s good years have coincided with bouts of unexpected inflation.

Gold just bobbed ahead of inflation in 2022 and 2023. It also had a reasonable 1970s during that stagflationary era.

Golden yearsThe US-orientated, 2021 research paper The Best Strategies For Inflationary Times stated that gold turned in average returns of 13% during four inflationary regimes post-1971.

But the paper’s authors then break our hopeful hearts by warning:

Looking at averages over all regimes could be misleading because of one influential regime. For example, Erb and Harvey (2013) show that gold’s seeming ability to hedge unexpected inflation is driven by a single observation.

And here is that single observation. The gold price shot up near 200% in 1980:

Source: Claude Erb and Campbell Harvey. The Golden Dilemma. 2013. Page 9.

Even Erb and Harvey say of gold’s relationship with unexpected inflation:

There is effectively no correlation here. Any observed positive relationship is driven by a single year, 1980.

Meanwhile, the long-term GBP annualised returns of gold are hard to pin down. Take your pick from:

1900-2022: 0.8%
1968-2022: 3.5%
1975-2022: 1.5%

Ultimately, gold is a total wildcard.

It may work during an inflationary crisis: the charts show it soaring like a NYC pencil-tower during some years in the 1970s.

You’d always want gold in your portfolio if you could rely on it doing that.

But then again, gold suffered a 19-year horror show from 1980 to 1999. Losses peaked at -78%.

Accumulators can happily skip the quandary. Decumulators who want to ward off sequence of returns risk may want to use gold sparingly as disaster insurance.

But the case for gold as an inflation hedge is weak.

Inflation hedge: real estateProperty is often named on the roster of potential inflation hedges. However, the renowned investment researchers Dimson, Marsh, and Staunton found that commercial real estate returns are negatively impacted by high inflation, though less so than broad equities.

However, that could be an artefact of sluggish property prices. In other words, the inflation effect is simply delayed in comparison to liquid equity markets.

Because REITs have reasonable long-term returns but a negative relationship with inflation, we think commercial property is best thought of as an inflation-beating strategy. As opposed to an inflation hedge.

Dimson, Marsh, and Staunton tentatively suggest that residential property is quite resistant to inflation. But returns still have a negative relationship with high prices.

However the verdict in The Best Strategies For Inflationary Times is a little more encouraging.

UK residential property delivered a 1% average return during high inflation periods. Returns were positive in 57% of the 14 periods examined between 1926 and 2020.

Incredibly, Japanese residential property delivered 12% average returns with a 100% positive return across six high inflation episodes from 1926 to 2020.

But US residential property returns were -2% during inflationary bouts. It only mounted a positive response a quarter of the time.

Location, location, locationKeep in mind that unique factors could be at play in each of these markets.

And we also can’t ignore the fact that historical records of property prices are notoriously problematic.

Long-term data typically fails to capture high-resolution details such as ownership costs, rental assumptions, taxes, default risks, transaction costs, and illiquidity.

You have to put a peg on your nose every time you lend credence to historical property returns.

UK homeowners conditioned by a 30-year property bull market have long thought of their castles as a bastion against inflation.

And residential property did deliver a positive return in two out of three episodes during the ‘70s, according to The Best Strategies For Inflationary Times.

But that’s little comfort for anyone struggling to get on the housing ladder.

Moreover, it’s difficult to diversify residential risks.

Even a portfolio of rental properties is prey to local market conditions. These can swamp any inflation effect.

Inflation hedge: stocks and equity sectorsCan individual stocks or sectors serve up inflation hedging salvation where the broad equity market cannot?

Dimson, Marsh, and Staunton sound dubious:

It is tough to find individual equities, or classes of equities, or sectors that are reliable as hedges against inflation, whether the focus is on utilities, infrastructure, REITs, stocks with low inflation betas, or other attributes.

Meanwhile, Neville et al investigate the performance of 12 US stock sectors in The Best Strategies For Inflationary Times. Every sector except energy stocks posted negative returns during high inflation periods.

The energy sector did manage a 1% average return during those periods. But the return was only positive 50% of the time.

Notably, average returns were -19% during the 1972-74 recession that was infamously fuelled by the OPEC oil embargo.

Ultimately, equity prices are subject to a swirl of forces beyond inflation. These can confound a simple thesis such as ‘high oil prices must be good for oil firms’.

Looking for the X factorThree other equity sub-asset classes posted positive returns during high inflation regimes according to Neville et al. These were three of the risk factors:

Momentum
Quality
Investment

Momentum looks especially hopeful, with 8% average returns and positive returns in three-quarters of the scenarios considered in The Best Strategies For Inflationary Times.

The snag is these compelling results tested the ‘long-short’ version of cross-sectional momentum.

But us ordinary UK investors can only access long-only momentum ETFs. Which offer a diluted version of the pure form examined in the paper.

Once again our hopes are stymied by the gap between backtested theory and investible reality.

The authors also say they’re cautious about momentum’s results, due to its low statistical significance and its sensitivity to their chosen dates:

For example, January 1975 was a very negative month for cross-sectional momentum, and our inflationary regime stops in December 1974. Equally, late 2008 through early 2009 was catastrophic for momentum, and our inflationary period ends in July 2008.

However, the authors do make encouraging observations about the benefit of straightforward international equity diversification:

Equities really only struggle when two or more countries are suffering. This is consistent with a global bout of inflation being very negative for equity markets.

The results also suggest benefits to international diversification. For example, taking the UK perspective, US and Japanese equities generate +6% and +9% real annualized returns during UK inflation regimes, respectively.

This is perhaps one of the drivers behind the large international equity allocations run by some of the major UK pension funds coming out of the inflationary 1970s and 80s.

Inflation-hedge: timberlandTimberland enthusiasts describe it as the dream package. Who wouldn’t want an inflation hedge that offers good risk-adjusted returns, plus low correlations with equities and bonds?

But even fund managers selling timber investments confess the asset class has been a moderate inflation hedge at best.

Alternative investment firm Domain Capital states:

Timber has been found to be positively correlated with unanticipated inflation. During periods of high inflation, as in the 1970s, timber provided a partial inflation hedge. With a correlation of 0.34 to inflation during the 1970s, timber prices tended to outpace unexpectedly high inflation.

Here’s a recap of how correlation metrics work:

1 = Perfect positive correlation: when one thing goes up so does the other
0 = Zero correlation: the two things being measured have no influence upon each other
-1 = Perfect negative correlation: when one thing goes up, the other goes down

A correlation of 0.34 during the stagflationary 1970s is not great.

The timberland / inflation correlation then drops to 0.29 between 2003 to 2017.

Between 1987 and 2010, the correlation was 0.64 according to Barclays Global Inflation-Linked Products – A User’s Guide.

That compares with inflation correlations of 0.80 to commodities and 0.84 to short-term index-linked gilts.

But the even bigger problem I encountered when trying to stand up timberland is that sources tend to use data from the NCREIF Timberland Index.

This US index has two main issues:

It only tracks timberland’s performance from 1987. That’s a pretty short timescale. Especially given that – until recent years – inflation had been quite benign since the late 1980s.
The index is dominated by private equity companies that invest in timber and forestry. Those companies are inaccessible to retail investors like us.

Instead, we can invest in publicly-traded timber REITs and forest product companies.

Barking up the wrong treeThe S&P Global Timber & Forestry Index is the most popular index covering public timberland firms.

You can gain exposure to it via an iShares ETF with the ticker WOOD. (See what they did there?)

But we’re stumped again! Public timber stocks are much less effective inflation hedges than their private equity brethren, according to the paper Assessing the Inflation Hedging Ability of Timberland Assets in the United States.

Its authors concluded:

Private-equity timberland assets can hedge both expected and unexpected inflation, and the ability becomes stronger as the investment time increases.

In contrast, public-equity timberland asset is not effective in hedging either.

As for timberland’s diversification benefits, they say:

In summary, private-equity timberland assets have a negative correlation with the market and are a good hedge against actual inflation.

On the other hand, public-equity timberland assets behave more like common stocks and have a high correlation with the market.

The study covers the period 1987 through 2009. But it chimes with my anecdotal experience of keeping an eye on iShares’ WOOD.

WOOD’s returns have been closely correlated to MSCI World ETFs. Ultimately, I’ve not been able to justify branching out into timber. [Ed – fired!]

Inflation hedge: trend followingTrend-following scored average returns of 25% in inflationary periods according to The Best Strategies For Inflationary Times. It also worked reliably in all eight scenarios.

Returns for the entire 1926 to 2020 period were an astounding 16%.

At this point, I wish I knew how to execute a proprietary trend-following strategy using futures and forwards contracts associated with commodities, currency, bond, and equity prices.

Because that’s what the authors backtested.

They name check their methodology. But I’d guess this strategy is beyond the ken of most people.

Other inflation hedges Our final inflation hedging candidates are collectibles: wine, art and stamps.

The Best Strategies For Inflationary Times suggests they have game:

| Collectible | Inflation episode average return (%) | Anti-inflation reliability (%) | | Wine | 5 | 50 | | Art | 7 | 63 | | Stamps | 9 | 75 |

But once again the academics are building a case on an index you can’t invest in. The underlying data ignores transaction fees, storage, and insurance costs. All of which would chomp down those returns.

Moreover the average punter is going to struggle to put together a diverse basket of Old Masters.

Right now there’s no ETF tracking the market for Picassos, Warhols, and Cézannes.

If you can profitably swim in those waters then the best of luck to you. But hopefully you’re not just sticking this treasure in a vault for the purpose of inflation hedging.

The Investor covered some of the pitfalls of investing in illiquid and opaque markets in his piece on alternative asset classes.

Beating inflationSo where does that leave us, except more disillusioned than ever?

As previously stated, because inflation hedging is so problematic I’d skip it if I was still an accumulator saving for retirement. I’d rely on straightforward global equities to beat inflation instead.

But decumulators and retirees are highly vulnerable to unexpected inflation.

The most reliable buy-and-hold method to hedge inflation is to create a ladder of individual index-linked gilts.

You might also consider an allocation to broad commodities and even gold as modelled in our decumulation strategy portfolio.

Hedging your hedging betsYou may consider inflation to be such a threat that it justifies a small percentage to each of the assets we’ve covered. This way you have a diversified hedge against inflation.

Is it worth it? Only you can decide what’s right for you.

I’ll give the last word to Dimson, Staunton, and Marsh. Their peerless work acts as a shining light for us ordinary investors in search of answers:

Inflation protection has a cost in terms of lower expected returns. While an inflation-protected portfolio may perform better when there is a shock to the general price level, during periods of disinflation or deflation such a portfolio can be expected to under-perform.

Take it steady,

The Accumulator

Annualised is the average annual return accounting for gains and losses. Real return is the amount the investment grows (or shrinks) over a period after inflation is stripped out.
Colloquially known as a ‘linker’.

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What caught my eye this week.

Articles in the mainstream media about what only the mainstream media calls ‘the FIRE movement’ are a staple nowadays.

And some of them have been kinder – or flat-out more accurate – than others.

Lingering recollections of the worst can have you reading the first few lines of a new take on ‘Those Wacky Folk Who Don’t Want To Work For The Man Forever To Buy Stuff They Don’t Need’ through your fingers.

But by any standard, The New York Times’ latest encounter in the wild with FIRE practitioners – which we can all read for free thanks to a gift link from the ever-vital Abnormal Returns – is one of the better ones.

At least it is once you get past the headline: Your Neighbors Are Retiring in Their 30s. Why Can’t You?

Hard bargainingThis time the focus is on FatFIRE. That is, retiring early because you can retire early because you’re loaded.

Once the preserve of rock stars, footballers, bankers, and criminals who really did manage to pull off one last job, FatFIRE is now a realistic prospect for anybody who can hold down a job with one of The Magnificent Seven tech giants for a decade.

But beware!

The New York Times’ article notes that:

“…while most other FIRE communities steer toward the friendly and pragmatic, FatFIRE’s adherents tend to be jaded, brusque, laser-focused. They hunt for the ‘exit’, in the tech-world manner of speaking: a fast, lucrative way out. On the r/FatFIRE subreddit, aspirants ogle severance packages, geo-arbitrage, REIT, tax loopholes, high-risk options straddles and potential business moonshots.”

The article’s author Amy Wang does a nice job contrasting these FIRE stormtroopers with the ‘stoic ultraminimalists living off beans’ of yesteryear – and she makes me feel ancient by doing so.

Then again, it was only a few weeks ago I republished Jacob Fisker’s extreme frugality pieces on Monevator myself – almost as a hymn to that lost era.

I guess there’s something in the air.

DefaultFIREIt’s true our kind of blog has attracted a broader range of readers over the years.

With respect to Monevator this definitely includes a sizeable cohort who’d either be deemed FatFIRE or wanting to go that way.

Much more so than in the old days, I reckon. I wonder why that is?

Has modern work – even sexy make-a-packet work – become so dispiriting that even the high-fliers want to fly away?

Is it Instagram filling our heads with dreams about what, where, and who we could be doing instead?

Or is it – whisper it – the invisible hand of capitalism fingering its way into our secret plans for financial independence, to make sure that if we’re going to do it then at least we’ll buy all the mod cons first?

Perhaps everyone always had a bit of FIRE in them. A decade of these articles has simply brought it to the surface.

More darkly though, I wonder whether a few years into a cost-of-living crisis, eating beans and turning down the central heating just doesn’t seem so newsworthy anymore.

Have a great weekend. Enjoy the sun!

From MonevatorScrimping and saving to start your snowball rolling – Monevator

From the archive-ator: Fixing your financial posture – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Bank of England holds rates at 5.25% for sixth consecutive month – Sky

House prices to rise by average £61,500 over next five years – This Is Money

Legal & General boss calls for fewer ‘unscrupulous’ BTL landlords – CityAM

Remittances to developing nations overtakes foreign direct investment – Guardian

Chinese women are teaming up with strangers to save money – BBC

Asset management industry ‘under pressure’ as costs rocket – CityAM via Yahoo

Chinese network behind one of the world’s ‘largest online scams’ – Guardian

Youngest self-made billionaire chooses London for European HQ – CityAM

One million families with two retired generations in a decade – This Is Money

UK has moved out of recession, official figures show – Guardian

Products and servicesHow deep are the problems at St James’s Place? [Search result] – FT

First Direct lifts bank account switch bonus to £175 – Be Clever With Your Cash

Tesco is gamifying Clubcard reward points – This Is Money

Transfer your ISA to InvestEngine by 31 May and you could get up to £2,500 as a cashback bonus (T&Cs apply. Capital at risk) – InvestEngine

What’s happening with buy-to-let mortgage rates? – Which

Fraud rife on marketplaces Depop, Preloved, and Shpock – Guardian

Used car sales hit a five-year high as prices drop – This Is Money

Get £200 cashback with an Interactive Investor SIPP. New customers only. Minimum £15,000 account size. Terms apply – Interactive Investor

Vomiting frogs and other ‘dust’ vex US bitcoin ETFs [Search result] – FT

The cheapest and most expensive cars to insure in 2024 – Which

Georgian homes for sale for Bridgerton fans, in pictures – Guardian

Comment and opinionTemper FOMO and regret by owning the market – The Financial Bodyguard

Pension savers warned of new tax-free lump sum cap [Search result] – FT

Long odds – Humble Dollar

The worst bond market ever marches on [US but relevant] – A.W.O.C.S.

Larry Swedroe on why you shouldn’t pick stocks [Podcast] – At The Money

Is the 4% rule too safe? [Note: US data] – Think Advisor

The sweet spot principle – Mr Stingy

How to avoid your wealth robbing your kids of purpose [Podcast] – Money Wise

Buffett minus Munger mini-specialHow would Warren spend one more day with Charlie? [Video] – Via X

How to find a partner like Charlie Munger – The Alchemy of Money

Lessons learned from Charlie Munger – Davis Funds

The religiosity of the Berkshire AGM – Flyover Stocks

Naughty corner: Active anticsBig tech’s big spending will crimp returns – Base Hit Investing

Is it time to look again at China? – Sherwood

Choosing the right counterparty – Capital Gains

The FTSE 100: bubble or a new bull market? – UK Dividend Stocks

American endowments’ love affair with private equity [Search result] – FT

Bill Gross thinks bonds are still not yielding enough – Morningstar

Gold is overvalued – MarketWatch [Also: Research]

Kindle book bargainsHow to Own the World by Andrew Craig – £0.99 on Kindle

The Great Post Office Scandal by Nick Wallis – £0.99 on Kindle

Number Go Up by Zeke Faux – £0.99 on Kindle

Chums: How a Tiny Caste of Oxford Tories Took Over the UK by Simon Kuper – £2.89 on Kindle

Global warming mini-specialWorld’s oceans suffer from record-breaking year of heat – BBC

Climate scientists are in despair about the future of the planet… – Guardian

…and coral scientists are gloomy after unprecedented bleaching – Guardian

The ‘world’s largest’ vacuum to suck carbon out of the air – CNN

Venezuela may be the first nation to lose all its glaciers – BBC

Robot overlord roundupWays to think about AGI – Benedict Evans

Environmental factorsEnvironment groups call for urgent action on UK sewage spills – BBC

The deep ocean photographer that captured a ‘living fossil’ – BBC

“I’m a blue whale, I’m here” – Guardian

Off our beatPlonker, prat, and numpty: study shows classic British insults dying out – ITV

How coffee became a joke – The Honest Broker

Saudi forces “told to kill” to clear land for eco-city Neom – BBC

The real science behind the billionaire pursuit of immortality – Vox

“I have no children and have started to fear for my legacy…” – Guardian

Google briefly lost the Google domain after selling it for $12 – Yahoo Finance

And finally…“Investing is a simple activity, which an entire industry strives to make complicated to justify its existence.”
– Nicolas Bérubé, From Zero to Millionaire

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: Frugality out, FatFIRE in appeared first on Monevator.

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I love the analogy of saving and investing as rolling a snowball down a hill. Your portfolio starts off ping pong ball-sized – but you can end up with an avalanche of money.

The Snowball was the perfect title for Warren Buffett’s biography.

That said, sometimes in the midst of your journey to financial freedom you may doubt your snowball is growing. Especially when the markets are going nowhere.

You’re automatically adding money to your accounts each month but your number isn’t growing. You might even feel like your snowball is melting.

Keep at it!

Those regular contributions to your equity funds are buying you ever more productive and money-making assets – regardless of how the market prices them in the short-term.

Sooner or later you’ll be rewarded.

Self-fulfilling prophecyThe point of the snowball analogy is that your savings and investments will gather their own momentum.

You may still be pushing – by adding new money – but most of the extra mass added becomes self-generated.

A snowball gathers ever more snow as its surface area expands while it moves forward.

Your investment pot does this when compound interest moves the dial on your returns. Eventually, when your pot is big enough, just a single year’s returns can equal serious money.

A 10% annual return on £500 – fifty quid – won’t have anyone daydreaming of chucking in their day job.

But a 10% annual return on £500,000 is a cool £50,000 added to the financial freedom fund.

When exactly these numbers start to matter for you – when the importance of internal momentum outweighs new contributions – will depend on your own earnings, savings, and expectations.

But keep saving and investing smartly for long enough and you’ll inevitably get there.

It’s just maths.

Ice ice babyIn a typical year for the markets (as opposed to a rubbish one like 2022) my annual portfolio gains now dwarf anything I’ve ever managed to save over 12 months.

Maybe this sounds like a boast. But it’s just me getting paid for actions I started taking decades ago.

I lived like a graduate student for many years to get my snowball rolling. Lots of people would have seen that as a slog, though personally I never felt very deprived.

So I won’t say I’m lucky. I’m in a position I planned for – and bought and paid for.

(I do though feel fortunate to have been able to make it happen without health mishaps or similar.)

I’d have to earn much more than I ever expect to earn again for additional savings to be the main driver of my wealth from here. My portfolio now does most of the work for me.

It could be youPerhaps you’ve just begun your own march to financial freedom. Money is tight and the idea of having even £10,000 to compound seems out of reach.

So a portfolio that out-earns your day job feels as faraway as Peter Pan’s Neverland.

I remember that feeling.

Indeed one of the challenges of writing Monevator from the other side of financial freedom is your priorities change as your wealth grows.

To some readers – younger, less flush readers – an article by our contributor Finumus about how best to manage a seven-figure pension pot tax-efficiently might seem fantastical, if not offensive.

But Finumus isn’t likely to write about turning down his central heating to save a few quid. Perhaps he’d do it out of principle – once you have the saving habit it’s hard to kick – but it’s no imperative for him.

And many of our readers are in such a position, or close to it. The challenge has turned to how best to extract the wealth they’ve worked so hard to accumulate.

But many of you still have a long way to go.

Now I happen to think that regularly reading about money management at the wealthier end of the spectrum is still useful and educational.

I’d even dare to say aspirational.

It gives you a vision of where you’re headed. And perhaps what mistakes you might avoid along the way,

But it can also feel a bit like pressing your nose against the window of a restaurant you can’t yet afford.

We’ve tried to find a younger contributor to help with this issue, but nobody has quite worked out for the long haul.

Perhaps they’re all off shouting into an iPhone on TikTok? I have my doubts but who knows.

For now you’re stuck with older duffers trying to recall our roots as young would-be FIRE-ees.

The upside is we’re living proof it can be done. The Accumulator, Finumus, and I all achieved financial freedom in different ways.

It’s not easy, but it’s very doable.

We might disagree about what FIRE means in practice. (I don’t take private helicopters, for example. Finumus’ mileage may vary…)

But for all of us, compound interest is the real deal.

Ignore the haters and just get started.

Money mattersI was prompted to think about all this recently for two reasons.

Firstly, there was Warren Buffett’s latest Berkshire Hathaway meeting – the first without his sidekick Charlie Munger.

Buffett made himself one of the richest men in the world on the back of early frugality, a de facto hedge fund, amazing investment returns – and of course compound interest.

So did Charlie Munger, who was so absent from this year’s meeting. And all the money in the world can’t bring him back.

Memento mori.1

Secondly, and much more prosaically, InvestEngine extended its cashback offer for ISA transfers. (Affiliate link, terms and conditions apply.)

Now, I have ISAs with a few platforms. Why not transfer one to bag £1,000? It’s free money, after all.

A decade or two ago, when I had much smaller pieces to move around the board, I’d definitely have gone through the hassle – and the risks of being out of the market – to bag the cash.

Even today a grand is a grand. That’s still proper money. Far better to have it than not.

And maybe if I was a passive investor I’d still do the transfer for the cash. InvestEngine is a good platform – see our broker table and review – if you’re building out a very cheap-to-run ETF portfolio. So why not?

But for my sins I find I don’t want to chase the bonus at the cost of curbing my naughty active investing adventures. Not even for the guaranteed return of cash back.

The Investor to himself: “You’ve changed!”

FIRE and forgetBuffett’s billions, Charlie’s absence, and the dulling of my own dash for cash instinct got me thinking about some other things I no longer do to bolster my investment pot.

Have I become lazy? Or is this a natural reaction to having a snowball that’s taken on a life of its own?

Some things I used to do to save that I don’t do anymore Open bank accounts for switching bonuses. Once I’d move money across numerous bank accounts to get sign-up bonuses and time-limited interest rates. Now it’s too much hassle.

‘Stooze’ to arbitrage interest rates. Stoozing is borrowing low interest debt – typically on 0% credit cards – to earn interest elsewhere before paying back the debt without penalty. I was on The Motley Fool boards when user Stooze popularised it, and I did my time in the trenches. For various reasons, no more.

Ruthlessly track and cut my investment fees. I use several platforms – not least because I’m paranoid – and there are slightly cheaper options I could switch to. For mostly non-financial reasons, I don’t.

Avoid all foreign holidays except for special offer weekend breaks. Fortunately I used to go abroad a lot with work, so this didn’t feel like a huge sacrifice. As I got more guilty about flying I dropped the short getaways too. But these days I will go on holiday, at least in theory. (I still hate organising it!) Contrarily, I still think experiences are overrated versus buying stuff you really want or need. But dropping thousands of pounds just to be somewhere else for a week is no longer almost physically impossible for me.

Shun expensive takeaway coffee. In the 1990s I laughed at friends spending coffee at a 10x markup. Yet the first thing I did when the March 2020 lockdown ended was to head to an indie coffee place for a latte to go. Walking through London again with it felt like freedom. And this from someone who loves making my own coffee! Time was I’d have rather fainted in the street then spend larcenous amounts on a flat white. The latte factor won’t make you rich. But at the start it really does all add up.

Shun buying lunch at places like Pret. I used to wince at the cost. If I had to buy food when out and about I’d go to a supermarket and buy cut-priced pastries and a banana or similar. To be honest I still avoid £6 sandwiches if I’m on my own, but I no longer make a fuss if with my girlfriend or others. Part of my annoyance is I’m a decent cook and I’m amazed at what people will happily pay up for. But I don’t begrudge spending on great food. (Or smelly cooking that I don’t want in my flat. Fish and chips, I’m looking at you!)

Buy all my clothes at TK Maxx, in a charity shop, or in the sales. I still enjoy finding discounted fancy stuff at TK Maxx, but I’m not averse to sometimes spending money in a full-price shop these days. Between 18-30 I mostly I wore what I was given for Christmas and miscellaneous bargains, which I wore until they fell apart.

Buy wasting assets at all. Actually, aside from my aquarium habit – which since childhood has stood in for owning cars, smoking 40-a-day, and crack cocaine when it comes to my budget – you had to prise money out of my hands with a crowbar until my 40s. I’m still no huge fan of rampant consumerism, not least because everything you buy tends to bring extra faff in its wake. (Set-up issues, add-ons, upgrades, return hassles). But once you buy your own place, the ultra-frugal gig is mostly done for.

Get a coach to visit my family instead of the train. For a few years after Uni I’d always go to a bus terminal and trundle around the houses for hours to save on long distance journeys. Nowadays I’m a baller who pays through the nose for a seat on a crowded train with somebody’s luggage in my face.

I could go on (and on) but you get the idea.

Snowball’s gonna snowballI will always like a bargain and I add money to my SIPP each month. But I’m no longer in Defcon 3 savings mode.

True, if I still religiously did all the stuff above then it would mean a decent chunk of extra cash going into my portfolio.

But I guess that given where I’m at financially, it no longer feels it’s worth all the friction and going without.

Does this mean I was foolish to ever sweat the small stuff, as some writers like to suggest?

Emphatically not!

A snowball has to start somewhere and getting started is the hardest thing.

Moreover, the act of cutting back and developing a savings habit is its own reward. One that will pay off big time over a long life.

Those habits are still with me, after all. It’s really just that the sticker prices that have changed.

I’ll happily buy a latte today. But I’m still not driving a show-off car, for example.

Time waits for no oneI don’t care for maths that says frugality can wait until you can earn and save a lot more – even as late as your 50s.

Or that one day you’ll look back and see you could have gone for sushi more often in your 20s.

I don’t believe it works that way.

Sure, you’re 50, earning £X and chucking £Y into your pension.

But I’m already financial free by then, thanks to saving hard, investing, and compound interest.

And as I said, saving and investing is a habit.

Yes, some people get religion late – say 10-20 years away from their State Pension. A few might cut to the bone and still end up comfortably ahead.

But personally I’d bet every day of the week on the person who begins to put real money away by age 25 as the one more likely to end up financially free.

Of course there’s a balance. I didn’t always get it right myself.

Sometimes I was too tight.

It’s also true there are certain experiences that are best had when you’re young. But I’d argue most of these are at the cheaper end of the spectrum, anyway.

Backpacking across Asia staying in youth hostels and scrounging street food with your buddies?

That’s probably worth putting money aside for in your 20s as a one-off experience. It won’t be the same when you’re much older and more easily able to afford it. (Assuming you even have the freedom to go).

But a lavish weekend on a whim in New York, staying at the trendiest hotels, and populating your Instagram account with all your fine dining?

That’s a hard no from me if you’re under-40 and not a Murdoch heir.

Remember, young people are already rich. You don’t need to spend much to play to your strengths.

Ways to start your snowball rollingStruggling to get going? Here’s a few things we wrote earlier that might help:

Conjure big savings without sacrificing your quality of life.
How to stick to your savings goals.
Simple savings tips to help you on the way.
101 ways to save money.

Saving is far more important than investing for the first few years of your journey, and if I was whisked back to my late-20s I’d do almost everything the same again.

Even when your snowball isn’t growing much on its own, it’s fun that you can make it noticeably bigger just by chucking more money at it.

As we’ve discussed, eventually your portfolio takes on a life of its own. Then how it grows is more down to the markets than anything you can control. Your financial future is mostly about your investment returns, not your income or savings.

I’ll look at passing this crucial crossover point in a future post. (Subscribe to ensure you see it.)

The not-so-abominable snowballMy best advice would be to enjoy the journey to getting your own snowball going as best you can.

Unless you get a kickstart from an inheritance, a big bonus, or the Bank of Mum and Dad, then the first £10,000 – outside of any pseudo-compulsory workplace pension – is probably the hardest.

Not just in terms of the cash. Also in the mentality shift that says your money is not all there for spending.

The first £100,000 is no walk in the park either. Especially if you’re trying to save a house deposit at the same time.

But after £100,000 you start going places.

A return of 10% is £10,000 extra in a year gathered up by your snowball.

Of course sometimes you’ll do a lot worse, but some years far better too.

Median full-time earnings in the UK are £35,000. So a portfolio that bolts-on £10,000 in a year is a very valuable asset.

With ups and downs, it will only get better from there.

It’s hard to believe it when you start and everything is about cutting and saving, but it’s actually fun watching your portfolio grow.

Stay with this journey, and you’ll find the impulse to spend money on material tat falls away too – even as your ability to splash the cash grows out of all proportion.

That’s not to say you shouldn’t spend any money, especially once you’re on-track or have achieved your goals. None of us is taking anything with us when the clock runs out.

But just having a decent financial buffer at your back – and building the habit of living well whatever The Jones’ are doing – is pleasurable in its own right.

Getting there will probably be one of the biggest achievements of your life. Try to savour the journey!

And start your snowball rolling.

Literally: “Remember you must die.”

The post Scrimping and saving to start your snowball rolling appeared first on Monevator.

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What caught my eye this week.

When I finally secured a huge mortgage to buy my London flat in 2018, I confided to a friend that I was excited but also nervous, because for the first time in my life I could go bankrupt.

My friend thought that was crazy talk. He knew I had enough in liquid investments – albeit mostly in ISAs, which I didn’t want to touch – to pay off the mortgage outright if I had to.

Maybe I was just trying to get out of buying the next round?

But I was dead serious and it wasn’t even difficult to imagine a scenario in which I lost everything.

A once-in-a-hundred years recession. Stagflation. Interest rates soar and the housing market collapses. The stock market crumbles – and my active investing does worse. Perhaps I try to trade my way through the unprecedented chaos and blow up completely.

After a few years of this I get ill and find it hard to work.

I’m in negative equity. A 1930s-style crash has toasted my shares. I’m spending the last of my savings to keep the lights on.

One day I update my spreadsheet on a now-ancient laptop and it shows I have a negative net worth.

The sort of thing that has happened to people throughout history.

All too plausible.

For whom the bell tollsOf course I didn’t judge that my utter ruin was very likely. I’d hardly have bought with a mortgage if I thought bankruptcy was a 50/50 coin toss. Not even at 95/5 odds.

However I did see it was possible. Indeed I felt this new risk entering the fringes of my sense of self, like icy fingers reaching out from various potential futures. If I strained my imagination, I could almost see the hypothetical disaster lands in the distance – like Frodo and Sam seeing the smoke of Mordor from a sunny green hill, long before they get there.

This visceral reaction was not surprising to me. I’d always hated debt.

I’ve noted before that I’m pretty sure taking out the mortgage tilted my active investing. Particularly in 2018, when I was first getting used to having debt in the picture.

2022 felt much worse than previous bear markets, too. Previously I almost whistled through those.

When Liz Truss drove the ship straight into an iceberg – just as I was coming up to remortgage – I wasn’t whistling anymore.

There’d still be a long way to go, but I knew that any march towards one of my worst-case scenarios would start something like that.

“I wouldn’t risk it”In my experience most people don’t think this way.

Rather, they see things as pretty binary.

People will take out a mortgage because they have a job and they can meet the payments. This makes the mortgage ‘safe’.

Or they won’t take out a mortgage because they are worried about what would happen if they lost their job, and house prices fell. Mortgages are ‘too risky’.

Of course, savvy Monevator types like us know both things are true, right?

Well yes – but then consider all the debate we have whenever we discuss paying off the mortgage versus investing.

I’ve been called an idiot who shouldn’t dare to blog about money for having a big mortgage while I’m also investing. At the same time I’ve been chided for being wary of leveraged ETFs by none other than Monevator contributor Finumus.

Or you’ll discover that those same people criticising me for preserving my ISAs while running a mortgage also have pensions and a big mortgage themselves. They are just bucketing differently to me.

The thing is, everyone is right!

Risk does increase expected returns.

At the same time risk increases, well, risk.

And not only along a smooth spectrum either, where riskier things are more volatile but if you ignore the noise you’ll be okay.

Also in a very Old Testament sense, where risky things can kill you.

Risk in the momentMorgan Housel illustrated this brilliantly this week with a series of graphs. I won’t pinch them all (please read his excellent post) but here’s the gist:

The black line represents anything volatile. It could be the stock market, house prices, your income, your health. Perhaps a blend that represents how things are going for you right now.

The red lines are tolerance bands introduced by debt.

How much can you take?

It’s a notional concept – obviously if the stock market soared, say, that wouldn’t directly hurt someone just because they had a mortgage – so don’t take it literally.

Rather it shows how debt is narrowing your window of resilience.

Particularly if you have a lot of debt:

This is a great illustration for how I think about the interaction of debt and risk.

Go and read Morgan’s post for the full picture.

What doesn’t kill you can still kill youEven a lot of debt and tough times won’t kill you if things go your way.

And milder brushes with danger are soon forgotten.

It’s 2024 and Liz Truss is now just a writer of comic novels. (Or biographies or political treaties, I’m not sure which). As things turned out I was able to remortgage for 4.49%, not 8-9%. And my portfolio has healed.

But there are worlds where those things didn’t happen. They got worse than merely wobbly for me.

Meanwhile, my friend from the 2018 chat is now more nervous about money than he was back then.

What has always seemed to me a gung-ho attitude serves him well in business. He’s a far better entrepreneur than I could ever be.

But yoyo-ing towards the fringes of an eight-figure net worth and back as private markets boomed and bust over the past few years has taken its toll.

Interestingly, he paid off his mortgage a few years ago, when times were especially rosy for him.

Perhaps he was thinking about more than just my next round when we had that conversation, after all?

Have a great weekend.

From MonevatorThe decline and fall of a buy-to-let empire – Monevator

Correcting market failure – Monevator [Mogul members]

From the archive-ator: Adrift in the vastness on the way to FIRE – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

“I am moving – that is it”: tycoon speaks out about the end of non-dom tax status – Guardian

Slowdown in US jobs market revives rate cut talk – BBC

Five ways retirees are cashing in their pensions: latest FCA data – Which

£27bn Paddy Power owner Flutter to move its primary listing to New York – Independent

Young American’s wealth grew by 50% over the past four years – CNBC

Ireland reaps €700m Brexit bonanza from customs duties – Guardian

Brexit means Poles will be richer than Britons in five years, says Tusk – Telegraph via MSN

Buying a first home is even harder when you’re single – BBC

Products and servicesVirgin Money offers unique 10% interest switch incentive – Which

Santander joins rivals in increasing mortgage rates [Twice!] – This Is Money

Get £200 cashback with an Interactive Investor SIPP. New customers only. Minimum £15,000 account size. Terms apply – Interactive Investor

Britons cashing in on high gold prices by selling gold back to the Mint – This Is Money

Mortgage rate switches explained – Be Clever With Your Cash

Transfer your ISA to InvestEngine by 31 May and you could get up to £2,500 as a cashback bonus (T&Cs apply. Capital at risk) – InvestEngine

M&S versus Waitrose: how do the upmarket grocers compare? – Which

Fractional home ownership is taking off in the US – Wired

Netflix forces Basic customers to change subscription – Be Clever With Your Cash

Remote coastal homes for sale, in pictures – Guardian

Comment and opinionUK inflation: From too high to too low? [Search result] – FT

Gen Z aren’t lazy, they just know work doesn’t pay – CityAM

Whose tax is it anyway? [US taxes but interesting] – Of Dollars and Data

The fight or flight response and how to overcome it – Vanguard

Many young American women dream of being DINKS, not mothers – Fortune

Why is it so hard to talk about money? – Guardian

Queue with the peasants – Fortunes & Frictions

The pandemic’s aftermath is driving slower disinflation – S.A.H.M.

In my absence – Humble Dollar

The Quietly Saving blog is now 10-years old [Congrats!] – Quietly Saving

When to retire mini-specialMy perfect daze – Humble Dollar

Can you afford to retire early? [Search result] – FT

Want to enjoy retirement? Consider delaying it – Bloomberg via AP

Adventure before dementia – Can I Retire Yet

You’ll need to work longer but will be forced to retire earlier – Random Roger

Naughty corner: Active anticsBerkshire after Buffett: can any stockpicker follow the Oracle? [Free to read] – FT

“Your fund is under attack” warns Blackrock as activist targets discounts – Bloomberg via P&I

Beware of benchmarks distorting your process – Klement on Investing

The curious case of catalysts – Behavioural Investment

Kindle book bargainsThe Great Post Office Scandal by Nick Wallis – £0.99 on Kindle

Number Go Up by Zeke Faux – £0.99 on Kindle

Elon Musk by Ashlee Vance – £0.99 on Kindle

Chums: How a Tiny Caste of Oxford Tories Took Over the UK by Simon Kuper – £2.89 on Kindle

Environmental factorsWorkers at the UK’s last coal-fired plant prepare to say goodbye – BBC

Microsoft signs deal to invest $10bn in renewable energy capacity for data centres – CNBC

Animals in the Galapagos live amid mounds of plastic waste… – Guardian

…could bacteria-infused self-destructing plastic help? – BBC

Let your garden waste rot in the soil – Guardian

London commercial property mini-specialThe (almost) radical rebirth of King’s Cross – Guardian

Canary Wharf sees nearly £1.2bn slashed from property values – Reuters via Business Times

US spending on London commercial real estate rebounds to eight-year high – Reuters via LSE

Strongest rent expectations for prime London office rents since Q1 2016 – FMJ

Off our beatThe man compiling the UK’s rail-based walking network – Guardian

Beachcomber finally finds ‘holy grail’ Lego piece from spill 26 years ago – Independent

Seven rules for happiness – Scott Young [h/t Abnormal Returns]

Airpods are really a subscription business – Sherwood

Brooklyn’s bard: Paul Auster’s fiction captured a generation [RIP] – Guardian

Britain is not a sicknote nation, but a sick one – The Conversation

Wounded orangutan seen using plant as medicine – BBC

And finally…“Ask the questions you need to ask, admit without apology what you don’t understand, and do the work to learn what you need to learn as quickly as you can.”
– Bob Iger, The Ride of a Lifetime

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The post Weekend reading: The risk of ruin appeared first on Monevator.

Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future

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The UK stock market has been on the ropes for ages. Clambering to its feet as the referee counts “six! seven!”…

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post Correcting market failure [Members] appeared first on Monevator.

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Apparently articles about the fag-end of my buy-to-let (BTL) portfolio are very popular. I don’t really understand why. Voyeurism, maybe?

Well, if writing them puts even one potential landlord off from getting into BTL then I’m doing them a service.

If you’re new, you might enjoy my first article in this series, about my formative days as a landlord in the 1990s. Or try the second about my one remaining property in London.

The only other buy-to-let I have left – hopefully, the third is currently sold subject to contract – is a Victorian terrace in a pointless London commuter dormitory town.

It’s a two-up / two-down with a small garden, and, enticingly for this particular street, it has an upstairs’ bathroom.

Finumus’ follyI bought this house in 2001, for about £60,000. The first tenant paid me about £450 per month rent. So did the second, who moved in during 2004.

That gave me a gross starting yield of about:

£450*12 = £5,400 = 9%

I took out an 85% mortgage at around 6%, set to track 75bps over the bank base rate for 25 years.

My managing agent also charged me about 10%, leaving me with £4,860 net income annually.

That was set against my annual cost mortgage costs of…

£60,0000.856% = £3,060

… so after the mortgage I was left with…

£4,860 – £3,060 = £1,800

…of cash leftover every year to go towards maintenance and repairs and so on, before I’d hit my cashflow breakeven point.

That was was all I needed really, since inflation would increase the rent and capital value over time.

And that’s where the profit comes from – in theory.

Rent reductionThe tenant from 2004 is still there. Which is why – spoiler alert – I’ve not sold the place.

Her initially fixed-term tenancy turned into a ‘periodic rolling tenancy’ after six months. And the rent, apart from one change in 2008, stayed the same until 2019.

That one change in 2008 was a reduction. The tenant lost her job and couldn’t afford the rent on benefits, so I lowered the rent.

Not by much mind, to £420 pm. It stayed there until 2019.

So no rent increase for 15 years.

Now on one level you might think that failing to raise the rent for 15 years is a bit of a landlording ‘skills issue’.

I’m aware that some landlords increase the rent by the maximum they think they can get away with every year. I am not one of those landlords, or at least I’m conditionally not one of those landlords.

The conditions are:

I’m not making a cash-flow loss
You pay your rent on time

My tenant has paid the rent, on time, in full, every month for 20 years. So I’m not going to do anything to upset such a tenant, while I can afford to.

I’ve experienced enough of the opposite variety – the tenant that pays no rent at all – thank you very much.

Near-zero gravityEven though I was completely negligent in raising the rent for a decade and a half, it didn’t really matter from a cashflow perspective. Because in 2008, the Bank of England cut its base rate to near-zero. And it pretty much left them there until the post-Covid inflation wave.

With a base+75 bps tracker, I was paying between only £600-700 per annum on the mortgage for more than a decade.

Yes, like, £50 a month.

There really was no need to raise the rent, from £420 per month when the mortgage was only costing me fifty quid a month, was there?

Well…

Costs and consequencesYou might think generating some £300 p.m. of cashflow would make this property a compelling investment.

Not so much.

Old housing stock requires a lot of maintenance. There was always something, such as:

Garden fence blown down in storm (about once a year)
Garden shed collapses due to rot from the neighbours dumping plant material behind it
Replace all windows with UPVC double glazing (because she can’t afford to heat the place in winter)
Get a new front door because the old one is not secure
Get a new boiler because the old one died
Replace the electricity consumer unit because it’s not compliant
Replace the downstairs flooring because of a flood caused by a plumping leak
Eventually replace washing machines, fridges, and so on

Also – you hear that dripping noise?

It’s surely only the sound of money steadily leaving my bank account, isn’t it?

Ahem.

The mould problemThis property has a small, downstairs ‘lean-to’ utility room and toilet out the back of the kitchen – along with the proper bathroom upstairs.

And the downstairs loo often suffered from mould on the walls.

I would find this out from my agent’s periodic inspection report, not because the tenant complained about it. I’d then immediately instruct the agent to send someone around to sort it out. I’m not the sort of landlord who wants to be letting sub-standard mouldy accommodation. This is far from my vibe.

Whomever the agent instructed to sort it out would do something – I’m not sure what, but it cost me a couple of hundred quid anyway – to ‘sort it out’.

But inevitably on the next inspection report the mould would be back. And we’d go through the same cycle again.

This is all pretty normal. To be expected. Not a problem.

However the costs increased steadily over time though – as you might expect, I guess – from £1-2,000 per annum at the start to a £3,000 run rate now.

Some years it’s a bit more. Some a bit less.

Economies of scaleCompounding this problem, the original letting agent – where I had known the principal – got sold to a larger group. Then that group got sold to an even larger group.

In theory this should have brought economies of scale. But in practice, you can probably guess what happened.

Service quality declined and my costs went up.

Although the core management fee remained the same, lots of other costs started appearing. Periodic inspections that used to be included in the management fee got an explicit charge. And the costs of their ‘independent’ contractors went up by a lot.

Section 24Since we’re going chronologically, the government also introduced the Section 24 taxation treatment of interest expenses in 2017, staged over four years.

This made mortgage interest not fully tax-deductible. Essentially it meant that one now got taxed on turnover, not profit.

Since we didn’t really make a profit on this property anyway, we had to start paying a bit of tax on profits that we’d not made.

But with interest rates still very low, this didn’t – yet – make too much difference.

Banning tenant feesThe straw that finally broke the ‘not increasing the rent’ back was the banning of tenant fees in 2019.

These fees include things like reservation fees, credit reference fees, right-to-rent checks, and inventory fees. The sort of thing that, historically, landlords and agents had tried to stick on tenants at the beginning of a tenancy.

Now you might think these sorts of fees would be neither my nor my tenant’s problem, on account of them having been there for 15 years?

I’d would agree with you. My agent though, not so much.

It decided to replace this revenue by applying a fixed surcharge on every tenancyof £15 per month (+ VAT).

This might not be a big deal if you’re letting somewhere for £2,000 a month. But with our £420 per month, that’s 4.2% of the rent.

I wasn’t happy about this. I even ended up having a chat with the CEO of the new-new merged agent about it. His point was, not completely unreasonably, that I was charging a massively below market rent anyway. There was no reason why I couldn’t just put it up by 5%.

With Section 24 also biting, I was set to lose about £500 to £1,000 a year on this property.

This is not much for a temporary bump in the cost of doing business, maybe. But the other problem was that house prices had stopped going up. In the absence of capital growth, I need the property to at least wash its face.

The other option, of course, is just evicting the tenant and selling it.

But was I really going to evict a single mother, with two kids in school – a reliable tenant, who has paid their rent on time every month for decades?

Honestly, I’d rather not.

Such are the unintended consequences of government policies to ‘crack down’ on greedy landlords.

Raising the rentAnd so for the first time in 15 years, and with an immense amount of reluctance, I put the rent up.

Only by 5% mind. The agent feels you can’t really just double the rent to the market rent. You need to do it slowly.

The wisdom of just putting the rent up a little bit every year was starting to make a lot more sense now. In anticipation of interest rates rising at some point – and having crossed the Rubicon – I resolved to increase the rent by 5% a year until we got up to the market level. (The tenant was now in employment).

Since I’d just put her rent up, I decided to make a concerted effort to sort out the mould problem. And as I was between jobs, I took the time to go over there myself to take a look at it.

I unblocked the drain just outside the toilet in question. I removed a five-foot tree that was growing in the silted-up gutter pipe. Next I did a bit of repointing around the affected area. Then I replaced the tiles on the lean-to roof above. Lastly, on the internal wall, I stripped back all of the paint, all of the blown plaster, and re-plastered and repainted with the most toxic and reassuringly expensive anti-mould paint I could find.

It all took about a week of solid work. But I was quite pleased with the result, optimistic I’d sorted the issue out – at least for a while.

Of course on the next inspection the mould was back.

Show me the moneyFinally, the post-Covid inflation arrives and I’m putting the rent up by 5% every year. Which for a while is actually a real-terms rent cut.1

But this is fine, just so long as interest rates don’t go up…

…which of course, they duly do:

From 2022 then, this investment has been making me a loss – even after I increased the rent.

And while Section 24 hasn’t helped, I still would have been in the red anyway, on account of my costs and interest rates climbing:

Thankfully property is not my pension.

Shrug emojiThe zero net cashflow, the tax implications, the capital value of the house itself even, are not particularly large numbers in the overall balance sheet of the Finumus household.

It’s not causing me any great financial distress anyway. Which is fortunate for my tenant, I guess.

It does leave me feeling that providing free housing is not an optimal use of my capital. But here we are.

If things stay this way – they can’t, for reasons I’ll get to below – it would take about another five years of compounding 5% rent increases to get back to this house not losing money. (For what it’s worth, without S24 it would only be two years).

But there are a couple of other worries on the horizon.

The first is that my mortgage comes to the end of its term the year after next. Something will need to be done, likely something fairly binary. Either just paying it off or leveraging it up to the max loan-to-value.

I’m not sure which I should do. At some point I might need capital to fill ISAs. Leveraging up is a way of ensuring I have the capital to hand without evicting the tenant.

Secondly, there are quite a few policy risks on the horizon that could make things even worse.

Incoming!The (hopefully) incoming Labour government will doubtless continue the trend set by the Tories of implementing economically-illiterate anti-landlord – and therefore anti-tenant – policies such as:

Rent controls: in which case I’ll need to raise the rent to market levels immediately.
Reduced repossession rights: in which case I’d likely have to evict the tenant and sell it.
Possibly something on energy performance certificates (EPCs) or similar.
Slightly orthogonally: Labour could re-introduce the Pension Lifetime Allowance (LTA). This would cause me to reduce my pension contributions and raise my marginal tax rate, worsening my Section 24 problem. Though it would also see me retire earlier – which might fix my S24 problem.

None of which will help my tenant, mind you. But people respond to incentives, regardless of how much politicians like to pretend otherwise.

Cashing upI’ve only made a few grand from annual cashflow on this investment so far – and even that will soon be wiped out.

But how much capital gain have I made?

Zoopla reckons the house is now worth £210,000. But it has not seen the mould. So let’s conservatively assume the house is worth £180,000 after selling costs.

This would imply I’ve made 200% in 24 years. A pretty underwhelming CAGR of 4.9%.

However £60,000 in 2001 is £109,000 in today’s money. Hence in real terms – that is, after-inflation – the CAGR is only 2.2%.

Oh, we forgot the tax!

If I sold it I’d have to pay 28% capital gains tax.

That’s £120,000 * 28% = £33,600 tax

So I’d enjoy a post-tax gain of:

£120,000 – £33, 600 = £86,6000

(Sadly we have to pay CGT on nominal gains, not real terms ones.)

This all works out at a post tax, real-terms CAGR of…drum roll… 1.27%.

Now you see why everyone thinks BTL is such a money spinner.

As an aside, these sums also suggests that – based on the Zoopla valuation estimate – the current gross yield is only:

£6,432 / £210,000 = 3.06%

This at a time when 30-year gilts boast a 4.9% yield-to-maturity.

“MSCI are on the line about the mould again!”Okay, you could argue that because I used leverage – and the tenant paid my mortgage interest for me – the actual capital invested is the deposit, not the purchase prices.

The deposit was:

15% * £60,000 = £9,000

In reality there are a few more costs at procurement time – legal fees, new kitchen and so on. Let’s call those £6,000.

So £15,000 capital all-in.

This certainly makes the CAGR look better. £15,000 in 2001 is £27,000 in today’s money. My £86,000 gain from £27,000 is a 6.4% real terms post-tax gain.

Not bad. But not that great either, I’d argue.

It’s actually about the same as the MSCI World index in GBP terms. And the MSCI World never calls to complain about the mould.

Certainly if I had the choice again in 2001 to do this or fill the ISAs (or was it still PEPs then?) it’s not obvious BTL would have been the trade. Especially given the hassle. And this during a time when house prices were booming, apparently.

What’s more I’m not even sure whether working on the basis of the deposit is an entirely fair comparison.

Leverage increases risks, and I could have ended up underwater. Not something that would have happened in my ISA. [Well… – Editor, with a wry smile. But no, not underwater…]

Going forward, it’s hard to imagine house prices are going to rise in the next quarter of a century like they did in the last.

So when people ask me what I think about BTL – which weirdly, they do quite a lot – I just tell them not to bother.

Unless perhaps you have a thing for mould.

Follow Finumus on Twitter and read his other articles for Monevator.

That is, after-inflation.

The post The decline and fall of a buy-to-let empire appeared first on Monevator.

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What caught my eye this week.

Every morning at 9.30am in New York, a bell is rung at the famous Stock Exchange to signal the start of trading.

It happens again with a closing bell at 4.30pm – repeating a routine that’s by watched by almost nobody in the actual business of investing.

Okay, a few hundred floor traders are prompted to think about which route they’ll take home. A giddy CEO from a biotech wonders if they chose a diverse enough team to join them on the platform for the bell-ringing ‘ceremony’ they coughed up for. A retired dentist in Florida watching CNBC growls as yet another day’s viewing has not revealed what sank her 3M stock.

Elsewhere, data whips around the globe. A high frequency hedge fund manager visiting a server farm coughs politely and suggests her cabling could be at bit closer to the wall. A thousand crypto bros ply their trades, day and night. And a fund manager in Tokyo curses himself for snoozing through his alarm and missing the US close.

Major currencies and bonds can now be traded all day and night from Monday to Friday.

But US equities can only be traded out-of-hours in a half-arsed fashion – via wonderfully-named ‘dark pools’ if you’re an institution, or even the internal markets of certain US retail platforms like Robinhood.

And that isn’t good enough for some people.

Be a part of it24 Exchange – a startup US trading venue backed by hedge fund manager Steven Cohen – has been looking to take trading 24-hours for years.

Its latest submission is with the regulators. Meanwhile the New York Stock Exchange is polling interested parties about how non-stop weekday trading could work.

The Financial Times notes the survey is being conducted by the New York Exchange’s data analytics team, rather than its management. It seems like a fact-finding foray at this point.

And one can certainly imagine all sorts of technical obstacles – from staffing to liquidity to compliance – that would challenge a stock market rolling along for 120 hours on the trot.

On the other hand, doesn’t it feel sort of odd that we still have set market hours?

The whole show is run by restless machines these days anyway, while cryptocurrencies have given the younger human participants a taste for always-on trading.

Google news stories about the New York poll and you’ll find most of the coverage is from the crypto sites. Not a coincidence.

There’s even an intellectual argument for 24/7 trading.

A stock’s price is supposed to reflect all known information about that company and its future cashflows.

But if an earthquake happens in San Francisco on Monday evening, say, a US company’s price is basically a stab in the dark until Tuesday morning.

Investors who want to react to the news cannot do so – except via overseas proxies, the futures market, or those alternative trading venues I mentioned. All of which have their own issues.

It’s up to you New York, New YorkWhether reducing these ‘blind spots’ in pricing overnight – and even, conceivably, at weekends – would produce more accurate prices overall is an open question.

Already out-of-hours markets are bedevilled with illiquidity and glitchy pricing.

Long-time commentator Felix Salmon warns “off-hours markets can be treacherous places for investors” and reckons any 24-hour equity market would be a ‘casino’.

Writing on Axios, Salmon also notes that institutions already do most of their share trading around the market’s open and close, when liquidity is greatest.

So most of them wouldn’t want anything to do with buying Tesla shares at 1am on a Wednesday.

That would make official nighttime trading the domain of retail punters – and of those who’d prey on them.

Which probably wouldn’t end well for the punters.

“As any casino will tell you, risky gambles are more popular at night,” Salmon concludes.

Contrarily, some European insiders are discussing actually reducing trading hours on the continent. European trading hours are currently two hours longer than the six-and-a-half hours seen in the US.

The aim would be to shore up liquidity, rather than spreading it even thinner over a longer trading window.

These little-town bluesWhere any of this would leave the poor old London Stock Exchange is anyone’s guess.

For many decades London profited from being in a convenient timezone between Asia and the US continent – as well from its ultra-close proximity to Europe.

Would London have more or less relevance in an always-on trading world?

Or are we anyway on a path to one exchange – in New York, which is already home to around two-thirds of global listed equities by value?

Who knows, but in the meantime the London market’s struggles continue.

This week we saw DarkTrace, Tyman, and Hipgnosis agree to bids from overseas acquirers. The £2bn drug maker Invidior also confirmed previously mooted plans to shift its primary listing to the US.

All in a day’s work for the shrinking LSE.

AJ Bells’ investment director Russ Mould warns the volume of firms being snapped up means “the UK market is experiencing death by a thousand cuts.”

Still, it’s an opportunity to profit if you’re an active investor. At least it is if you can figure out what’s truly cheap and/or potentially attractive, versus what’s a conked-out value trap. (Harder than it looks.)

Needless to say, passive investors owning global trackers can ignore all this noise with a wry shake of their heads – and then continue to go about their business of compounding their long-term gains, regardless of how and when the underlying shares are traded!

Have a great weekend.

From MonevatorFancy a short duration index-linked gilt fund to guard against inflation? – Monevator

From the archive-ator: How to save money on travel – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Homeowner pain as major banks hike mortgage rates – BBC

Charles Schwab eyes UK rollout for US-domiciled ETFs [Search result] – FT

UK rejects talks on EU-wide youth mobility scheme – Yahoo

IG Group faces criticism after clients hit by refunding errors – Shares

Pensioners’ fears over paying income tax – BBC

Paragon Bank reveals the top ten buy-to-let hotspots – This Is Money

London leaseholders told they face costs of up to £99,000 each – BBC

Many UK adults unwilling to travel to Europe under new entry/exit scheme – Euronews

KPMG UK cancels foreign graduate job offers after tighter visa rules… [Search result] – FT

…rules that campaigners say penalises couples – BBC

Products and servicesThe pros and cons of Monzo’s new paid-for accounts – Be Clever With Your Cash

Can long-term mortgages help solve the UK’s housing crisis? [Search result] – FT

Sign-up to Trading 212 via our affiliate link to claim free fractional shares worth up to £100. T&Cs apply – Trading 212

Blackrock is trialling a product to deliver paycheque-like income from a retirement portfolio [US but relevant] – CNBC

How does Co-Op Bank’s new 7% regular saver account compare? – Which

Outfox The Market’s new energy deal 13% cheaper than Ofgem price cap – This Is Money

Open an account with low-cost platform InvestEngine via our link and you could get up to £2,500 as a cashback bonus (T&Cs apply. Capital at risk) – InvestEngine

Aviva launches free pension tracing service – Which

Six questions to ask before taking out private medical insurance – Which

One year with a Tesla Model Y – Mr Money Mustache

Urban flats for sale, in pictures – Guardian

Comment and opinionJoin the investor class as soon as you can – Downtown Josh Brown

Is it too late to invest in the gold rush? [Search result] – FT

All about the quest – Humble Dollar

Are you an investing historian or a futurist? – Morningstar

Risk seeking versus risk mitigating – Collaborative Fund

Large cap US growth dominance is mostly a multiple expansion story – Morningstar

Why do people make ‘bad’ financial decisions? – Of Dollars and Data

Volatility is a necessary evil in the stock market – A Wealth of Common Sense

Should a retiree keep paying life insurance premiums? [US but relevant] – Oblivious Investor

Diversification is a negatively-priced lunch [Podcast, nerdy] – Flirting With Models

Naughty corner: Active anticsEven ‘forever’ stocks have a shelf life – Micro Cap Club

Accounting numbers and cash have to add up…eventually – Capital Gains

Hedge funds have done better than we thought, but there’s catches – Alpha Architect

Retail investors trade riskier ETFs too much – Klement on Investing

How’s the private equity winter looking? [Search result] – FT

Risk parity has underperformed for years – Bloomberg via F.A.

Kindle book bargainsHow to Read Numbers by Tom Chivers –£0.99 on Kindle

The Dip: Knowing When to Quit by Seth Godin – £0.99 on Kindle

The Pathless Life by Paul Millerd – £0.99 on Kindle

The Deficit Myth by Stephanie Kelton – £0.99 on Kindle

Environmental factorsConservation slows biodiversity loss, scientists say – BBC

High prices blamed for heat pump installations running behind target – This Is Money

What the heck is seaweed mining? – Hakai

‘Huge disappointment’ as UK delays bottle deposit plan and excludes glass – Guardian

What happens after your country runs on 99% renewable electricity? – The Verge

Birdsong no longer signals the onset of spring in Cambridge – Guardian

Robot overlord roundupDaniel Dennett: “Civilisation is more fragile than we realised” – BBC

AI is the end of the web as we know it – The Atlantic [h/t Abnormal Returns]

Technological risks are not the end of the world – Science

Looking for AI use cases – Benedict Evans

‘Miss AI’ is billed as a leap forward, but it feels like a step backwards – Guardian

Age appropriate mini-specialAges of the people we marry [Interactive] – Flowing Data [h/t Abnormal Returns]

More life advice from a super-smart septuagenarian – Kevin Kelly

Dollar cost average into your health – A Teachable Moment

The surprising data behind super-centenarians [Search result] – FT

Retirees are racing against the clock – Humble Dollar

Man, 110, has simple tips for a long life – Today

Off our beatHyperphantasia and the quest to understand vivid imaginations – Guardian

Discipline is underrated – Raptitude

The ‘holiday paradox’: how to slow down time – Life After The Daily Grind

No one buys books – The Elysian

The Silicon Valley gold rush started with… a gold rush – Asterisk

Who should pay when space junk falls through your ceiling? – NPR

“You can even kill them”: the UN and the rise of Singapore – Global Developments

How $61bn in US military aid to Ukraine will flow through the US economy – Yahoo Finance

The 80% solution – We’re Gonna Get Those Bastards

Countries with the largest happiness gains since 2010 [Infographic] – Visual Capitalist

And finally…“Philosophy and theology give you the perfect background for investing. To succeed at investing, you need a philosophy. Then you’ve got to pray like hell.”
– Shelby Collum Davis, The Davis Dynasty

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: The city that never sleeps mulls midnight share trading appeared first on Monevator.

The Pathless Path: Imagining a New Story For Work & Life

The Dip: A Little Book That Teaches You When to Quit (and When to Stick)

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A new-ish short duration index-linked gilt fund from iShares gives UK investors an easy way to hedge against inflation – without taking on huge interest rate risk.

Now I realise that sounded like “schmargle bargle bumpty tumpty” to some readers.

So today I’ll explain as succinctly as I can why this new iShares fund should be good news for everyday UK investors like us.

What’s that you say?

‘Should be’ good news?

Ahem – yes.

Alas there’s a catch. After a Monevator reader comment got us and others excited about this new fund, it transpires the reason we hadn’t heard of it seems to be because it’s institutional-only.

Which means peasants like us can’t get at it.

I say ‘seems to be’ because I haven’t been able to confirm this yet.

Certainly I can’t buy it on any of my platforms. Nor can Monevator contributor Finumus.

What’s more, I asked two brokers early last week whether they could make the fund available – including a giant famed for its supposedly-excellent service – and I’ve yet to hear a definitive answer back.

The signs are not good though.

Either way, I still think it’s worth us sticking our grubby noses up against the glass and gawping at this new model: the iShares Up to 10 Years Index Linked Gilt Index Fund (UK).

That’s because in our lusting over it, we can get a refresher as to why index-linked gilts can be tricky investments, despite their obvious appeal.

Want to go deeper after today’s drive-by? Then click the links throughout to learn more about inflation and index-linked gilts. You’ll surely impress your co-workers, classmates, and Tinder dates.

See the iShares factsheet for all the pernickety details.

What is duration?We’ll start with a necessary but quick recap – the meaning of short, long, and duration in bond jargon.

In this context, duration refers to how much a bond price is expected to move as interest rates move.

High duration bonds (/bond funds) will tend to fall a lot in price when interest rates rise – and vice versa.
Low duration bonds (/bond funds) mostly shrug and say ‘meh’.

This may appear to be another example of the investing industry taking a perfectly sensible word – duration – and then using it to mean something only its disciples can understand.

However there is an underlying connection here, too.

Because of the mechanics of how bond income is paid out before the capital value of the bond is finally returned, there’s a close correlation between a bond’s stated duration and the length of time the bond has left to run before it matures.

Bonds set to mature ‘shortly’ – typically in the next few years – have a lower duration than bonds with many years left on the clock.

The same applies to bond funds. If they own a lot of short-dated bonds – those maturing soon-ish – they will have a lower duration than funds stuffed with longer-dated bonds.

By the numbersDuration is expressed in the literature as a number.

For example if a bond’s duration number is 11 then it:

Loses approximately 11% of its market value for every 1% rise in its yield1
Gains approximately 11% for every 1% fall in its yield

Again, read our article on duration for a much deeper explanation.

Why is duration so important with index linkers?All bonds are affected by changes in interest rates. Hence all bonds have a duration metric. They will perform differently in different interest rate movement scenarios.

However index-linked bonds are extra complicated.

That’s because the very reason you’d own linkers is to guard your portfolio against unexpected inflation.

And what happens when we see unexpected inflation?

That’s right, interest rates tend to rise in response. As we all have visceral experience of in recent years.

All bonds with high duration figures will suffer when interest rates rise a lot.

But with normal ‘vanilla’ bonds you might shrug and say, “them’s the breaks, I bought my bonds to guard against low growth / deflationary environments. I can’t expect them to do well when inflation takes off”.

But with linkers you’ll likely feel gutted.

That’s because you bought linkers to hedge your portfolio against unexpectedly high inflation. You got high inflation – and yet your (longer duration) linkers fell in price anyway.

It’s a rip-off! Where’s Martin Lewis when you need him?

Note though you are still getting your inflation protection. It’ll be there in the price return, as per the mechanics of how the linkers’ coupons and repayment amounts are adjusted higher with inflation.

The trouble is with a high duration linker, the impact of rising rates can overwhelm the uprating from inflation, because inflation is leading investors to demand higher yields from bonds, driving down prices.

2022 and all thatIt’s easier to appreciate how this can happen now we’ve lived through a definitive example.

The problem we faced in the run-up to the bond rout of 2022 was that real interest rates were very low.

The ‘real yield’ (that is, what was expected after inflation) on some UK linkers was minus 2-3% at one stage.

This meant that even if you held such linkers until they matured, you could expect to earn a negative annual return of minus 2-3%!

That’s dreadful enough. But you might be thinking: “Huh? My longer duration index-linked gilts were down 50% at one point in 2022. That’s much more than a 2-3% decline!”

No doubt. What happened was instead of taking your negative 2-3% lumps for two decades, you got most of them in one whack as rates rose far faster than anyone expected – and bond prices duly sank.

This brought forward the baked-in pain. (And left index-linked gilts on positive real yields again, incidentally.)

Why short duration index-linked gilts?Exactly why index-linked gilts were ever trading at negative real yields is a question for economists, academics, and fans of the stage illusionist Derren Brown.

I know the conventional explanation, obviously.

Talk to a pension fund manager and she might tell you she had to own index-linked gilts at almost any price, because it best matched the liabilities of her beneficiaries.

Also, maybe it wasn’t actually a given that either interest rates or inflation would go higher in the foreseeable future? Or at least not as savagely as we saw over the past couple of years. They’d stayed ultra-low for a decade after all, confounding many investors’ expectations.

Personally though, I don’t think there was much excuse for buying linkers on negative real yields of -3%.

Yes interest rates were near-zero for years. But this hardly seemed likely to last – uninterrupted – forever.

Hence to me index-linked gilts seemed like a time bomb waiting to explode.

This isn’t hindsight speaking. We alerted Monevator readers about this risk many times, most notably in late 2016. We adjusted our model portfolio allocation accordingly, too.

Thank goodness in retrospect. And yet who knows? Maybe everyone was right in that almost anything could have happened, in other universes?

But then time rolled on. The dice fell as they did in this universe, and we got a crash that perhaps wasn’t quite ordained, but which did seem likely to happen, sooner or later.

DIY dilemmas Anyway, pension funds and other institutions faced difficult choices in the near-zero interest rate era.

But private investors had an extra problem if they wanted to reduce interest rate risk while also owning index-linked gilts.

That’s because the best way to reduce interest rate risk – while still getting some lovely inflation hedging – from linkers is to own the shorter duration ones.

But not many private investors had the knowledge or nerve to buy individual short duration index-linked gilts in the market.

And unfortunately the only retail-friendly linker funds available were high duration.

For example, from memory the iShares core index linker ETF – ticker: INXG – peaked at a duration in the mid-20s! Talk about an accident waiting to happen.

INXG’s duration has come down a lot – to under 16 – after the big decline over the past two years. It’s still high though, when you remember what it implies about how the price will move with a 1% move in its yield.

With scant UK alternatives, for our Slow & Steady model portfolio my co-blogger The Accumulator chose to reduce duration by taking its bond allocation global.

He plumped for a currency-hedged, shorter duration fund that owns inflation-linked foreign government bonds.

This successfully reduced the S&S’s exposure to interest rate risk, thanks to the new fund’s lower duration.

But it did also mean this part of the portfolio was now hedging more against global inflation, rather than UK inflation. A reasonable proxy, but not ideal.

The iShares Up to 10 Years Index-Linked Gilt Index FundInstead we could opt for this new iShares fund next time, if we’re ever faced with the same challenge. (If we can buy it, of course…)

Launched in June 2023, the iShares Up to 10 Years Index-Linked Gilt Index Fund already has more than £700m to its name.

The ongoing charge figure (OCF) is just 0.13%. But the minimum investment size is £100,000. That might seem a dealbreaker – or even proof it’s for institutions only – except that sometimes factsheets quote high minimums but the figures turn out not to apply to retail investors. (I still have hope.)

Here’s the skinny on this short duration index-linked gilt fund, as of my writing:

Source: iShares

Don’t be concerned at the fund’s low number of holdings. Not from a riskiness perspective, anyway.

As the UK government stands behind all gilts, they are all assumed to have the same credit risk – extremely near-zero, because it’s assumed the UK government will never default. Hence you don’t need to diversify gilts like you would individual corporate bonds or equities.

The fund is very new as I say, so we don’t have long-term data. But iShares is a top-tier fund house and we can assume this fund will behave just as you’d expect shorter-term index-linked gilts to act, minus a small drag from fees.

One of these funds is not like the other oneiShares awards its new linker fund a ‘3’ risk level. The risk scale runs from one to seven, where low is less risky.

Its conventional index-linked fund2 – which has a duration of over 18 – has a risk level of ‘6’.

Six is bigger than three. And so again, I don’t see why the short duration index-linked gilt fund shouldn’t be available to common folk like us.

The following graph shows how this lower risk playing out in practice.

The blue line charts the return of the iShares shorter duration linker fund since its launch in June. In yellow we have iShares’ standard longer-duration index-linked fund. Both funds are accumulation class

Note which one gave you the smoother (less risky) ride:

Source: Hargreaves Lansdown

Between October and December 2023, hopes rose that the rapid cooling of inflation would soon lead to much lower interest rates. But as 2024 has developed, markets have tempered their expectations due to somewhat sticky core inflation, especially in the US.

The graph shows how the longer duration linker fund reflects these changes in sentiment. Its value moves roughly 15% between the October 2023 trough to peak rate cut optimism in December. Its returns over this period are not driven much by inflation. Rather the move reflects changing interest rates.

In contrast, the iShares ‘Up To 10 Years’ linker fund is a sedate affair. Its much lower duration means it’s far less affected by changing interest rates.

Note you’re not getting something for nothing here. The real yields on shorter index-linked gilts are much lower than on longer-dated issues – less than 0.25% for linkers with less than five years to run versus a real yield of over 1% if you go 20 years out, according to TradeWeb.

It’s not that one fund is ‘better’ per se than the other fund.

It’s that they are doing different things.

What’s the alternative?Now we know why owning a short duration index-linked gilt fund could be appealing. But what can we do instead of buying it – since for now it seems we can’t?

Create your own short duration index-linked gilt fund via a linker ladder. Basically DIY your fund but only from shorter duration index-linked gilts up to ten years. We’ve written about how to create a linker ladder [for members]. You can expect a lower yield than with a longer-duration ladder, but less volatility.

Buy a longer duration index-linked gilt fund anyway. As I’ve said, the duration on the standard iShares’ ETF (ticker: INXG) has come down to just below 16. That’s still pretty wild if interest rates move. But (a) it’s lower than it was and (b) interest rates seem more likely to come down than to rise, so it could work in your favour as lower rates would push its price up. Crucially, real yields for index-linked gilts are positive right along the curve now. You’re not being charged a negative return for inflation protection like in 2021.

Invest in a lower duration global inflation linked bond fund that’s hedged back to UK pounds. As noted, this is what The Accumulator did with the Slow & Steady portfolio. Global inflation should roughly proxy UK inflation – though over the short-term especially they could diverge. Hedging protects you from currency risk and lowers volatility, but note currency moves are also a mechanism that corrects for inflation differentials. Which means there are scenarios where you might wish you owned such bonds unhedged.

Buy some US Treasury Inflation Protected Securities. I own a slug of the iShares US TIPS ETF (ticker: ITPS). It’s cheap and the duration is just under 7. My bond allocation is modest and only really there for some peace of mind in a crisis, so I’m happy with (unhedged) US dollar exposure. Often – but not always – the US dollar does well when markets crash.

Increase your cash allocation. I believe cash is the king of asset classes. However it tends to get a bad rap in investment circles. You won’t retire early or rich if you only hold only cash. Strategically though, a chunky allocation to cash provides many benefits, from dampening volatility to dry powder for investing into sexier stuff during a bear market. You can think of cash as a short-term bond with a duration of zero. Allocating to cash therefore pulls down your overall average fixed income duration. Cash earning a decent interest rate can also help you with (imperfect) inflation hedging. You noticed how interest rates rose as inflation spiked over the past two years? Not by enough to match the worst of it, but enough to keep the lights on. (Obviously I’m talking about milder inflationary bursts here, not actual hyperinflation.)

This short duration linker fund should be available to usWhen you consider all the bonkers stuff you can buy on your broker’s platform, there is no good reason for this particular fund not to be available to private investors.

I mean, two years ago ‘bonkers stuff’ included a long duration index-linked ETF from iShares that at that time was primed to crash 50% in a year when interest rates rose.

Such interest rate risk is massively lower with iShares’ short duration index-linked gilt fund. True we can also expect a lower return – because its holdings are on lower real yields – but that isn’t a risk, it’s pricing.

Who knows. Perhaps I’ll press ‘Publish’ on this post and immediately receive news from my broker that it has made the fund available. I’ll drop a note into Weekend Reading if so. Subscribe to ensure you get it!

Until then we can only dream of owning such easygoing inflation protection.

(As well as asking ourselves some serious questions about when and why we began dreaming about funds, and whether it’s entirely healthy…)

Yield to maturity. You can think of it like the interest rate you’ll get provided you hold the bond to maturity.
Not its longer duration ETF I mentioned earlier, though they’re very similar.

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What caught my eye this week.

Hard to believe it’s more than ten years ago that I wrote – slightly tongue-in-cheek – about how I was betting against Neil Woodford.

The then-lauded fund manager had just handed back the reins of the Edinburgh Investment Trust – one of several funds he ran as Invesco’s superstar manager – because he was opening his own fund shop.

Edinburgh’s share price fell from a 5% premium to trade at a discount to NAV in response.

But I reasoned:

Sure, a few [other] income investment trusts are on a discount, but my point is it’s clearly possible to run an income trust and be well-regarded enough for investors to pay more for shares in your trust than the value of its assets, even if your name is not ‘Neil Woodford’.

And my bet – and the reason I bought the shares after the sell-off – is I believe the same will likely be true of the Edinburgh trust at some time in the future.

In fact, I wouldn’t be surprised if the premium even comes back before Woodford has left in April!

Okay, it took until August – but I was right and it was a nice little trade.

However I kind of missed the wood for the trees.

Woodford’s stockMost readers will know Woodford’s new venture went on to collapse within just a few years. It left a trail of broken-hearted followers in its wake. As well as a legal kerfuffle that was still dragging on this year.

Here’s a podcast recap from A Long Time In Finance. Or take your pick of two books written about Woodford’s rise and fall.

I can’t say I predicted this disaster in my 2013 piece. Although to be fair, who honestly could have?

The scale of the drama, anyway.

Me, I even admitted I thought Woodford had as good a claim as any to investing edge.

Although thankfully – and more on-brand – I said we couldn’t be sure. Even 25 years of outperformance at Invesco – which had made him the darling of middle-England savers – wasn’t definitive evidence of skill versus luck.

Also, I wrote:

I don’t think you should spend your time looking for the next Woodford though, any more than I think you should bet your two-year old grandson is going to be the next David Beckham.

Some scant few of us are touched by the gods of fortune, but you surely don’t want to gamble your retirement on it.

That second line is pretty portentous in light of what happened next.

Hey brother, can you spare a follow?One person who is definitely not looking for the next Neil Woodford is… Neil Woodford.

Because the fund manager this week relaunched himself as a financial influencer.

Writing on his new blog, Woodford says:

My name is Neil Woodford. I am 64 years old, and I live in southwest England. I have worked in the investment industry since the early 1980s. You may remember me as the fund manager who avoided the dot-com bubble and the banking crisis and delivered index-beating performance for over 25 years, or perhaps as the ‘disgraced’ fund manager who presided over Woodford Investment Management’s collapse in 2019. Others may not have heard of me at all. Whatever your perspective, you may be curious about what I have to say about a wide range of economic, social, and political issues that impact our everyday lives.

Unfortunately, much of the commentary I read about the UK economy is long on opinion but critically short on data. It is often factually wrong, perhaps because established narratives are too willingly accepted. What is clearly severely lacking is data-supported information and analysis.

The economic analysis and commentary in Woodford Views will focus on relevant facts and data without censorship from editors, pressure to toe a particular line or consensus thinking.

Well you’ve gotta admit the lad’s still got chutzpah coming out the Wazoo. There’s even a dose of 2024-style post-truth anti-mainstream posturing in there.

Only 93 followers so far on Instagram though. The struggle is real.

Glass fund housesWe can surely guess how those who’ve pursued Woodford in the courts feel about this development. Or those who lost money with his funds. Or, worse, who waited for years just to get their money back.

Me? I’m a complicated soul.

While it’s abundantly clear in hindsight that Woodford’s mixing of private and public assets was ill-advised in open-ended vehicles, it’s not like that hadn’t been done before. It still goes on today.

He was criticised too for loading up on unlisted holdings with his closed-end Patient Capital trust. But many investment trusts are languishing on discounts today in part likely because of their illiquid private assets, including giants such as Scottish Mortgage and RIT Capital Partners.

And while it’s now far harder to make the case for Woodford’ stock picking prowess in light of the disastrous run at his second venture, there is probably even another universe where economic circumstances turned differently and his contrarian bets were rewarded.

Not need to type angry comments at me! I know he earned millions selling himself as someone who could avoid such landmines but was ultimately paid for failure, given this disastrous outcome:

Source: Guardian

I’m just saying it’s a truism we only live through one reality but many other things could have happened.

If you like fund managers when they outperform, then you must at least acknowledge that such outperformance was possible because they – and you – took a risk that things would turn out far worse.

Sympathy for the devilEven the likes of Buffett could have been wiped out in an alternative universe where, say, the US went to war with Russia in the mid-20th Century, or if his legal troubles of the early 1970s hadn’t been amicably resolved, or if a couple of key decisions during the Salomon Brothers scandal of the late 1980s had gone differently. And nobody’s track record is as a good as Buffett’s.

So yes, I too have read the stories of hubris and yes-man-ning in the Woodford Investment Management days. It all seems very off. I also agree it was ill-advised for him to go investing in blue sky nano-caps after making his bones – and his brand – as a large-cap fund manager.

But I can’t quite bring myself to write an apoplectic and hyperbolic op-ed about Neil Woodford the ‘finfluencer’ that would easily write itself.

(My co-blogger in contrast would surely have a field day.)

I don’t know, perhaps I think everybody deserves at least a chance of redemption.

I also recognise someone who can’t let go of a love of markets and the game. A fellow sufferer, perhaps?

Maybe it’s just the sheer brass balls of the man refusing to go quietly.

Or perhaps I pity anyone trying to make money from a new blog these days.

Why go there?To be crystal clear, I understand anyone who splutters angrily at Woodford’s new venture. It’s almost surreal.

And I obviously don’t think anybody needs to invest money with Woodford or any other star manager.

Invest via a global tracker fund – or some other passive index funds – and you’ll never face being embroiled in fund manager drama ever again.

Have a great weekend!

From MonevatorOur updated guide to help you find the best broker – Monevator

25 years of a family investment club – Monevator

From the archive-ator: How to protect your portfolio in a crisis – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Bank of England talks up rate cuts as inflation eases to 3.2% – This Is Money

Coventry BS and Co-Op Bank agree takeover terms – BBC

Brussels proposes return to pre-Brexit mobility for UK and EU young people – Guardian

Hunt urged to launch inheritance tax raid on unspent pension pots – Telegraph via Yahoo

London listing looms for Zopa as fintech turns in first annual profit – Yahoo Finance

The parents caught out by the child benefit charge – Which

How much have UK prices risen in the past two years? – Observer

Rare Bitcoin from ‘Satoshi era’ moves after 14 years of dormancy – CoinDesk

Historic Copenhagen stock exchange goes up in flames… – BBC

…even as neighbour Sweden’s becomes the envy of Europe [No paywall] – FT

Are shared ownership schemes really making up for new social housing? – Sky News

Products and servicesThe struggle to choose the right mortgage [Search result] – FT

Will letting your flat on AirBnB breach your insurance policies? – This Is Money

Paying monthly for insurance could cost you dear – Which

Sign-up to Trading 212 via our affiliate link to claim your free share and cashback. T&Cs apply – Trading 212

Not chipping your cat could affect your pet insurance – Which

London-based Nothing’s earbuds set a new standard for budget quality – Guardian

Open an account with low-cost platform InvestEngine via our link and you could get up to £2,500 as a cashback bonus (T&Cs apply. Capital at risk) – InvestEngine

Top ten credit card hacks – Be Clever With Your Cash

New ISA rules starting this month, explained – This Is Money

Get £100 worth of free trades when you open an ISA or trading account with Interactive Investor. Terms apply – Interactive Investor

Garden centres stockpile plants before new Brexit checks… – Guardian

…though it seems UK will not ‘turn on’ post-Brexit checks of EU goods for fear of border delays [Search result] – FT

Homes for sale that have had an eco overhaul, in pictures – Guardian

Comment and opinionInvest for the decades, not the years – Of Dollars and Data

More people in the UK are downsizing to save money – Guardian

Should governments tax the great boomer wealth transfer? [Search result] – FT

Why wealthy American families are creating ‘passport portfolios’ – CNBC

Investing earlier in the tax year could be better for your ISA – Vanguard

The limit does not exist – or does it? – Money With Katie

Should you pay off your mortgage or invest your savings? – Morningstar

“Please stop asking me when I plan to retire” – Herb Greenberg

The realities of retiring [rich] early [Podcast] – Money Wise via Apple

What are you willing to give up in pursuit of an all-weather portfolio? – Random Roger

Knowledge doesn’t change behaviour – A.W.O.C.S.

A dirty business – Humble Dollar

Why is it so easy to disregard behavioural finance? – Behavioural Investment

Use your time wisely mini-specialTime is a thief – Joy Levere

The 67-hour rule – The Atlantic via MSN

Naughty corner: Active anticsWill the growth of indexing lead to its downfall? – Wisdom Tree

Challenging the process – Novel Investor

These financial tidbits could give you an edge when picking funds – K.O.I.

The market size mistake in venture – Tom Tunguz / Tobi Lutke

Let’s hear it for the FTSE 100’s magnificently unglamorous seven [Search result] – FT

Stocks and flows – Capital Gains

The optimal allocation to managed futures [Slightly old] – Price Action Blog

Kindle book bargainsHow to Read Numbers by Tom Chivers –£0.99 on Kindle

The Dip: Knowing When to Quit by Seth Godin – £0.99 on Kindle

The Pathless Life by Paul Millerd – £0.99 on Kindle

The Deficit Myth by Stephanie Kelton – £0.99 on Kindle

Environmental factorsSeven countries now generate 100% of their energy from renewables… – Independent

…while new wind installations hit a record last year… – Reuters

…and two new offshore Norfolk windfarms approved to double capacity – BBC

Wooden turbine towers could make wind energy even greener – CNN

Nature officially becomes a musician, earning royalties – BBC

Exploring kelp forests – Hakai

No birdsong: how a haven for nature fell silent… – Guardian

…except in New Zealand’s big cities – Guardian

Greece becomes first European country to ban bottom trawling in marine parks [By 2030] – EuroNews

Robot overlord roundupThe AI race is generating a dual reality [Search result] – FT

Is there enough text to feed the AI beast? – Semafor

UK rethinks AI legislation given growing risk concerns – Taylor Wessing

All are punished culture wars mini-specialFrom Intellectual Dark Web to Crank Central – The Bulwark [h/t Abnormal Returns]

What is ‘lived experience’? [Social science nerdy] – Aeon

Off our beatThe cloud under the sea – The Verge

Amazon is filled with garbage eBooks. Here’s how they get made – Vox

Everyone in finance is getting ripped – Bloomberg via Wealth Management

Americans are still not worried enough about the risk of world war – Noahpinion

Welcome to mass-market mountaineering – The Walrus

And finally…“Ten minutes, once gone, are gone for good. Divide your life into ten-minute units, and don’t waste even a minute.”
– Richard Branson, Screw It, Let’s Do It

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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Built on a Lie: The Rise and Fall of Neil Woodford and the Fate of Middle England’s Money

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I hadn’t heard of an ongoing investment club for many years before a long-time Monevator reader – and member of the Patrick Investment Club – dropped me a line. Such clubs were common 20-30 years ago. And as David Patrick’s guest article below shows, they filled a niche that today’s more impersonal and often abrasive social investing options hardly replace…

For more than 25 years my extended family has been pooling monthly subscriptions of at least £50 into the Patrick Investment Club.

This club has had a profound impact in helping us learn about investing. It has also helped bring us together as a family.

Such is the interest, these days we’re more likely to all meet for the Club’s AGM than for Christmas lunch!

Clubbing togetherThe Patrick Investment Club was established in 1998 by six family members. My three brothers and I – then in our 20s – and our parents in their late-50s.

The club has since doubled in size and now spans three generations.

We spent our early years pouring over library copies of the Financial Times and Investor’s Chronicle trying to understand company valuations. We felt oddly confident back then that we could identify companies destined to be the ‘movers and shakers’ of the future.

Sadly none of us identified any of the FAANGS, though we did have one multibagger success in Imagination Technologies.

There were a few dogs, too. One, Island Oil and Gas, disappeared beneath the seas – along with our shareholding.

These days – and with total assets in the low six-figures – we’re a little more cautious. Some 70% of assets are held in a global equity tracker and 30% in three sector ETFs.

Why start an investment club?Back in the day our investment club, like many others, was set up to invest in companies and help us learn about investing.

At our inaugural meeting we adopted a constitution to govern how we operate.

We also opened a club bank account with Barclays and of course an investment trading account – currently with Hargreaves Lansdown.

One golden rule that has persisted in guiding all our investments was inspired by our pacifist teetotal mother: absolutely “no guns, no booze, no porn”.

So we apply an ethical SRI screen, though we don’t take too close a look at exactly what we hold within our funds.

The price of entryFamily members invest at least £50 each month. Some invest up to £200.

Monthly investments are automated and free through our investment platform.

The club is run with a light touch by the three officers: Chair, Secretary, and Treasurer. These roles have rotated over the years between family members with one – this writer – having been an officer for the whole period.

The club’s investment strategy is reviewed at each AGM. We offer each other commiserations on our under-performers and congratulatory back-slapping when we occasionally outperform our global benchmark.

Monthly statements set out the current value of members’ holdings, subs received and any withdrawals, along with the change over the last one, six and 12 months.

Holdings are unitised to take account of subs and ad hoc withdrawals. Brief commentaries are included, noting how the club’s performance compares to the MSCI World index.

A more virtual investment clubOther than at the AGM, engagement from members is low – though any miscalculations are quickly spotted.

Given the number of members involved and their locations – spread across Glasgow, Nottingham, and rural Wales – the AGM these days is usually a hybrid of face-to-face and video-conferencing.

In the early years the AGM was always in person. It was usually followed by a meal out or other social activity, too. One year we felt sufficiently flush to hire a barge for the afternoon.

Accounting activityThe absence of any tax benefits for investment clubs means that any dividend and interest income, however small, needs to be notified to members each April for inclusion in their tax returns.

Members have largely adopted a buy-and-hold strategy. Capital withdrawals are infrequent. There’s perhaps two or three a year among the 12 members. Typically these have been to pay an unexpected tax bill, fund a cruise, or contribute to a deposit for a new home.

In the early years a hardship fund was established to gift or loan members money during more challenging times. For instance, funds were occasionally requested to help tide a member over between jobs or to fund vocational retraining.

Fortunately such support has not been called on recently.

The evolution of an investment clubReflecting back over the last 25 years, the club’s investing style has evolved through three phases.

We moved from investing in individual equities to focus on actively managed funds, and then to our current approach of investing in global passive ETFs – with a slant towards particular sectors that we feel will outperform.

For the first 15 years until 2013 the club was invested in individual equities. These included M&S, Tesco, WPP, Severn Trent and St James Place – as well as the dog and multi-bagger mentioned earlier.

The second phase began after a friendly financial advisor reviewed our portfolio and recommended a shift into actively managed funds and bonds.

Over the next six years we built modest holdings in, among others: F&C Corp & Ethical bonds, First State Global Property, Henderson Global Care, Impax Environmental Markets, Kames Ethical Fund, First State China Growth, Henderson European, Neptune US opportunities, Old Mutual UK Small Companies, and Aberforth UK Smaller Companies Fund.

These choices often mirrored personal holdings of club members, such as the nod towards China and environmental funds.

Lessons learnedIn retrospect we had far too many holdings. However we learnt how funds worked, their charging structures, and how bonds were priced. We also began to better understand our own attitude to risk. We even offered members a choice between contrasting portfolios for a few years.

In 2019 we embraced another major shift – this time towards passive investing in a single portfolio. This was partly down to members’ own personal portfolios taking on more of a passive slant and partly due to the influence of Monevator.

Active funds were sold and we increasingly concentrated on just one passive global equity SRI ETF held with iShares.

Additionally one of our younger members had begun a career in wealth management. They put forward a persuasive case to slant our portfolio towards clean energy, automation and robotics, and global healthcare.

We duly invested 10% of our total assets in each of three passive ETFs – one per sector. Annual rebalancing happens in the spring, usually after the AGM.

Three years in and our sector bets combined have made us a loss, though Automation & Robotics helped to minimise this with a stellar 38% return last year. With our AGM looming we’ll soon debate whether to stick to these sectors or switch elsewhere.

Many happy returnsThe club’s annualised growth over 25 years is 9.5%. This means £100 invested at start in 1998 would now be worth £338.

By comparison over the last 20 years the MSCI World index has risen by an annualised 11.9%.

Reflecting on the last 25 years, family members have seen a huge educational benefit from belonging to the club. We’ve learnt about the mechanics of investing, how different asset classes perform, and the risks associated with those assets.

With a larger membership including two juniors giving a greater spread of ages, we’ve increasingly had to reflect on the effect of differing time horizons on our investing style.

Risk appetites also differ between us. Members view their club holding as one modest part of their overall wealth. If they feel uncomfortable being 100% in equities, they can balance this with personal holdings in less risky assets.

There is always a lively debate at the AGM on our investing style. Some members argue that we don’t have an edge in spotting out-performers and therefore need to embrace low-cost passive investing.

Others espouse a broader approach. They argue for the club to speculate with a greater variety of assets including specific companies, currencies, and commodities, to provide us with hard-won skin-in-the-game experience.

Currently the wind blows in favour of a largely passive approach.

Perks for membersThe Patrick Investment Club has had an interesting impact on family relationships. We learn from each other regardless of age and life experience!

Several of us have gone on to manage our own ISA and SIPP portfolios. And as mentioned above, one younger member is even pursuing a career in wealth management – having been inspired by the club.

The club has also helped with family cohesion. Often the only time we all meet – virtually or in person – is at the AGM.

The democratic nature of the club – one member, one vote – is sometimes challenging for those with larger holdings.

Overall our investing club has had a hugely positive impact on the family. Having already embraced several younger members, it’s likely to continue going for another 25 years.

Thanks to David for his engaging story. And my congratulations to his family for being so wholesome – I suspect organs would be lost in any such bartering among my own tribe. But what about you? Have you ever been a member of an investment club? Would it work with your family or friends? For me a major drawback would be the lack of a shared tax-efficient wrapper. Let us know what you think in the comments below…

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Duration matching with bond funds? Pah! It's easy after you've read this 10,000 word treatise on the topic

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What caught my eye this week.

A couple of weeks ago Nick Maggiulli of Dollars and Data fame conceded that lately he’d been writing for the Google’s search algorithm, rather than about what really interested him.

And doing so was destroying Nick’s passion for blogging:

I can’t keep doing this and preserve my creative sanity.

One of the reasons I’ve been able to blog consistently for nearly seven years is because I’ve always chosen what I write about.

I’ve been able to follow my curiosity wherever it has led me. Unfortunately, this year I strayed a bit from that path.

And while I don’t consider it a major mistake, I’m glad I realized what was going on before it was too late.

Happily this change of direction has immediately paid off with one of the best posts he’s ever written (and that’s saying something…)

Exploring why you should never look too far down roads you didn’t take – in life or investing – Nick argues:

I’m here to tell you that this kind of thinking is a mirage. It’s pure fantasy. Because the way you think things would’ve turned out is not the way they actually would’ve turned out.

How you imagine an experience is a theoretical exercise. It’s a mental simulation of your past. But, how you live through that experience in real-time tends to produce very different results.

Nick illustrates his point with a graph that shows why basketball star Magic Johnson’s alternatively lived experience where he chose sponsorship by Nike over Converse – thus supposedly ending up $5bn richer – would have at least felt very different over a long reality, and may never have happened at all.

Anyone who invests actively knows about these lost fantasies all too well.

I wrote about it with respect to my hugely costly Tesla sale a few years ago, for instance.

Others mourn the house they didn’t buy or the job they didn’t take – or outside of the financial realm, the person they didn’t marry or the musical instrument they gave up on despite some talent.

I wouldn’t say that thinking about these missed opportunities is entirely pointless, or even that they’re somehow not real decisions and outcomes.

In many cases they are all too real. Maybe we did make a mistake.

I should have held onto Tesla – and I should have bought my first flat in London in 1998, not 2018!

But it’s that the way we think about them is so often faulty. A lot of the time the motivation is to make ourselves feel bad, not really to learn anything.

In that case it’s better to look forward, not back.

Searching questionsAs for writing for the search algorithm instead of for real readers, I see that temptation too.

At Monevator we lost about half our search traffic overnight in summer 2021, due to a capricious-seeming Google change that appears to have nothing to do with the quality of our content.

It’s been hugely frustrating.

There’s a balance to be struck, of course. Google needs to have guidelines, for the sake of a good searching experience.

But I can’t help thinking the tail is too often now having to wag the dog. And nobody starts blogging – or doing any other sort of creative endeavour – to please a robot. (At least not yet!)

I might also add that if you subscribe to get our articles as free emails, then you’re one fewer reader we have to try to recapture again via the harsh lottery of Internet search.

Anyway, do read Nick’s post – and have a great and balmy weekend.

From MonevatorMaximising FSCS protection for your investment portfolio – Monevator

From the archive-ator: Sad story stocks – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Treasury braced for an 8% rise in pensions because of triple-lock [Search result] – FT

Triple-lock could add £45bn to state pensions bill by 2050, says IFS – Guardian

UK rejoins EU science research scheme Horizon – BBC

Housing cost fears reach record levels… – Which

…though mortgage rates just fell for sixth consecutive week – Mortgage Solutions

Vet pricing review, on fears of rip-off charging – BBC

Britons least likely to say work is important to them, study finds – Guardian

UK crypto firms get three-month reprieve on new marketing rules – Yahoo

NHS to begin autumn Covid jabs next week as new variant spreads – Guardian

The puzzling underperformance of performance fees [Search result] – FT

Products and servicesCould NS&I spark a rates war on one-year fixed savings? – Which

Monzo’s new ‘call status’ tool aims to stop impersonation scams – Monzo

Twenty ways to save on household bills and living costs – Which

Open a SIPP with Interactive Investor and get £100 to £3,000 cashback. Terms apply – Interactive Investor

How much will Amazon’s same-day Prime delivery cost you? – Be Clever With Your Cash

“Do I really have to tax and import duties on £145 trainers bought from EU site?” [Oh my sweet child. Sit down and let me tell you about this genius idea they had called Brexit…] – This Is Money

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Top cash ISAs right now – Money Saving Expert

New mortgage lender Perenna offers 30-year fixed-rate deals – Guardian

Why almost every Omaze dream home winner puts it up for sale – Metro

Warehouse-style apartments for sale, in pictures – Guardian

Comment and opinionGlobal stocks = more stocks – Oblivious Investor

Time for the UK to tax inflation [Search result] – FT

Who knows how long we have? – A Teachable Moment

Dollar-cost averaging in a bear market wins again – A Wealth of Common Sense

Compound interest misconceptions – Lazy FI Dad

How to emotionally prepare for retirement – Kindness FP

Rethinking restraint – Humble Dollar

Will I keep spending more and more money forever? – Vox

The trimesters of retirement – Financial Advisor

Life after growth and soul loss – Simple Living in Somerset

Bonds are back mini-special[All US but relevant or interesting]

Bonds aren’t boring anymore – Quiet Wealth

What ‘escape velocity’ means for a fixed-income portfolio – Morningstar

The bond bear market and asset allocation – A Wealth of Common Sense

Should bond fund investors be going long? – Morningstar

What to do about high interest rates [Mortgage bit US-centric] – M.M.M.

Naughty corner: Active anticsSing me a song of valuation… – Wisdom Tree

…US small-cap value stocks look very cheap Vs large-cap growth – Validea

A primer on multi-strategy hedge funds [Podcast] – Invest Like The Best

Deep dive into building materials supplier Howdens Joinery – Flyover Stocks

John Lee: my dividend strategy continues to deliver [Search result] – FT

Kindle book bargains How to Read Numbers by Tom Chivers – £0.99 on Kindle

Freakonomics by Steven D. Levitt – £1.99 on Kindle

Creativity Inc. by Ed Catmull – £0.99 on Kindle

No Rules Rules: Netflix and the Culture of Reinvention by Reed Hastings – £1.99 on Kindle

Environmental factorsWalking away from investing in the face of climate change – DIY Investor

“Disaster”: UK auction secures no offshore windfarms – Guardian

Life and death in American’s hottest city [Vital if miserable read] – New Yorker

Heat denial: influencers question high temperatures – Guardian

Deep freezing coral reefs for the future – NPR

Invasive species cost the world $400bn a year says UN – Semafor

Robot overlord roundupWhat OpenAI really wants – Wired

How predictive technology is shaping everything from medicine to investing – I.I.

Off our beatThe decomposition of Rotten Tomatoes – Vulture

Giving $7,500 directly to homeless people worked well in a Canadian study – Vox

A 95-year old cardiologist’s advice on living a long, happy life – CNBC

The mystery of the Bloomfield Bridge [Nerdy] – Tyler Vigen [hat-tip A.R.]

How to choose what advice to take – Art of Manliness

Where on Earth? A geo-location quiz [Interactive, 7/8 to beat!] – BBC

And finally…“The ease of online dealing makes many people act as if investing was positively scored, but the arithmetic of compounding dictates that it is really negatively scored. Success in investing consists mainly of avoiding big mistakes.”
– Guy Thomas, Free Capital

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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Free Capital: How 12 private investors made millions in the stock market

Creativity, Inc.: Overcoming the Unseen Forces That Stand in the Way of True Inspiration

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A little-known fact is that most investment types are not protected by the Financial Services Compensation Scheme (FSCS). Yes, your broker is likely covered. But what happens if the firm that actually manages your investment funds blows up?

In that scenario, the only kind of vehicle you can expect to be protected is a UK domiciled Unit Trust or OEIC (Open-Ended Investment Company).

Offshore funds aren’t covered by FSCS compensation. Neither are ETFs or Investment Trusts.

In practice this means there’s no FSCS protection for a broad swathe of funds marketed to UK investors, because they’re either the wrong type or they’re domiciled in exotic, far-off lands like… Ireland.

Now you may be entirely comfortable with that, because your assets are lodged with a financial titan such as Vanguard or BlackRock. The chances of such a giant being wiped out – and so vaporising 100% of your assets in a hot mess of scandal and fraud – are exceedingly small.

But you can never rule out the possibility entirely. Which is why some Monevator readers prefer to invest in funds that should benefit from the FSCS scheme in a nightmare scenario.

Here’s our guide to the FSCS investment protection rules if you’d like a refresher.

If having the FSCS scheme as a backstop helps you sleep at night, then read on for our pick of low-cost UK domiciled funds provided by FCA1 authorised and regulated firms.

These funds should all be eligible for FSCS compensation (though it’s not an absolute certainty as we’ll explain in a sec), enabling you to build your passive investing strategy – as per our previous investment portfolio examples – with the knowledge that you couldn’t be any more protected.

Caveat Time!The FSCS bends over backwards (and you might wonder why) to point out that compensation is not guaranteed just because a firm is FCA authorised and regulated.

The most reassurance you’ll get on each fund provider’s Financial Services Register page is:

The FSCS may be able to provide compensation if this firm goes out of business owing you money.

Hmm. Doesn’t exactly sound cast iron, does it? Moreover, check out the following piece of advice plastered liberally across the FSCS website:

Ask your firm to confirm that the activity they are carrying out for you is a regulated activity and FSCS protected.

Given that’s the lie of the land, then the best your plucky DIY investor champ Monevator can do is to say the following funds are all UK-domiciled Unit Trusts / OEICs, offered by fund firms that were FCA-authorised at the time of writing.

In other words, please follow the FSCS’ advice above to maximise your chances of being eligible for compensation, should you ever need it.

Beware too that compensation tops out at £85,000 per firm.

If Vanguard went bust, for example, the most you could claim from the FSCS is £85,000 – no matter how much you had invested in different Vanguard funds.

That won’t be a problem for some people, but 100% protection could become pretty laborious to maintain for those investors with larger portfolios.

At the very least it may require some creative juggling between different fund providers. Hence our selection focuses on enabling you to diversify your choice as much as possible.

Incidentally, you could go even further by including active managers in your scope. But on Monevator we typically major on keenly-priced index trackers, so that’s our focus today.

Enough with the ambling pre-amble, let’s get into our list of FSCS-eligible funds.

Global / All-World equity (Developed world and emerging markets)* HSBC FTSE All-World Index Fund C * OCF 0.13% * Fidelity Allocator World Fund W * OCF 0.2% * Vanguard FTSE Global All Cap Index Fund * OCF 0.23%

Developed world equity* L&G Global 100 Index Trust C Inc * OCF 0.09% * Fidelity Index World Fund P * OCF 0.12% * L&G Global Equity Index Fund * OCF 0.13% * Vanguard FTSE Dev World ex-UK Equity Index Fund * OCF 0.14% * Aviva Investors International Index Tracking Fund 2 * OCF 0.25% (ex-UK fund)

UK large cap equity* HSBC FTSE All Share Index Fund Institutional * OCF 0.02% * iShares UK Equity Index Fund (UK) D * OCF 0.05% * Vanguard FTSE UK All Share Index Unit Trust * OCF 0.06% * Fidelity Index UK Fund P * OCF 0.06%

Emerging markets equity* Fidelity Index Emerging Markets P * OCF 0.2% * iShares Emerging Markets Equity Index Fund (UK) D * OCF 0.21% * L&G Global Emerging Markets Index I * OCF 0.25%

Property – global* iShares Environment & Low Carbon Tilt Real Estate Index Fund (UK) * OCF 0.17% * L&G Global Real Estate Dividend Index Fund I * OCF 0.22%

UK government bonds * Fidelity Index UK Gilt Fund P * OCF 0.1% * iShares UK Gilts All Stocks Index Fund * OCF 0.11% * HSBC UK Gilt Index C Acc * OCF 0.13% * Vanguard UK Long-Duration Gilt Index Fund * OCF 0.12% * abrdn Sterling Short Term Government Bond Fund * OCF 0.25% (Active management)

Global government bonds hedged to £* abrdn Global Government Bond Tracker B * OCF 0.14%

Global inflation-linked bonds hedged to £* abrdn Short Dated Global Inflation-Linked Bond Tracker Fund * OCF 0.13% * L&G Global Inflation Linked Bond Index Fund I * OCF 0.23% * Royal London Short Duration Global Index Linked Fund M * OCF 0.27% (Active management)

Useful pointersAs always, make sure you do your research to ensure these funds are the right fit for your portfolio. Morningstar and the fund provider’s own factsheets are good starting points.

We’ve ranked our selection purely by cost (as measured by OCF). Check out other Monevator pieces for more on how to choose the best global tracker funds and the best bond funds.

You’ll often find more index funds available in each category if you need them. There’s a good slate of US tracker funds available too – but nothing doing for gold or commodities.

You can quickly tell if a fund is UK domiciled by checking its webpage or by looking out for the designation GB in its ISIN number.

Investigate more low-cost index fund and ETF options.

Market-leading index fund providersTo diversify your passive fund holdings as much as possible, check out these investment firms for your FSCS-eligible OEIC / Unit Trust needs:

Vanguard AKA Vanguard Investments UK Limited, FRN2 494699
iShares AKA BlackRock Fund Managers Limited, FRN 119292
Fidelity AKA FIL Investment Services (UK) Ltd, FRN 121939
HSBC AKA HSBC Global Asset Management (UK) Ltd, FRN 122335
L&G AKA Legal & General (Unit Trust Managers) Ltd, FRN 119273
Abrdn AKA abrdn Fund Managers Limited, FRN 121803
Royal London AKA Royal London Unit Trust Managers Ltd, FRN 144037
Aviva AKA Aviva Investors UK Fund Services Limited, FRN 119310

You can investigate a firm’s FSCS particulars by typing its FRN into the Financial Services Register page.

Bear in mind that the FSCS scheme kicks in only if a firm fails and the value of your assets is otherwise irrecoverable. (And it only protects you up to the exciting £85,000 limit, of course).

The Financial Ombudsman holds sway in other scenarios.

Do you need to go to these lengths?Personally, I don’t worry about whether my funds are FSCS protected. Insisting upon it would cause a level of stress (induced by excessive portfolio management) that isn’t worth it to me. At least versus the low probability of ever calling upon the scheme for a bail out.

But all that really matters is that you are comfortable with your investing choices.

If you’d like to create a ‘It helps me sleep at night’ portfolio then I hope the fund list above speeds you on your way to the Land of Nod.

Take it steady,

The Accumulator

Financial Conduct Authority
FCA Firm Reference Number

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What caught my eye this week.

Morning all. I’ve got to admit that after writing 5,788 words for this month’s member post for Moguls – trust me, I counted them – I’m out of puff for the week.

(While I do aim to go into depth with these reports, I agree that 5,788 words is not sustainable! Perhaps not even for busy members. Must cut harder…)

So before the links I’ll just point you to this chart that was highlighted to me by Monevator member Mark:

Source: Trustnet

The chart is taken from this year’s Credit Suisse Equity Yearbook. It was flagged up in the Trustnet article I’ve linked to by Martin Currie’s chief investment officer, who describes it as the most helpful guide to investing he’s come across in his career.

What does it tell us? Nothing more – but also nothing less – than that since 1900, equities have beaten bonds for returns in all economic environments except when lower growth coincides with lower inflation.

And even then, there’s only a whisker in it.

It’s simply a reminder that for all the good reasons we have for diversifying our portfolios, shares should be the engine. At least until you’re getting ready to start spending. Even then you should almost certainly keep a decent-sized wodge in them.

Not a revelation to many Monevator readers perhaps. But tell it to the millions with collectively £1.5 trillion sitting in cash savings accounts.

(Yes, having some cash is great. But cash won’t be a driver of wealth).

Eat up your house depositOh, before I go here’s a menu entry shared by a Monevator reader holidaying in Amsterdam:

Very droll. If you’d like to pay homage to these personal finance ironists on your next visit, the restaurant is called Box Sociaal.

Have a great weekend!

From MonevatorHow to create your own financial independence plan – Monevator

And now for something completely different – Monevator [Mogul members]

From the archive-ator: Keep it simple, stupid – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Nationwide: UK house prices falling at fastest rate since 2009 – Guardian

UK economy surpassed pre-Covid size in late 2021, new data shows – Reuters

Aberdeen named the most affordable city to own a home – This Is Money

Octopus Energy gains two million new customers in Shell deal – Sky

Bank of Mum and Dad contributes to 47% of under-55 home purchases – This is Money

A well-off retirement now requires a pension pot of £600,000 – This Is Money

Court hands Grayscale Bitcoin trust victory against SEC… – The Block

…The SEC failed to prove that dog wags tail, court rules [Search result] – FT

FWIW, the market is saying the low-rate era is over [Search result] – FT

Products and servicesNS&I launches one-year saving bond paying 6.2% – NS&I

HSBC to offer 40-year mortgage term to cut bills – This Is Money

Open a SIPP with Interactive Investor and claim £100 to £3,000 in cashback. Terms apply – Interactive Investor

Would an annuity work for you? [Search result] – FT

London’s ULEZ expansion: facts and fiction – Be Clever With Your Cash

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

A reminder of how the “Hi mum!” WhatsApp scam works – This Is Money

Cheapest destinations for a last-minute holiday this September – Which

Are you a victim of ‘dogflation’? – This Is Money

English homes for sale within walking distance of school, in pictures – Guardian

Comment and opinionFrugal vs cheap – White Coat Investor

Should we move the 2% inflation goalposts? – David Smith

Win big, lose big: range of outcomes thinking – Mr Stingy

Mind the behaviour gap – The Big Picture

Boomers: the luckiest generation – A Wealth of Common Sense

Why we glorify overwork and refuse to rest – Harvard Business Review

S&P 500 calculator, with dividends [Tool] – Of Dollars and Data

Don’t have a cow – Humble Dollar

Scared to death of running out of money in retirement – Wall Street Journal [h/t A.R.]

The reality of retirement beyond the numbers [Podcast] – Best Interest via Apple

Naughty corner: Active antics15 ideas, frameworks, and lessons from 15 years – Flirting with Models

Optimising position sizing for better returns – Flyover Stocks

Neglected aspects of investing – Investment Talk

Lessons from David Herro’s holding on to Credit Suisse – Morningstar

Is illiquidity a feature or a bug? – Savant Wealth

Warren Buffett’s canvas – Rational Walk

Sizing up startup rocket ships – Axios

Kindle book bargainsFreakonomics by Steven D. Levitt – £1.99 on Kindle

Creativity Inc. by Ed Catmull – £0.99 on Kindle

Way of the Wolf by Jordan Belfort – £0.99 on Kindle

No Rules Rules: Netflix and the Culture of Reinvention by Reed Hastings – £1.99 on Kindle

Environmental factorsThe behavioural shift in how we think about climate change – Vox

UK must label showers and toilets to cut water usage, experts say – Guardian

RSPB boss apologises after charity calls ministers ‘liars’ over sewage issue – BBC

Burning Man’s climate protestors have a point – Vox

Iceland to allow whaling to resume – Guardian

A new bio-leaf solar power design improves efficiency – Imperial College

Robot overlord roundupMoney is pouring into A.I., skeptics call it a ‘grift shift’ – Institutional Investor

Generative AI and intellectual property – Benedict Evans

ChatGPT versus a real financial advisor: who wins? – Fortune

‘Blue zone’ mini-specialWhy ‘blue zones’ may hold the key to a longer, healthier life – ABC News

10 healthy home tips from the world’s longest-lived people – Mbglifestyle

Live to 100 Netflix doc names Singapore world’s sixth blue zone – Green Queen

Costa Rica’s longevity blue zone predicted to fade in 20 years – Next Avenue

Off our beatI, exponential – Not Boring

Covid infection risk rises the longer you are exposed, study confirms – Nature

Why isn’t Ukraine a superpower? – Uncharted Territories

Workers are quietly quitting, and only employers can stop it – BBC

Chuck Palahniuk is not who you think he is – Esquire

Results – Indeedably

“She’s totally lost it”: a year on from the ‘Trusterfuck’ – Guardian

How Google made the world go viral – The Verge

1930s slang terms – Mental Floss

And finally…“Spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.”
– Ramit Sethi, I Will Teach You To Be Rich

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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Way of the Wolf: Straight Line Selling: Master the Art of Persuasion, Influence, and Success

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What if I told you that you can easily invest in something that’s historically done very well when the stock market has collapsed? And even better – that it’s currently going cheap?

.memberful-global-teaser-content p:last-child{ -webkit-mask-image: linear-gradient(180deg, #000 0%, transparent); mask-image: linear-gradient(180deg, #000 0%, transparent); } This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post And now for something completely different [Members] appeared first on Monevator.

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A rapid fire rundown of how to calculate when you'll achieve financial independence. The same plan could be adapted to any long-term financial goal.

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New research shows just how divergent the UK's property market has become, plus all the week's best reads…

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Bored? Anxious? Excited? Melancholy? You might think you've got some sort of mental condition, but don't worry... you're just a normal investor.

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Money too tight to mention? That's no reason not to start investing!

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Money won't solve your problems – the 1960s take. Plus all the best investing reads from around the web…

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Bonds are not the same as cash. To confuse the two is a flogging offence in my book.

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Why duration matching your bonds to your time horizon isn't the no-brainer it's been made out to be.

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Show us the value for money, says the FCA to fund managers. Plus all the week's good reads…

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How one Monevator reader is now on a glide path to the finish line…

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US workers have stopped job hopping, but the UK long-term sick abide. Plus the rest of the week's good reads…

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Updated model portfolios to help you nut out your asset allocation strategy

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Remembering the investing hardship of the 1970s, plus all the week's good reads…

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Let’s be clear: leveraged ETFs are hyper-controversial and not well understood. Nevertheless, in forthcoming articles from the Finumus camp about gearing up a portfolio and investing for different generations I intend to talk openly about them. Hence I want to spend today explaining how they work. That way – with all the blood and gore […]

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What's the best commodities ETF to invest in? We explain our pick

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What most urgently needs to be fixed in Britain – and it's not the borders. Plus all the week's great reads…

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Should older FIRE-ees stop preaching to a younger generation who cannot take this path?

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Why take 45 index trackers into the investing shower when one will do. (Ah, but which one?)

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Expect better comments to come, plus all the week's good reads…

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For a long time we couldn’t compare the rates of interest on cash in investment accounts for one simple reason. Brokers weren’t paying any interest on cash! Rising rates have so dominated the news for the past 18 months that it’s easy to forget that interest rates were near-zero for more than a decade. Even […]

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How effective are commodities as an inflation hedge in the UK?

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Could we really create a shareholder democracy out of Britain's huge cash pile? Plus all the week's good reads…

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The rise in rates since 2022 has smashed the returns for all sorts of assets. That might make them good buys today…

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This is what drifting sideways looks like

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Why go back to index-linked bonds, plus all the week's good money and investing reads…

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A unique portfolio asset, with an 'interesting' personality…

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How much value does commodities diversification add to UK investment portfolios?

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Rich pickings, plus all the week's good money and investing reads…

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The Oracle of Omaha dispenses effortless wisdom on investing strategy, stock picking, and holding on in a market crash.

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Yields are surging again, plus all the week's good reads…

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The good news is you're living longer. The bad news is the government wants your pension fund to be in bonds. We need to think harder about longevity.

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Is passive investing a Holy Straitjacket or do you have some freedom of manoeuvre?

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The best of the latest money and investing reads from around the web...

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This guest post on the ramifications of the demise of the gold standard is by Rob Dix. A long-time Monevator reader, Rob is co-host of the popular Property Podcast and co-founder of Property Hub. Rob is also the author of the Penguin bestseller The Price of Money. You may have been taught as a child […]

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The recent commodities bear market – 2008 to 2020 – was like watching a faraway, failed state descend into chaos. Hard to understand, it went on for years, and all you really knew was that you didn’t want to go there. Hence I’d guess that many Monevator readers instinctively recoil from the very idea of commodities investing.

But ongoing research and long-term data pieced together by multiple teams of investing academics suggests that commodities have been unfairly tarnished.

What happened to the asset class in that slump is most likely explained by a terrible sequence of returns. Bad luck for commodity investors, but a perfectly standard manifestation of investing risk.

If that thesis is correct, then by ruling out commodities we make the same mistake as a risk-shy investor who has a lifelong aversion to equities because they came of age during the Great Depression.

The bigger picture – filled in by 150 years worth of investment returns – is that broad commodities deliver excellent results over time, can diversify equity / bond portfolios, and boast some inflation-hedging capability, too.

Please read our commodities investing explainer for our intro to the asset class, how it works, and the drivers of return that make it profitable.

The ghost of futures pastThe following long-run UK returns chart shows why commodities futures are worth a second look:

Data from AQR1, Summerhaven2, JST Macrohistory3, and FTSE Russell. May 2023.

Since 1870, equal-weighted commodities have delivered a surprisingly good annualised real return of 4.3%.

Meanwhile, UK equities paced ahead with a 5.3% return, while government bonds brought up the rear on 1.4%.

Investing returns sidebar – All returns quoted in this piece are real annualised total returns. That is, they’re the average annual return (accounting for gains and losses) realised in a given time period. These returns include the impact of reinvested dividends and interest, but strip out the vanity growth delivered by inflation that does nothing to boost your spending power. Commodities dollar returns have been converted to GBP4.

Equities’ stronger returns mean we could forget about commodities if all that was happening was that shares and commodities rose and fell in synchronicity.

But the chart above also shows that commodities wax and wane to a different beat.

They’re highly volatile, but the fact that they often perform when equities (and bonds) falter is central to the pro-commodities case

They’re also a potent diversifier because the record shows that they’ve delivered superior long-term returns compared to gold, cash, or bonds.

Reality check Before we go any further, I have to deliver a reality check that takes the gloss off these results. (Although with that said it doesn’t undermine the nub of the issue: that commodities generate good returns – and otherwise unattainable diversification benefits – for a passive investor.)

The 150-year index shown above enables us to see the long-term pattern of commodity returns. But that index is very difficult to actually invest in.

That’s because the Summerhaven and AQR research teams behind the historical data reconstituted it as an equal-weighted commodities futures index.

This is a standard academic practice. It apportions the same weighting to every commodity futures contract included in the index.

However there’s currently only one broad commodities ETF that tracks an equal-weighted index – and it excludes agricultural products.

The majority of commodity indices weight their constituents by world production quantities and / or trading volume.

This method is intended to represent the global economic significance of each commodity type. (Just as equity indices represent firms according to their market capitalisation.)

The issue is that production and liquidity-weighted indices typically underperform their historical equal-weighted counterparts.

So to ensure we stay firmly grounded in the real world, I’ll only use data from historically investable commodities indices for the rest of these articles.

Happily we have just such an index going back to 1933, thanks to the forensic efforts of Summerhaven’s research team. They published the data alongside their paper The First Commodity Futures Index of 1933.

Their reconstruction of the Dow Jones Commodity Index can be directly linked to the contemporary Bloomberg Commodity Index, which is tracked by some of the largest ETFs in the space today.

Do long-term investable commodity returns stack up? Thankfully, still yes. Here’s the chart:

Data from Summerhaven5, S&P GSCI TR, BCOM TR, A Century of UK Economic Trends, and FTSE Russell. May 2023.

The annualised return of commodities is 4.5% versus 5.5% for UK equities over this 89-year timeframe. Bonds dawdled along at a paltry 0.85%.

Happily, aside from confirming that investable commodities deliver very handy returns, the chart also demonstrates that commodities often soared when equities stumbled.

You can see commodities spike as equities sold off during World War Two, again in the early 1950s, and incredibly so in the stagflationary ’70s.

The same happens in reverse, too. Equities did the heavy lifting when commodities crashed in the aftermath of the Credit Crunch.

How do commodities help as a portfolio diversifier?The next chart shows how the main diversifying asset classes performed in years when equities were down, from 1934 to 2022.

Even at a glance, the cyan bars tell us that commodities sometimes spectacularly outperform everything else.

That’s true in 1939 and in the post-war years of 1947 and 1949. It happens again in 1973, during the first leg of the UK’s worst-ever stock market crash, the opening innings of the dotcom crash in 2000, and most recently in 2022.

There are also times when commodities are the only asset class that registers a positive return, while the others burrow into the ground.

Indeed, commodities are the best asset in the portfolio 32% of the time. That’s a record only bested by cash’s 34% score. And cash earns pitiful long-term returns by comparison.

Yet the fact remains that commodities can be a difficult bedfellow. They made portfolio returns worse in 42% of the years examined in our chart above. (Of course this also means they improved portfolio returns 58% of the time…)

Commodities won’t always bail you out. Sometimes they’ll make you rue the day. But there have been crises when they were the only thing that worked.

We’ll examine how much commodities improve overall portfolio performance across the entire 89-year timeframe in a future post in this series.

Commodity correlations A correlations asset class matrix can help us assess the diversification benefit of commodities over different periods. An effective diversifier registers low positive or negative numbers against the other main asset classes.

Asset class returns correlations: annual returns 1934-2022 (inflation- adjusted)

| Commodities | UK equities | Gilts | Cash | Gold | | Commodities | 1 | -0.11 | -0.16 | 0.05 | 0.37 | | UK equities | -0.11 | 1 | 0.39 | 0.08 | -0.21 | | Gilts | -0.16 | 0.39 | 1 | 0.29 | -0.05 | | Cash | 0.05 | 0.08 | 0.29 | 1 | 0.04 | | Gold | 0.37 | -0.21 | -0.05 | 0.04 | 1 |

Gold data from The London Bullion Market Association and Measuring Worth. Cash is UK Treasury Bills data from JST Macrohistory and JP Morgan Asset Management. Other assets as per previous charts. May 2023.

Quick correlation recap:

1 = Perfect positive correlation: when one asset goes up so does the other
0 = Zero correlation: the two assets being measured have no influence upon each other
-1 = Perfect negative correlation: when one asset goes up, the other goes down

On this measure, commodities look like an excellent diversifier. The asset’s slightly negative correlation with equities and gilts means that it will sometimes spike when they stall or fall.

Of course this also means that commodities can hold a portfolio back when shares and bonds are steaming ahead. But on balance, the historical record shows the asset class is a net positive.

One of the exciting things about these correlation numbers is you rarely see other assets produce a combination of numbers that gel so well with equities and bonds and deliver strong long-run returns.

By way of contrast, gold’s weak results over extended time periods (and the lack of a strong economic rationale for decent expected returns in the future) make me nervous about owning significant quantities of the yellow metal.

Most of us buy into the idea of equity and bond diversification – even though they’re relatively highly correlated, and thus likely to be less effective diversifiers at times.

Once again, it’s the combination of strong positive returns and low correlations with equities and bonds that make commodities worthy of serious consideration.

2008-2020 be damned!

Well, maybe…

Commodity drawdowns and crashesI still can’t help being scared by that horrendous -66% commodities drawdown lasting from June 2008 to April 2020.

Other lowlights include a 20-year bear market that dragged on from 1951 to 1971. And another -62% beasting that ravaged commodities from the end of 1974 to the beginning of 1982.

Overall there are several lost decades to wince at. Especially if we go back to the 1870s via the equal-weighted index.

By the way, don’t forget that these figures are real returns. Most commentators will talk about crashes and bear market recoveries in nominal terms – a much gentler standard.

However it’s my duty to tell you that commodities investing is no easy ride. Although historically they’ve been a touch less volatile than equities.

On that note, it’s important to remember that all this and worse has also happened to the other asset classes we stake our future wealth on.

UK equities caved -79% from 1972 to 1974, for instance. The UK’s worst bond market crash also plunged to -79% depths, from 1935 to 1974. Gold suffered a near 20-year bear market between 1980 and 1999.

Nothing is ‘safe’.

If commodities still give you the willies, I can only say I’m right there with you.

They’re an unfamiliar asset class that works in an arcane way. And we’ve just lived through one of the worst commodities drawdowns on record.

None of that helps my rational self override my emotional self.

Which begs a serious question…

Are commodities a broken asset class?Was the 2008 to 2020 losing streak just a bad bear market, or did something fundamentally change to impair the future fortunes of commodities?

To answer this question, let’s bring in the big guns. Namely the venerable financial academics Dimson, Marsh and Staunton (hereafter DMS).

DMS looked at precisely this question as part of their commodities investing chapter in the Credit Suisse Global Investment Returns Yearbook 2023.

A particular concern is that the launch of commodity index trackers shortly before the Global Financial Crisis – and the concomitant flood of institutional investment capital – might have led to a permanent reduction in the historical advantages of the asset class.

DMS highlighted three possible dangers associated with the ‘financialization’ of the relatively small commodities market:

First, inflows could have lowered the risk premium through the increased competition in the provision of insurance to hedgers. Second, because institutional investors hold portfolios of commodities and their allocation to commodities competes to some extent with that to other assets, their activities might increase the correlation between individual futures, and between futures and other asset classes. Finally, passive index investments might weaken the link between futures prices and fundamentals.

However, DMS then go on to survey the work of other researchers who’ve examined this question and say:

The authors conclude that, despite the high growth in commodity markets during this decade, the proportion of hedgers and speculators was broadly constant. Nor, in terms of risk and return, was this decade significantly different from the longer historical experience. Correlations between commodities rose, then fell again. The authors attribute this to the Global Financial Crisis, not financialization.

Citing additional evidence, DMS judge that:

It would seem quite wrong, therefore, to conclude that the risk premium from futures had disappeared simply because of the Global Financial Crisis drawdown in commodity futures that followed the publication of GR’s [Gorton and Rouwenhorst] research. This was a disinflationary and low inflation period, and, as we will see below, these are challenging conditions for commodity futures.

DMS go on to show that commodities tend to perform poorly during recessions and disinflationary periods, concluding:

The disinflationary decade following the crisis was a very difficult time for commodities. Many institutions capitulated, reducing or removing their commodity positions – before they turned useful again in 2021/22. It is harder for investors to stay the course in commodities than equities amid a comparable drawdown, given that commodities are less ‘conventional’. This can be a typical fate for a good diversifying asset.

Indeed, the academic trio believe that the commodities risk premium remains alive and well:

What risk premium should we expect from a long-run investment in a portfolio of collateralized futures? Ilmanen (2022) concludes that the best long-term, forward-looking estimate is the historical premium. He suggests that “a constant premium of some 3% over cash seems appropriate for a diversified commodity portfolio – though not for single commodities!”

Other researchers float that 3% excess return figure too as the average long-term return you would hope to gain over and above the interest rate earned on cash in the bank.

Vanguard’s 2023 commodities paper for instance employs an expected returns model to draw in data beyond the historical record. It proposes a highly finessed base-case estimate of a 2.85% future expected excess return.

Though it then hedges its bets by citing a range anywhere between 0.5% to 3%.

Where does this leave us?It’s because I think we should all hedge our bets that I’m writing this commodities series in the first place.

I want to evaluate the evidence for and against as well as I can, especially as it’s an asset class with enough ifs, buts, and maybes to fill a comedy of manners.

Perhaps we need to move on from considering the strengths and weaknesses of commodities in isolation? After all, what really matters is their potential contribution as part of our properly diversified portfolios.

Let’s get to that in part three.

Take it steady,

The Accumulator

Levine, Ooi, Richardson, and Sasseville. “Commodities for the Long Run.” FAJ, 2018.
Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert. 2019. “The Commodity Futures Risk Premium: 1871–2018.”
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
British Pound Sterling
Bhardwaj, Geetesh and Janardanan, Rajkumar and Rouwenhorst, K. Geert, “The First Commodity Futures Index of 1933,” Journal of Commodity Markets, 2020.

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What caught my eye this week.

Last month we discussed how many more people are being taxed at the highest rates of income tax than ever before.

And despite a spirited rearguard action from a few old-timers who say you wouldn’t believe the tax they paid back in their day (days when you could still buy the average home for four times even a slightly higher-taxed salary, incidentally…) the consensus was that enough will soon be enough, if it’s not already.

Unsurprising perhaps, given we also learned last week that a majority of Monevator readers are higher or additional-rate taxpayers.

Turkeys are not renowned for their love of the roasting tray.

Same old questionSo here’s a more contentious challenge – especially for the higher-earners among you who feel overtaxed right now.

The Telegraph recently launched a tub-thumping campaign to abolish inheritance tax (IHT). Veteran Monevator readers know IHT is my favourite tax. But the UK population hates it.

For whatever reason, the typical person would rather we tax hard work over a lifetime than someone who just happens to pop out of a particularly auspicious uterus through no effort of their own – a scenario where if anyone deserves a big wealth windfall it is surely the gasping and pained owner of said uterus, not the newcomer riding the slip-and-slide into human civilization.

I would continue, but happily ex-Telegraph leader writer James Kirkup has done so less sloppily in The Spectator this morning.

He writes:

I like IHT and so do a lot of people like me: professional policy wonks and economists, who proliferate at Westminster and often get a lot of prominence in political debate – especially on Twitter.

My technocratic tribe largely regards inherited wealth as harmful to social mobility and economic efficiency. We’d rather see large accumulations of wealth redistributed by the state than cascade down to children who may already have enjoyed significant economic and social advantages […]

We get particularly enraged by arguments like ‘it’s double taxation’, since ‘double taxation’ is commonplace and unremarked on elsewhere.

Every pound of taxed income that you spend on VAT-rated items, for example, is being taxed twice.

Hear hear. Alas, Kirkup continues:

We’re all scared of dying and one of the few sources of comfort is the idea that when we do, we can leave something behind for the people we love; the power of that feeling is so strong that it doesn’t matter if your estate isn’t in any danger of incurring IHT. You’re still very likely to hate the idea of that tax and support its reduction.

Kirkup’s whole article is worth a read. He makes further pertinent points about the state of British politics and especially the still-benighted Tory party. More than 50 Conservative MPs apparently support the idea of this unfunded £7bn tax cut that benefits a mere 4% of the population.

Political titan Liz Truss is one of them, which would be enough to get the policy squirreled away into an old biscuit tin in the attic in a saner reality.

But what about you guys?

Heir-raising taxationWe mostly agree income taxes are too high.

But do you also call for the equivalent of a 1p hike in the basic rate so that already-advantaged kids can get everything they’re due but nothing they’ve earned for themselves?

Or do you accept that – unpleasant as it is – somebody has to pay the state’s way? And that it’s better to incentivise hard work and, dare I say it, entrepreneurship, than the feudal notion that every old Telegraph reader’s three-bed in the South of England should be their castle to be passed on unmolested to their by-then already mostly-well-to-do 40-to-50 something year-old offspring?

I’ll don my flame suit (I’m off to a BBQ next, it’ll do double-duty) though I’m not looking for a fight. Rather one of our considered discussion about the facts.

Which are: we’re poorer as a nation than we were, not least due to a previous populist decision we made a few year ago. That economically self-destructive move is already costing us at least £40bn in lost tax receipts. Yet someone has to pay to keep the show on the road – and it can’t all be done by the GDP-boost from record immigration.

So it’s a serious question. If you won’t tax the dead than who?

Have a great weekend.

From MonevatorCommodities investing: why we’re missing a trick – Monevator

Ego as a catalyst: why I see value being outed at this investment company [Mogul members] – Monevator

From the archive-ator: How to estimate care home costs – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK mortgage lending hits record low in sign of market stress – Guardian

Larry Summers blasts Brexit, calls it a historic economic error… – Proactive Investors

…meanwhile Eurozone inflation falls more than expected to 6.1% – CNBC

The S&P 500’s gains this year are almost entirely from five companies – Axios

Is your Barclays or Lloyds Group branch among hundreds closing in 2023? – Which

ESG-hostile activists in the US could break how Vanguard runs index funds – RIABiz

They came. They saw. They incinerated half their funds’ potential returns – Morningstar

Products and servicesBuilding societies offering members regular saver rates up to 9% – Guardian

Annuity sales soar by 22% on much more attractive deals – This Is Money

Can you save money with a ‘green’ mortgage? – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

The tiny odds of winning nothing in a year with £25,000 in Premium Bonds – This Is Money

The best savings accounts in June – Be Clever With Your Cash

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Return train tickets to be scrapped on LNER routes. A money-saver? – Which

Pastel-coloured homes for sale, in pictures – Guardian

Comment and opinionAgainst index funds, part II – Fortunes & Frictions

Have index funds become growth funds? – Morningstar

Don’t bet on market timing – Humble Dollar

Inflation is widening the gap between private and public sector pensions – This Is Money

Other people’s money – Humble Dollar

A discretionary withdrawal strategy for early retirement – Mad Fientist

Introducing the weird portfolio [Few weeks old] – Portfolio Charts

Do you need a ‘Mary Jean’ list to help your other half or kids? – Humble Dollar

Regret-optimised portfolios and optimal retirement income [Podcast] – Rational Reminder

Naughty corner: Active anticsWeddings and divorce: the scourge of investment returns [Search result] – FT

Working hours in hedge funds vs. private equity – eFinancial Careers

How to build defensive equity portfolios – Advisor Perspectives

Why people continue to invest in active funds – Financial Samurai

How to avoid dividend stocks with excessive debts – UK Dividend Stocks

Why down-and-sideways markets are bullish – Of Dollars and Data

Sector expertise doesn’t typically generate alpha for fund managers – Finominal

Kindle book bargainsA Man for All Markets by Edward O. Thorp – £0.99 on Kindle

Liar’s Poker by Michael Lewis – £0.99 on Kindle

Love, Pain, and Money: The Making of a Billionaire by John Caudwell – £0.99 on Kindle

Crickonomics: The Anatomy of Modern Cricket by Stefan Szymanski and Tim Wigmore – £3.79 on Kindle

Environmental factorsWhat ‘rewiring’ an economy means for investors – Schroders

Why cultivated meat is still so hard to find in restaurants – BBC

Black sea urchins have disappeared, threatening a coral reef – CNN

Huh, our fake beach is good for baby sharks – Hakai

Pesticide firms withheld brain toxicity studies from EU regulators – Guardian

In defense of flies – Vox

Robot overlord roundupAI ‘godfather’ Yoshua Bengio feels ‘lost’ over life’s work – BBC

Is an AI stock market bubble inevitable? – A Wealth of Common Sense

AI-controlled military drone ‘kills’ its operator in simulated test – Guardian

Tech giants have been investing in AI for years – Crunchbase

Off our beatTarzan FIRE [Sort of on our beat!] – New York Post [h/t Abnormal Returns]

Can humans ever understand how animals think? – Guardian

Paying attention – Morgan Housel

Multi-cancer blood test shows real promise in NHS study – BBC

One of the world’s most controversial philosophers explains himself – Vox

The power of staying put [Podcast] – Morgan Housel, again, via Spotify

It’s good that we now do vital government business on burner phones, like drug dealers – Marina Hyde

Is Apple’s weird headset the future? – Vox and FT [Search result]

Why our allergies are getting worse – NPR

And finally…“The cowards never started and the weak died along the way. That leaves us, ladies and gentlemen. Us.”
– Phil Knight, Shoe Dog

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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The time has come to talk about commodities. Chances are you don’t hold a position in this asset class, despite its low correlation with equities and bonds. And despite the fact that it’s often lauded as an inflation hedge.

If you’ve looked into commodities at all – beyond flirting with gold – then you probably walked hurriedly away murmuring, “nothing to see here” at the sight of the -60% car crash that totalled the market from 2008 to 2020.

But then came inflation – and over the next two years commodities smashed it. Gains north of 30% in 2021 and 2022 even while other assets bombed.

Are we all missing an important diversifying asset that actually does defend against inflation?

Keeping the faithEven while investors were throwing their unwanted commodities overboard, investment academics kept at work, cracking the code of this most misunderstood of asset classes.

Were commodities really broken? Or was the recent twelve-year bear market just a completely normal case of investment risk incarnate?

As it turns out, the academic research suggests the stench of complexity and negativity hanging around commodities masks a valuable portfolio diversifier that can deliver strong long-term returns.

Which brings us to this article – the first in a Monevator mini-series to explain, demystify, and marshall the data on commodities.

Because – whisper it – this may well be the ‘alternative’ asset class many of us are searching for.

Here’s how the series will pan out:

Part one (this piece) is a commodities explainer. Let’s see how the asset class works.
Part two digs into the research showing the role commodities can play as a strategic diversifier.
Part three is on the difference commodities can make to the portfolio returns of UK investors.
Part four concentrates on commodities’ record versus UK inflation.
Part five will scrutinise what investable commodities products are available.

Right then. On with the explainer!

What commodities investing actually meansInvesting in commodities as an asset class means buying funds with exposure to raw materials such as:

Energy products – for example oil and gas
Staple crops – soybeans, wheat, cotton, sugar, and more
Livestock – things that walk, like cattle and hogs
Industrial metals – aluminium and copper and the rest
Precious metals – gold, platinum, and other shiny stuff

An investment vehicle that holds a mix of these categories is known as a broad commodities fund. Passive investing versions exist as commodities ETFs.

Single commodity ETCs1 exist too. But they don’t offer the same diversification benefits as a broad commodities product.

So far so good. But from here, commodities funds begin to sound like the type of financial engineering that ends with the investing equivalent of the Titanic sliding to the icy depths.

Bear with me though. There’s a strong economic rationale for commodities investing, plus a recently unearthed and impressive historical track record to support it.

Commodity futures tradingThe first weirdness to dissect is that commodity funds and ETFs don’t literally own herds of cows or fleets of oil tankers. Agribusiness and oil refining is not their bag.

To avoid getting their hands dirty, they invest in commodity futures contracts.

Commodity futures are derivatives that commit a fund to buying a quantity of a particular commodity at a specific price on a specific date. Say, two months from now.

However the fund has no notion of ever taking delivery of said commodities.

To avoid their offices being overrun by cows, the canny fund manager sells their futures contract before the due date. But they’ll maintain their exposure to steers or longhorns or whatever by buying into a new, longer-dated futures contract. This, too, will be sold, further down the line, as the thunder of hooves draws near.

This manoeuvre is called rolling. It means the fund continually tracks each commodity – via a chain of ever-expiring future contracts – without ever being saddled with the costs or the raw reality of buying in bulk.

Back to the futuresYou might wonder why do futures even exist?

Well, commodity producers want to hedge against the possibility of adverse price movements before they’re ready to sell.

Meanwhile, buyers who actually need commodities to run their business must ensure continuity of supply.

Investors get involved in the middle because there’s money to be made in supplying liquidity to the commodity futures market.

Why commodities investing is profitableThe most counterintuitive thing you’ll discover today is that the return of a commodities futures fund or ETF has very little to do with the spot price of the underlying raw materials.

Spot price moves make up only a small component of a total return that is highly volatile but – over the long-term – only marginally less profitable than equities. And far superior to bonds.

The total returns of a broad commodities futures fund derives from three sources:

Spot price changes
Interest on collateral
The roll return (related to the rolling manoeuvre mentioned above)

The spot price is simply today’s price for a barrel of oil, or a bushel of wheat, or a ton of coffee.

Interest is earned because a commodities fund diverts some of its capital into purchasing collateral that underwrites the risk taken on its futures contracts.

But the roll return is the main source of long-term excess profits for investors.

The roll return is the profit (or loss) the fund makes on trading futures contracts.

Remember it’s a perpetual motion machine that constantly buys contracts with delivery dates some way off in the distance. Those self-same contracts are then sold off as D-Day looms, and are replaced by longer-dated versions.

You’ve got to roll with itRoll return is the difference between the price earned on the sold contract and the price paid for its replacement.

If the short-dated contract is sold for a higher price than its long-dated replacement then the market for that commodity’s futures is described as being in backwardation.

If the short-dated contract is sold for a lower price than its replacement, then the market for that commodity’s futures is described as being in contango.

Backwardation good, contango bad.

A state of backwardation indicates the market expects the spot price to fall. Hence more distant contracts are cheaper than short-dated ones, and the fund should make a positive roll return when it sells and replaces the maturing contract.

A state of contango indicates the market expects the spot price to rise. Now we’re in the reverse situation and facing a negative roll return when the short-dated contract is replaced with a more expensive one.

Individual commodity futures markets flip between the two conditions depending on supply and demand.2

From our perspective, the important point is that commodity investment returns benefit from backwardation and are dragged down by contango.

These states can last for long periods. The atrocious returns of commodity funds post-2007 was often linked to contango in the oil market for years after the Global Financial Crisis.

However while individual commodity futures markets are highly volatile, they also enjoy low correlations with each other.

This enables diversified commodity funds to descend into the broad commodities market like claw-craned arcade grabbers.

The claw retracts clutching handfuls of winners and losers but, over time, the gains provide ample compensation for investors.

Commodities investing: the underlying rationale There are two competing theories that seek to explain why commodities investing is profitable.

The first is the theory of normal backwardation, attributed to John Maynard Keynes.

Commodity producers want to lock in a minimum price to insure themselves against a dramatic drop in the value of their output, say at harvest time.

Thus producers hedge against the possibility of loss by selling futures contracts to investors. They pledge their product for a price that could be lower than the one they’d receive if they waited until delivery day.

Investors expect to be rewarded for offering this insurance and for taking on the risk that they may be overpaying for the commodities. Thus they set the futures price below the spot price they expect to prevail when the contract matures.

If the investor has made a shrewd guess then they can theoretically sell the commodities for a profit.

Although in reality, as discussed, they’ll punt the contract to a buyer who genuinely wants the goods. All being well, the investor still pockets a tidy profit as the value of the maturing futures contract converges upon the spot price.

The second rationale for commodities investing is known as the theory of storage.

In this conception, the value of short-dated futures is bid up by commodity buyers who cannot risk their production line slowing down for want of raw materials.

Once again, investors benefit if they’re able to purchase long-dated contracts for a relatively low cost, and then later cash in, when buyers flood into the market like forgetful husbands who’ll pay stupid prices for flowers come Valentine’s Day.

Wake up and smell the coffee, the crude oil, and the hogsThese theories help explain why a long-term risk premium should exist for commodities futures – making them more profitable than sitting in cash.

Without the promise of that premium return, there’d be no reason for investors to create the market. Eventually it would dry up.

But theory is not enough. We rational investors want to see it backed up by a historical track record of positive results.

It turns out there is one. That will be the topic of my next commodities post.

Take it steady,

The Accumulator

Exchange Traded Commodities
The grubby realities of handling real-world commodities are also a factor. For instance, it costs money to store oil. And wheat rots.

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What caught my eye this week.

The results are in from last week’s poll (now closed) and in news that will shock no one, it turns out that the readers of a personal and investing website are in general earning much more than the average UK citizen.

Over 2,000 of you voted – thanks! Your votes confirmed that a majority of Monevator readers pay higher-rate taxes:

Indeed going by the poll results, more than a fifth of you pay additional-rate taxes.

That high score does slightly surprise me. The figure nationally is around 1% of the adult population.

Perhaps higher-earners are more likely to want to tell us about it in polls?

And maybe I should cajole Finumus into writing more mundane stuff about household accounts for the very wealthy among you?

Or maybe not: he’d have you putting the family home into an offshore vehicle that you securitise on the Moldavian Stock Exchange by teatime…

How much?I’m often surprised by how much some people earn. Blame my long years of Bohemian living like a graduate student – plus my multi-decade avoidance of the office.

In a standout example, I learned this week that an old friend took home £600,000 last year.

I knew he was world-class at his job, and that his employer is the best in the field. But that field is not financial services – nor money-laundering, racketeering, or producing hip-hop records.

And my friend is a wage slave (still 15-hour days in his late 40s, he claims, at times) not an entrepreneur.

A bit more interrogation revealed 2022 was an outlier thanks to some massive bonuses, but still.

We were talking about general investing, and as my friends tend to he’d asked for some thoughts about something. In the subsequent conversation I’d guessed his salary – I thought generously – at about £150,000.

He looked at me without saying anything for a moment. Not unkindly.

Everyday high earnersAre you feeling hard done by? Remember my friend is an extreme outlier. Nearly everyone earns a lot less.

An annual salary of just over £60,000 a year puts you in the top 10% of wage earners:

Source: Statista

At least I think it does. Unfortunately Statista restricts access to the source for this data to subscribers; I presume it’s from the ONS.

Note that if you randomly Google around, most reports discuss ‘household income’. That includes all sorts of non-salary income – and in many cases the earnings of multiple people.

Cheap cutsIt was my friend’s turn to be shocked when I said I’d only paid higher-rate taxes in a handful of years. Even after I explained I’d used SIPP contributions to mitigate the impact.

My friend has been prudent with saving and investing, and is no spendy oligarch. Lots squirreled away, mostly lives in a two-bed flat – though there is a holiday home and buy-to-lets – and one where the kitchen has been unusable for a year (another story).

Nevertheless, we were speaking a totally different language on income. I was in mild shock for the rest of the evening; I think he was in turn unsettled by my earnings profile, too.

He’s now looking to downshift his family’s life or even to retire – our conversation was basically about ‘the number’ – and is mulling doing a couple of years in a less pressured and more enjoyable role as an off-ramp.

A big salary cut, obviously. He reckons to about £150,000 a year.

You can know the statistics but it’s always different with revelations from friends. Whatever you tell yourself in the cold light of day, or from a soap box in the comments on a blog. (Anticipating? Moi?)

I walked the long way home, wondering for a bit if I’d done something wrong with my life. I decided I hadn’t – I couldn’t hack his work-life for a week – but it did make me think.

No bad thing. Just not too often!

Have a great weekend.

p.s. A couple of readers who have signed-up for membership were confused when they couldn’t access yesterday’s article on the site. Remember we have two tiers – essentially passive and active, though it’ll be a bit cloudier in practice. If you’ve joined the lower-priced Mavens cohort (thank you!) then you can’t read the naughty Mogul stuff. High-rolling Moguls can read everything. I’ll look for a way to make the paywall clearer.

From MonevatorFIRE update: second year anniversary – Monevator

Ego as a catalyst [Mogul members] – Monevator

From the archive-ator: The UK stock market’s worst-ever crash – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

BoE set to raise rates above 5% as UK inflation disappoints… – Guardian

…causing mortgage lenders to hike rates and pull products – This Is Money

…meanwhile households have lost £5,455 to inflation in two years – Yahoo Finance

Which? wins campaign to protect free access to cash – Which

All-time low of 31% of Britons think it was right to leave EU – Sky News

The Londoner who lives amongst billionaires for £200 a week – Guardian

Switching to the best savings account annually tripled your interest since 2008 – This Is Money

Products and servicesShawbrook Bank’s new best buy one-year bond pays 5.06% – This Is Money

Borrowers told to brace for 5%-plus mortgage rates – Guardian

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Is Help To Buy coming back? – Which

Lenders are pulling ten-year fixed-rate mortgage deals – This Is Money

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Netflix starts charging UK password sharers – Be Clever With Your Cash

Which shops offer the best value on lunchtime meal deals? – Which

Stylish new-build homes for sale, in pictures – Guardian

Comment and opinionThe market usually goes up (but sometimes it goes down) – A.W.O.C.S.

The Renters Reform Bill explained [Video] – Property Hub via YouTube

What if you run out of life? – 1500 Days

How some people get away with doing nothing at work – Vox

Long cycles – Humble Dollar

The City of London needs an intervention [Search result] – FT

Why investment clients are attracted to complexity – Advisor Perspectives

The best time of my life – Humble Dollar

The Good Enough Job: reclaiming life from work – Next Big Idea Club

Gold isn’t a convincing core asset for Larry Swedroe – Alpha Architect

A high tax primal scream – Simple Living in Somerset

Naughty corner: Active anticsInvestment junk food – Behavioural Investment

Private equity trust discounts widen [Search result] – FT

Long-term buy-and-hold of yesterday’s winners is risky – Morningstar

Trend following in equities – Finominal

Optimal duration – Verdad

Great investors see things differently – Neckar

I don’t know – Ted Seides

Crypto o’ cryptoValuing Bitcoin by addressable market size and network effects – Morningstar

Kindle book bargainsToo Big To Jail: The Greatest Banking Scandal of the Century by Chris Blackhurst – £0.99 on Kindle

Amazon Unbound by Brad Stone – £0.99 on Kindle

200 Years of Muddling Through: The British Economy by Duncan Weldon – £0.99 on Kindle

The Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle

Environmental factorsHow melting icecaps and glaciers affect everyone [Graphic rich] – NPR

Weird, rare, and everywhere – Hakai

Full-year results from Tridos’ Thrive Renewables – DIY Investor

The scientists coaxing back nature with sound – BBC

All the arguments against EVs are wrong – Noahpinion

UK farm curbs greenhouse gases by making sheep burp less – Semafor

Robot overlord roundupThe man who put Microsoft in the lead on AI – Semafor

Vanguard CEO says AI will revolutionise asset management – PI Online

AI and the offline moat – Dror Poleg

Government to tighten AI rules amid fears of existential risk – Guardian

AI fake photo of Pentagon blast goes viral, spooks stocks – Yahoo Finance

Off our beatThe liabilities of success – Of Dollars and Data

How you brain tells the difference between reality and imagination – Quanta

Digital culture is literally reshaping women’s faces – Wired

The psychedelic renaissance is missing the bigger picture – Vox

Why are large companies so dominant? – Klement on Investing

What do adults owe their parents? – Fatherly [h/t Abnormal Returns]

Brexit has wrecked the UK car industry, but so has the government – Guardian

Sudden death – Slate

And finally…“True security lies in the unrestrained embrace of insecurity – in the recognition that we never really stand on solid ground, and never can.”
– Oliver Burkeman, Four Thousand Weeks

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The post Weekend reading: earning learning appeared first on Monevator.

Four Thousand Weeks: Time and How to Use It

Two Hundred Years of Muddling Through: The surprising story of Britain's economy from boom to bust and back again

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The effortless way to beat the market is to pay someone to do it for you. Especially if you enjoy sleeping in, tap dancing, bingeing Netflix, golf, time-consuming love affairs, or doing almost anything but hunting for good investments.

This article can be read by selected Monevator members. Please see our membership plans and consider joining! Already a member? Sign in here.The post Ego as a catalyst: why I see value being outed in this investment company appeared first on Monevator.

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I will cut to the chase. FIRE Year Two was not all sugar-sprinkles and marmalade dreams. Not at all. It was completely dominated by the illness and death of Mrs Accumulator’s mum.

A sudden hospitalisation. Followed by tests, and a diagnosis that brooked no argument. There was a little time left, but not the endless supply you always assume you’ll have.

The sentence seemed suspended for a while. We had a beautiful May Day together in the garden. Mrs TA and I, her mum and step-dad. Everything was set up just as mum liked it.

Dreamy cream tea, dreamy weather, a gentle day, remembered as if in the soft focus of a film. It seemed as though nothing was wrong.

We didn’t talk about arrangements, or wishes, or any of the things we planned to, because – why spoil it?

It was the last perfect day. The last time we could pretend that everything was just as it used to be.

Time runs out.

The rest was the agony of watching a loved one slowly depart. Seeing them fight the pain and fear. You can only try to repay a little of the debt you owe for their love.

I don’t want to drag out my description of what happened or turn the experience into a trite FIRE lesson. It was just the inescapable reality for us in year two.

There is no lesson, except life cannot be avoided. You deal with it as best you can.

Perhaps Mrs TA and I were in a stronger position in that respect than we might have been a few years ago. But that’s all.

Life goes onThe most disorientating part of letting somebody go? The rest of life must still be attended to.

Initially you’re on auto-pilot, or in a zombie state. But grieving, like any other cleansing process, works to maintain your balance, patch you up, and keep you ploughing on.

So Mrs TA and I returned to building the life we want.

And one of the things I want, is to live without paying heed to the kind of grinding anxieties that sandpaper the soul.

At work, that was mainly the fear of a mid-life redundancy ending my little game of corporate snakes and ladders with a slide back down the board.

Now I’m out of that for good, I absolutely refuse to replace one insecurity with another – some new mental cheese-grater, such as fretting about my sustainable withdrawal rate (SWR), or inflation, or spending levels.

That last concern is something I want to talk more about though. Because a number of readers have mentioned that it’s troubling them.

Almost exclusively they’re FIRE-ees who find it difficult to spend.

My guess is that the FIRE population over-indexes towards natural saver types.

Whereas that was never my bag. I was a spendthrift in a former life. I had to learn how to stop chucking my money away. So perhaps undoing the purse strings isn’t so hard for me.

But I have some thoughts on how to spend, all the same. Our lean-ish FIRE still requires a good frugality game.

How to spend money in retirement Three things help me to spend money so that it enhances our life.

Firstly, there’s mindset.

Secondly, there’s guide ropes.

Thirdly, there’s a story.

MindsetBy mindset I mean our resolution on what the money is for.

We saved so hard for so long – why?

Yes, for the security of financial independence but also for the promise of a better life in the future.

Well, that future is here and it’s every bit as good as I thought it would be. So it’s time to let go a little. If we don’t spend now, then when?

We’re both past 50. How long do we have left? 20 good years? A bit more? Less?

Mrs TA’s mum was only 25 years older than us.

Am I going to spend the next decade obsessing about sequence of returns risk?

Screw that.

We have to live life like we mean it. I’m past spending time worrying about shadows. If something awful slithers out, we’ll deal with it then.

Guide ropes This free-spending talk doesn’t mean I advocate going loopy and blowing our carefully harvested FI nuts on a lambo or whatevs.

I only mean we should not feel guilt or anxiety about spending within our means.

I think it’s quite likely that the people who suffer most from spending aversion have already mapped out an extremely prudent income level. And that with back-up plans to spare.

An SWR already offers a historically safe drawdown level. If an unprecedented squadron of apocalyptic horsemen turn up like the opposition’s cavalry, then either there’s nothing you can do, or you take evasive action as the threat materialises.

On a personal level, there’s good evidence that you’ll probably spend less later in life. Forgoing spending in the go-go years at the start only means penalising yourself twice.

If you already have a good decumulation plan but your brain is badgering you for new guardrails, then create some. For example:

Live freely on a near-bombproof 2.5% SWR.
Or tot up how much you overspend every month. Put half of it into your back-up funds and spend the other half without regret.
If extreme frugality is crimping your lifestyle then try calculating that cup of fancy coffee as 0.0005% of your net worth. Expose it as a rounding error.

You’ll know best how to distract your own meddlesome mind.

StoryThis is the technique that works best for me, especially when it comes to big expenditures.

I simply create a narrative that justifies the outlay.

This might be as simple as the aphorism ‘buy cheap, buy twice’ when I’m choosing between an expensive item that will last, versus a cheapo substitute that’ll probably fall apart in a couple of years.

The line could be, “because we deserve it”, or “I’m spending this money on people I love”.

We’re renovating our home right now. In that case spending is okay because we’re going to be: “…living with it for the next 20 to 40 years”.

The extra money I pick up from hobby work is also fair game because: “it’s all a bonus, anyway”.

Perhaps inventing a story sounds like a cheap trick to your mind? But our society depends upon it. We can’t get anything done unless we collectively tell ourselves: “money is worth something”, or “we’re British, for God’s sake”, or “the time I spend on this Earth matters”.

If you’re an established yarn-spinner then please do let us know some of the ways you convince yourself to spend in the comments.

Be good to yourselfThere’s one last strategy you can use to cope with financial constipation and that is to embrace it!

Money symbolises different things to each of us.

For some, its value clearly lies as much in the security that it represents as its purchasing power. And what’s wrong with that? Nothing, except that we’re constantly told that money is for spending, and that spending equals living.

Sure, most people act like that’s the case. But maybe that’s exactly what they’re doing: acting.

Or maybe you’re just not ‘most people’.

You could belong to a culturally underrepresented personality type that draws great comfort from keeping their financial powder dry – rather than flushing it down the drain.

Perhaps your happiness is to some degree dependent on underspending?

Here’s my direct equivalent. Most people apparently like parties. I don’t because I’m an introvert. Parties are an overwhelming sensory nightmare for me.

I used to think something was wrong with me until I found out that there are plenty of people like me. They just don’t get much airtime. Because nobody wants to watch a bunch of introverts having a good time. Even I don’t need to see that.

I suspect that hardcore frugality is the same.

It’s a behaviour that’s fairly obviously wired into many people from an early age.

If that’s you, maybe it’s time to stop fighting it. Not everyone lives to spend, the same as not everyone wants to be on TV.

So don’t beat yourself up.

Send yourself up by all means if your notorious tightwaddery is a matter of mirth among your nearest and dearest.

They’ll thank you for the legacy later.

Sure, you can’t take it with you. But some of us self-evidently need plenty of it hanging around until the matter is beyond doubt.

Anything left over can be handed to your successors, along with your compliments for having put up with you.

Take it steady,

The Accumulator

P.S. My FIRE budget for 2022-23 was £26,780 for two. Actual spend £25,939. I’m happy with that.

The post FIRE update: second year anniversary appeared first on Monevator.

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What caught my eye this week.

One reason you hear more people complaining about high taxes these days is because more people are paying higher-rate taxes.

At the start of the 1990s, just 3.5% of UK adults were in the upper tax band. That wasn’t exactly fun – and there was a recession coming, with a big housing crash imminent. But least those 1.6 million higher-rate payers could console themselves they were members of an earning elite, of sorts.

Loadsamoney? Not any more. We’ve only just begun to slog through a six-year freeze on tax thresholds that is set to send the number of higher-rate taxpayers to 7.8 million by 2028.

If nothing else it should be a boom time for tax accountants.

Check out this graph from the IFS:

Source: IFS

The higher-rate threshold today starts at £50,270. For the same share of the population to be paying higher-rate taxes as were in 1991, the IFS calculates the threshold would need to be nearer to £100,000 in 2028.

As things stand it will be… £50,270.

There’s an argument that a broader tax base is more equitable and sustainable, I suppose. But good luck raising it in the midst of raging inflation, rising mortgage rates, and disquiet over the state of the public services, especially healthcare.

People can see their money doesn’t go as far as it used to with their own spending, and they’re impatient with what they’re getting for their taxes too.

The UK economy is stagnant and ONS figures show productivity growth has slipped to the lowest level in a decade. (At least energy bills are set to fall – a windfall for both our wallets and also the State purse, given the energy price guarantee.)

Thanks to high inflation and the frozen thresholds, some will even find their incomes go nowhere in real terms1 over the next few years – yet they’ll be taxed more heavily on the top slice of what they do earn, because they’ll be dragged into a higher-rate tax bracket.

It could be youIt’s not a pretty picture, but we only recently did politics so let’s leave that for another day.

Instead I wonder how closely Monevator readers reflect the national statistics?

My instinct is we’re overweight higher-rate payers. Though I guess perhaps a heavier skew to retirees might bring the number back down?

An anonymous poll! Please select according to the highest official rate of UK income tax you pay:

This poll is no longer accepting votes

Which tax bracket are you in?* Not a UK income taxpayer * Basic-rate taxpayer * Higher-rate (40%) taxpayer * Additional-rate (45%) taxpayer VoteSo much for where we’re at today. But if you’re currently a basic-rate tax payer, do you think you’ll be dragged into the higher-rate bracket by 2028?

And if you’re already paying higher-rate taxes – perhaps even the marginal rates the crazy system introduces – are you taking evasive action (such as diverting more salary into your SIPP) to curb the damage?

Let us know in the comments below, and have a great weekend!

From MonevatorInvestor compensation schemes: are you covered? – Monevator

Too good to be true: on investment opinion, commentary, and third-party analysis – Monevator

From the archive-ator: Holiday strategies to refresh a frugal soul – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Government introduces sweeping changes with Renters’ Reform Bill – GOV.UK

Two-thirds of Britain’s mortgage rise pain to come – Resolution Foundation

Renters need £617,000 plus state pension for ‘moderate’ retirement – This Is Money

Annual energy bills should soon fall to an average of £2,053 – Sky

Soldiers to be trained to check passports at UK borders – Guardian

George Osborne to lead £2.4bn investment management firm – Guardian

Fallen darling Purplebricks sold to rival estate agent for £1 – BBC

Rishi Sunak cites… cheaper beer and tampons as the Brexit benefits – Guardian

Vice media files for bankruptcy – Hollywood Reporter

Wait for probate hits at least two months – Which

Products and servicesWill you qualify for Nationwide’s £100 member bonus? – Be Clever With Your Cash

Five reasons you’re wrong about switching broadband provider – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Should you spend £229 or £2,149 on a washing machine? – This Is Money

Lloyds’ new £150 current account switching offer comes with a perk – Which

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

How to fly economy class but feel like you’re in business – Guardian

Homes for sale close to the sea, in pictures – Guardian

Stealth wealth mini-specialThere’s no secret to how wealthy people dress – The Atlantic via MSN

The quiet luxury of language – Dror Poleg

Comment and opinionWhy has the equal weighted S&P 500 index beaten the market cap weighted? – Morningstar

The spectrum of financial (in)dependence – Morgan Housel

Was a ‘price-price spiral’ behind the inflation shock? – Stay At Home Macro

Era of “massive” UK house prices near end, says OBR economist – Guardian

Can we ever really have enough? – Forbes

The pandemic was an experience in hedging your life – Financial Samurai

Halving inflation isn’t going to transform Tory fortunes – David Smith

The problem with investing in bond indexes [Podcast] – Peter Lazaroff

An overview of factor investing and its pros and cons – Humble Dollar

Active outperformance: luck or skill? [Spoiler alert…] – T.E.B.I.

Protecting seniors – Humble Dollar

Naughty corner: Active anticsSix ways that UK equities look like a bargain – Schroders

Investing in wind farms, motorways and phone masts [Search result] – FT

Finding quality stocks using profitability ratios – UK Dividend Stocks

Concentrating on the best – Verdad

Something’s gotta give: investing ahead of deglobalisation – Sapient Capital

US small caps look cheap versus large caps – Janus Henderson

Look beyond expensive US stocks, says GMO – Institutional Investor

The coming Greek ‘megacycle’ [Search result] – FT

The Winner’s Game – Investment Talk

Kindle book bargainsThe Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle

200 Years of Muddling Through: The British Economy by Duncan Weldon – £0.99 on Kindle

A Journey Through Labour’s Lost England by Sebastian Payne – £0.99 on Kindle

Too Big To Jail: The Greatest Banking Scandal of the Century by Chris Blackhurst – £0.99 on Kindle

Environmental factorsWhere to find the energy to save the world – Wired

UN: world likely to see hottest year on record in next five years… – Axios

…at least saving the Ozone Layer stopped it being even worse – Hakai

Could restaurants solve the world’s jellyfish problem? – BBC

The first really awesome biodiversity-meets-investing resource – K.O.I.

Octopus and L&G make £70m in UK heat pump manufacturer – This Is Money

Crypto o’ cryptoA retrospective on the crypto runs of 2022 – Chicago Fed

One million individual wallets now hold a whole Bitcoin – CoinDesk

Robot overlord roundupThe coming AI battles at the international level – Stratechery

What ChatGPT means for investment professionals – CFA Institute

Searching for investment answers – Humble Dollar

Example of someone already taking the guardrails off an AI model – Eric Hartford

ChatGPT can’t do much for everyday investors yet… – Savant Wealth

…but could enable radical visual strategies in the future – Institutional Investor

Off our beatHow England’s seaside towns became both a trap and a refuge – Prospect

Choose the activism that won’t make you miserable – The Atlantic via MSN

How Formula 1 became the world’s fastest growing sport – Huddle Up

He told followers to starve to meet Jesus. Why did they? – N.Y.T. via Yahoo

The ‘return to the office’ won’t save the office – Vox

And finally…“He who has learned to disagree without being disagreeable has discovered the most valuable secret of negotiation.”
– Chris Voss, Never Split the Difference

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That is, inflation-adjusted.

The post Weekend reading: Higher calling appeared first on Monevator.

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Like nearly every publication that talks about active investment ideas and strategies, our new Mogul membership articles will come with disclaimers.

Some may see this as a cop-out. Or as arse-covering.

And on the latter they’d be right, at least in our case.

Our articles cannot be personal financial advice or guidance. It should be obvious that an anonymous website with anonymous readers cannot give individual financial or investment advice.

But it’s not obvious to some people. Hence it’s prudent and important to have a disclaimer.

However I would object to the argument that it’s a cop-out.

It’s much more complicated than that – and as Monevator has always been about educating people in (excessive) depth, let’s get into why.

Capital at riskTo me, it seems pretty clear that you shouldn’t expect to find can’t-miss winning lottery tickets in the guise of 2,000 word posts on a free or low-cost investing website.

Tens of thousands of people are paid six-to-seven-figure salaries to beat the market, and the vast majority of them fail over time. So don’t expect any better from a low-cost newsletter.

Nevertheless, as a past and present member of several investment info services myself, I’ve seen that – again – some people think otherwise.

Let me be clear: if you’re thinking of signing up as a Moguls member to secure a string of winning stock tips or market timing signals, then please don’t.

I say as much in the marketing. But if you missed it then please do feel free to cancel.

Because while I’m uncertain exactly how the content will pan out over the months ahead, I know a guaranteed way to beat 95%+ of investing professionals is not on the menu.

I’ll talk about my share ideas. Definitely! But I won’t claim they will be sure market-beating stocks.

This is not arse-covering. If you’re the type who’ll be at home with Moguls, then it should be common sense.

Investing: I did it my wayNow, you might be wondering exactly what kind of self-defeating message I’m delivering here?

Are we over-subscribed with members already? Because as a pitch to sign-up, I can see this seems straight out of Reginald Perrin’s playbook for ‘Grot’.

But not so fast.

If I wasn’t writing Moguls myself then I’d be joining it. Truly! This blog has been around for 17 years, and I’ve got to know and like its writers’ style and perspective…

And as for myself, for more than 20 years I’ve learned almost everything I know about investing from such articles, as well as books, forums, Tweets, and even the occasional YouTube video.

Not to mention the thousands of company reports and updates I’ve digested.

Without all this material made available for mass consumption, then I’d be none the wiser.

Indeed, for many of us investing would remain the preserve of opaque professionals charging a fortune for exposure to the markets.

(Without public information how would we even learn about index funds?)

Furthermore, I personally believe the right kind of person – with the right mindset and more than a little effort – will do better picking their own stocks and funds than by paying the average advisor or fund manager to do it for them.

Partly because it can be cheaper. Partly because we can be more nimble. But mostly because you and they have different incentives – you care much more about you – and different time horizons.

You have to love the challenge though, because the thrill of the game is the only certain payoff. And it helps to be a little obsessed and weird, too.

That’s all a long way from saying that I believe any particular article – mine or anyone else’s – should be taken a personal directive to buy and sell.

Learn to fish for yourselfThe point is to read and learn as much as you can – with an increasingly discerning and skeptical eye – to make ever-better investment decisions for yourself.

As Morpheus in The Matrix might put it, by the time you’re able to fully parse an investment idea, the last thing you’ll want to do is to follow it blindly.

And that is where I’m hoping to contribute with my Mogul articles for Monevator.

Information and education – and imparting what I think and I’ve learned, for what it’s worth – partly illuminated with examples of where I’m investing and what I’m seeing.

Nothing more. But nothing less, either.

Reasons to be wary of everything you readLet’s really ram this home by running through a laundry list of why it’d be silly to think a sensible route to riches is to invest blindly based on stock tips you get via email or on the Web.

Firstly, investing skill is rare (and may be non-existent) The biggie. It’s been widely shown that the ability to beat the market through stock-picking is at the very least uncommon. Even winning fund managers tend to mean revert over time.

And while I’ve seen research that finds professional managers might slightly outperform in aggregate before fees (with less skillful punters making up the difference in this zero-sum game) such an edge is evidently unevenly distributed. (A subset of managers mop up the pre-fee wins).

Which is exactly why most people should invest the bulk of their money passively in index funds.

Now, given skill is rare, what are the chances that you’re reading the fundamental analysis of someone who has it?

The Seeking Alpha website has had 17,000 contributors over the years. I’m not aware that any has turned out to be the next Warren Buffett.

Other investing opinion outlets are similarly diverse.

As I said in my introduction, that doesn’t mean I think these articles are useless for those who invest actively – whether as a hobby or to try to beat the market.

But it’s obviously naive to think they are all serving up winning share ideas.

(As for short-form social media influencers – finfluencers – maybe you’d do better to short them.)

What about me? Do I have skill? My jury is still out. My confidence was shaken by a rotten 2022.

So read my stuff with that in mind. I may prove to be at best a lucky coin-flipper.

Winning stocks are heavily skewedAnyone who has run a traditional stock portfolio for a long time knows that a small number of their decisions will deliver the majority of their returns.

The father of value investing Ben Graham generated most of his excess returns from a single growth stock, GEICO.

My own portfolio’s performance was strongly juiced by a couple of multi-bagging shares. (And it should have been further boosted to the moon by one that I fluffed, Tesla.)

Small cap investment writer Richard Beddard has commendably published a market-beating stock portfolio for years. You can see that just a handful of his selections delivered much of the returns.

And as we’ve covered before, an analysis by academic Henrik Bessembinder found only 4% of stocks delivered all the US stock market outperformance over one-month bills since 1926.

Or look at the US index today. Apple had grown to comprise more than 7% of the S&P 500 over the past 15 years. That’s a lot of index points that one behemoth has put on the board.

Run your winners, as they say.

Certainly that’s one takeaway. But another – more relevant for this discussion – is that statistically most stock ideas you read are more likely to come from Bessembinder’s mediocre 96% than the winning 4%, especially over the long-term.

The legendary stock picker Peter Lynch said: “If you’re great in this business you’re right six times out of ten. But the times you’re right, it overcomes your mistakes.”

Even clinical and emotionless quant funds are wrong all the time (albeit often with only small amounts of capital at risk with any particular trade).

Of course there are many ways to approach the market. Modern systematic or multi-asset fund managers staffed by should-be rocket scientists are playing a very different game to a traditional equity fund manager, with different risk and reward profiles.

Even so, an insider at the legendary hedge fund Renaissance Capital once revealed the firm started to find its edge when it was right about medium-term trades just 50.75% of the time.

On the back of that tiny win ratio was built the greatest wealth-compounding machine of all-time, with average annual returns well over 60%.

The bottom line: most stuff you read about will not beat the market, regardless of who wrote it. A minority of shares deliver the majority of returns. Even if you’re reading something written by a rare person with skill, there’s a high probability they’re talking about one of their duds. So most ideas you read about will probably lose to the market.

Common sense: what is realistic for the price of a pint?Monevator Mogul membership is an extra few quid over the passively-orientated Mavens.

I will try hard to deliver a deep and interesting or educational article every month for members. And of course I hope to share some profitable ones. Though as I said, no promises.

But ask yourself…would I be giving away sure market-beating investment ideas for £5 a month?

Spoiler: no.

If I had such a golden goose, I wouldn’t even be working in the lucrative – and market-laggard infested – financial services industry.

I would borrow heavily and care for my goose on my own account.

Back in the real world, while I’m happy to put my interest-only mortgage where my mouth is, I do not believe I have an invincible formula or brain or strategy or time machine to inevitably beat the market.

Hence my aim with Moguls is to share ideas. To get you and me thinking better and more creatively about our investing. And to be there month in, month out, so that we learn together over time.

I’m looking for comrades, not customers.

A lot of the people who have signed-up to Moguls say they’ve done so simply to support our wider Monevator mission. We couldn’t be more grateful!

But I hope those who love the active investing game like I do will also enjoy the journey.

Incentives and career risk“Show me the incentive and I’ll show you the outcome,” says Charlie Munger.

This statement is true almost everywhere in life, and clearly with investing.

Have you ever seen an advertisement for an active fund that mentions how most fail to beat the market? They don’t even talk about their rivals failing. Better not to bring the subject up.

That’s because the incentive for most money management shops is not to outperform. It’s to gather all the assets they possibly can. They will then take a percentage of the money they run, to some extent regardless of how well they do.

These people are not dumb. They are as aware as anyone of how hard it is to beat the market. So they naturally bury that difficulty deep in the messaging.

The Behavioural Investment blog just ran an interesting piece on the things that managers should say but don’t.

Some relevant ones include:

“We are managing too much money, it’s probably not in your best interests to invest with us.”
“Our recent strong performance is totally unsustainable.”
“I have to admit, we have been incredibly lucky”.
“Our new CEO is really focused on improving short-term performance.”
“The performance fee structure means that I can become very rich, even if I underperform.”

For a fund manager, keeping their lucrative job is the top priority. They will typically speak and act – and even think, rife as they are with cognitive dissonance – accordingly.

But I don’t get off the hook! What are my incentives with Moguls?

I’ll want to keep you subscribed, where possible. So I’ll want to keep you interested.

Even if I felt the same single stock had the best chance of beating the market every month, I’d be unlikely to only write about it again and again. I’d fear you’d get bored or feel short-changed.

What if I saw no good ideas, for months on end?

I hope I’ll say so. We’ll see.

Elsewhere, like everything else the wider investing media strives to get your attention.

What will Google searchers click on? What stocks are held by the most people, and so are of the greatest interest? What’s the point of discussing an obscure small cap if nobody clicks to read it?

Our membership articles will be behind a paywall. They won’t suffer from the clickbait curse. But it’d be overly-innocent not to imagine that other forces won’t shape our editorial instead.

Only you know what’s going on in your portfolio – and your lifeOnly you know how much money you have. How secure your job is. That you have two kids and a partner who is out of work. That you just paid off your mortgage – or you just took out a new one. You’re 35-years old. Or you’re 70-years old. You hate risk. Or you eat risk for breakfast. Your individual stock picks are made in a fun side-account with just 5% of your portfolio. Or you’re (very ill-advisedly) trying to catch-up on many years of not saving by striving to beat the market, fast.

Given all that, it should again be clear that any investment article is not speaking to you.

If you go to a professional and qualified financial adviser – ideally paid a flat fee, by the hour – and they talk through your aims, look at all your finances, understand your tax situation, and invoice you £3,000 at the end of it, then you’re entitled to believe you got personal financial advice.

If they didn’t then that’s not what you got.

Were I to say the consumer goods company Unilever – the maker of Dove soap and Ben & Jerry’s ice cream – is ‘low-risk’, then I’d mean that compared to other companies its future looks more predictable, its cashflows more stable, and perhaps it has a stronger balance sheet.

I could turn out to be right or wrong about that. But either way I would not be saying anything about the risks to somebody cashing in their private pension to put all their money into Unilever in their SIPP.

I’d not be saying anything at all about what any individual might do.

Does everyone understand what I’m saying here?

You say worth a punt, I say risk-adjusted portfolio diversifierEveryone is different, and is in a different situation.

So if you read somebody on Twitter or ADVFN or Seeking Alpha saying they’ve put £10,000 into an particular share, know that without much more information it should give you zero extra confidence.

Perhaps they’re multi-millionaires? Maybe they have 100 individual investments of that size?

On the other hand, maybe they have a five-stock concentrated portfolio. But even this doesn’t tell you much, if you don’t know much more. How old they are. Whether they will inherit a fortune from their parents.

Whether they’re idiots.

Sure, you can get a better feel with exposure over time – it’s why I hope my long record of at least showing up on Monevator will make our membership more appealing – but you can never be sure.

It’s your money. It’s your life. You must make your own financial decisions every time.

Welcome to The SuckActive investing began as an offshoot for me from passive investing. As I got ever more interested – those who know me might say obsessed – the index funds went, and the passion blazed.

Many of my favourite active investors have been great writers and sharers. I set up Monevator to write about my active investing, too.

Yet over the years it’s become painfully obvious that a majority of people should stick to tracker funds. Hence it’s felt counterproductive to talk much about active investing here, at the risk of diverting a typical reader from that path.

This is the prime reason why I added an active tier to our membership push.

Of course I want it to be an income stream too, but at least for the foreseeable future it’d be quicker and easier for me to do a couple of extra hours of my usual work a month instead.

No, I want a safe space to talk active investing. Without diverting the main message of our site.

Mogul materialSome of you nodded through all above. Those who did – and who are also a bit obsessed with investing – will hopefully enjoy Mogul membership for years to come.

Another of my aims with my articles will be to leave more people nodding than I found them.

But maybe it’s not for you? Absolutely no worries. Most people will do best to join our Mavens tier – to enjoy, learn from, and support The Accumulator’s passive investing mission.

Let’s all enjoy our investing, whichever path we take and with our eyes wide open.

The post Too good to be true: how to approach investment opinion, commentary, and third-party analysis appeared first on Monevator.

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Like all financial services, investing attracts its unfair share of bad actors and inept shysters. So it’s comforting to think that if the worst happens and your investments disappear in a puff of fraud, then the UK Financial Services Compensation Scheme (FSCS) will swing into action and bail you out.

But that ain’t necessarily so.

The FSCS protection scheme may come to your aid. But eligible claims have more strings attached than a puppet show.

How can you know if your investments are actually covered by the FSCS? And what further steps can you take to maximise your protection level?

Fancy hearing about a route to 100% FSCS compensation coverage with no cap?

Read on!

The FSCS compensation limitThe first knot to unpick is that FSCS compensation is limited to £85,000 for investments.

The formula is £85,000 per person, per firm.

Hence £85,000 is the maximum amount of compensation you can personally claim per firm you invest with. (Assuming all the other eligibility criteria are met. We’ll get to that funfest shortly).

The per person element means that you’re covered for up to £170,000 in a joint account.
Per firm means that if, in some future dystopia, two or more of your investing platforms collapsed, then you could make a separate claim for up to £85,000 to cover assets lost in each implosion.

For example, if you had £30,000 lodged with Ee-z-eeMoney Broker$ Ltd then you could put in a claim for the full amount owed.

Meanwhile, you’ve also got £200,000 stashed with the Hard4Profits Company. Their directors were last seen boarding a flight to Panama so you can claim back £85,000 for that mess, too.

You’re not covered for the remaining £115,000. The FSCS compensation limit maxes out at £85,000 per firm, no matter the value of your accounts with that firm.

Which firms are covered by FSCS compensation?You’re only protected if the firm that pops its clogs is authorised by the UK’s Financial Conduct Authority (FCA) or Prudential Regulation Authority (PRA).

Note, the word you’re looking for is authorised by the FCA or PRA.

The next step is to ensure that the authorised firm is actually regulated (by the FCA or PRA) to undertake the particular service you’re using them for.

For example, is your broker regulated for ‘Arranging investments’ (translation: executing trades) in the particular security you wish to invest in? Such as ETFs or shares?

The FCA’s Financial Services Register theoretically enables you to check these details for every firm on their books.

But in reality it’s a minefield. A fact the FSCS acknowledges by shifting the responsibility for keeping tabs to you.

The FSCS says:

Ask your firm to confirm that the activity they are carrying out for you is a regulated activity and FSCS protected.

I thoroughly recommend you do that. Then double-check your broker’s claims are verified on the firm’s Financial Services Register page.

There was a time when I felt confident in checking a broker’s status purely through the Financial Services Register.

However, a firm’s status on the register is nowadays defined by specific, technical terms. I cannot be certain my interpretation of those terms is correct.

Plus the FSCS’s “Ask your firm to confirm…” edict is plastered everywhere on the site – which suggests we cannot solely rely on the register.

Multiple brand names, one firm If you decide to diversify your money between brokers, then check they are not part of the same financial group.

For example, iWeb, Lloyds Bank Share Dealing, and Halifax / Bank Of Scotland Share Dealing are all in the same group.

This means they all count as being part of the same firm, from an FSCS perspective. So you’d only be eligible for a maximum £85,000 payout, even if you diligently split your assets across them all.

You can quite easily check whether your broker is part of a wider group on the Financial Services Register page.

Just search for its name, then check the Trading names section of its particular entry for other aliases.

FSCS protection for fund providersFSCS protection does not cover you for investment risk. If your meme stocks go to zero then there’s no backstop.

Rather, the £85,000 compensation limit is there to cover your investments from fraud, negligence, mismanagement, and mis-selling.

And those vices can affect the companies that manage your funds, too. (What a wonderful world!)

However the FSCS scheme only covers a narrow sliver of fund manager firm situations.

The headlines are:

FSCS protection applies to UK domiciled OEICs and Unit Trusts.
It does not apply to funds domiciled overseas. For example, in Ireland.
Nor will you be compensated if you hold ETFs or Investment Trusts with a fund provider that runs into trouble.
The same goes for individual securities like shares or bonds. Never mind crypto.

Use this tool to check your investment type’s FSCS protection status.

If you do invest in UK-domiciled funds then your maximum payout remains £85,000 per person, per firm.1

This is separate to the FSCS protection you’d be eligible for if a broker broke.

However, there is a way to invest with 100% protection…

100% FSCS protection for insured personal pensions and annuitiesSome personal pensions qualify for 100% FSCS protection. (That is, the maximum compensation level is not capped at £85,000.)

The FSCS describe eligible pension schemes like this:

The FSCS protects 100% of a pension directly managed under a life insurance contract.

Essentially that refers to some personal pensions and stakeholder pensions that are offered by large insurance firms.

The firms must be regulated by the PRA. And the particular scheme must be classed as a contract of long-term insurance to qualify for FSCS protection.

100% FSCS protection seems to be woefully advertised, given that many people would value it highly.

Rather than plastering it all over their brochures, I’ve found pension providers typically relegate any references to a couple of paragraphs that are sometimes found in their Key Features documents.

Here’s the kind of thing to look out for, courtesy of a Standard Life Stakeholder Pension document (bolding is mine):

Your plan is classed as a long term contract of insurance. You will be eligible for compensation under the FSCS if Standard Life Assurance Limited becomes unable to meet its claims and the cover is 100% of the value of your claim.

Watch out for clauses that warn you lose FSCS compensation if you invest in certain funds available through the pension. These funds are usually managed by another investment firm but, bizarrely, they may also include own-brand funds provided by the firm that is actually running your pension.

Talk to your pension plan provider if you’d like to know more and maintaining 100% FSCS protection is important to you.

Bear in mind that – along with annuities – these types of pension qualify for compensation under the FSCS insurance claim category.

In other words, pension assets like this don’t interfere with your £85,000 investment category claim should you hold a brokerage account, or other funds, with the same firm.

FSCS protection for Master Trust pension schemesIf a Master Trust workplace pension scheme runs into problems then its trustees can invoke FSCS protection on behalf of its stakeholders. You wouldn’t claim yourself.

However, here again, beware of warnings in the documentation about choosing certain funds that aren’t eligible for FSCS compensation.

Defined benefit pensionsDefined benefit pensions should be covered by The Pension Protection Fund (PPF) rules. Double check that yours is.

The top-line is:

100% compensation if you’ve reached the scheme’s pension age.
90% compensation if you’re below the scheme’s pension age.

Public sector pensions are funded by the taxpayer, so you’re fine as long as we have a functioning government (place your bets) and the Bank of England money printer doesn’t run out of ink.

What about cash in an investment account?Your £85,000 FSCS investment compensation limit doesn’t reduce the £85,000 you can claim for lost cash deposits.

Most brokers lodge client money with one or more big-name banks.

If a bank fails while holding your cash on behalf of your broker, then you can claim £85,000 back, while still claiming £85,000 elsewhere for missing investments.

However, if your broker money was stashed with a single institution – say Lloyds – and you also had a personal account with those self-same black horsie people, then you could only claim up to £85,000 for the two losses combined.

That’s because the limits apply per person, per firm, per claim category. (Cash is one category and investments another).

Some brokers park your money with multiple banks. They say that means your cash is equally divided between them all.

So, if your broker uses four banks for client cash, then you wouldn’t have to worry about exceeding the compensation limit until there was more than £340,000 sitting in your account.

(If you’re – cough – an absolute baller with more than £340,000 in cash at your brokers, then I hope you’ve already ponied up for Monevator membership…)

How likely are you to need FSCS protection? Of course, the worse shouldn’t come to worst.

There are regulations in place that require fund managers and brokers to segregate your assets from their own.

If the mother company explodes, your money should be safely ring-fenced in a separate pot. You’ll get it back once the smoke has cleared. The company’s creditors have no legal right to your piece of the pie.

That’s what is meant to happen. But any system can fail. You will find a warning to that effect in the terms and conditions of any reputable UK broker.

As Cofunds puts it:

As with any FCA regulated investment firm in the UK, while it is highly unlikely that Cofunds were to become insolvent, or cease trading and have insufficient assets to meet claims, we can’t provide a 100% guarantee that your money is fully protected.

So FSCS compensation provides a last resort backstop – just in case the next Bernie Madoff happens to be running your brokerage, while the cast of Dad’s Army is in charge of administration and oversight.

If your investment platform went pop, shouldn’t the bulk of your assets actually be held elsewhere, though? Shouldn’t your money be invested in ETFs and funds with other companies that are still in perfectly good nick?

Yes, that’s true. Indeed, most claims that require FSCS intervention seem to involve mis-selling, where consumers took advice from a so-called investment professional.

However, the FSCS did step in to assist customers of Beaufort Securities and SVS Securities – two UK brokers that collapsed in 2018 and 2019 respectively.

In both cases, the FSCS made good customers who would otherwise have taken a haircut because client assets were earmarked to pay the fees of the insolvency administrator.

It turns out that administrators are not creditors. So they can dip into the pool of supposedly segregated customer assets, at the discretion of the FCA, if there’s no other way to meet the bill.

Passively paranoidDuring the wind-up of Beaufort Securities, the FCA used the FSCS scheme to ensure that most but not all customers avoided a hit.

In this case, people didn’t lose everything. But clients with a very large account balance took a haircut that exceeded the FSCS compensation limit. Whereas most customers took a percentage loss on a relatively small total account balance, meaning their share of the shortfall was inside the FSCS cap.

So you may decide that you don’t need to fret when your account balance reaches £85,000. That you’ll only need the FSCS to cover you for a percentage of whatever amount you’re owed.

On the other hand, my biggest fear is the (admittedly small) chance of being caught up in a massive financial fraud.

It’s not hard to picture a scenario in which a firm tells you, “Don’t worry your cash is safely tucked away in Vanguard funds,” when it’s actually been spent on a fleet of supercars and crypto bets.

For a full picture of why your brokerage account may not be as ironclad as you’d like, please read this piece on the weaknesses of industry-default nominee accounts.

What should you do?We’ve had many discussions in the Monevator comment threads about how far to go for peace-of-mind.

Most people accept that their chance of needing FSCS compensation is acceptably low. Hence few of us open a new brokerage account for every £85,000 worth of investment assets we own.

But anyone with a large holding would be well-advised to diversify.

I personally operate across two different, reputable brokers. The Investor uses at least four that I know of.

Even if it all ends happily ever after, broker insolvencies can take many months to clean up. During that time your funds will be inaccessible.

If liquidity is important to you, then you’d be wise to spread your assets across multiple platforms, regardless of the FSCS.

Managing broker risk No guarantees but here’s some tips if peace of mind is extremely important to you. Choose at least one broker that is:

Big not small
Listed rather than private (greater scrutiny)
Profitable (check their annual report)
High credit rating rather than low or no rating
Doesn’t offer margin, loan out stocks, or run their own trading desk

Brokers can buy ‘Excess of FSCS cover’. This is an insurance scheme that apparently “protects investors for deposits above the level that the FSCS will reimburse.”

I haven’t seen any online broker advertise it as a USP, but it’d certainly offer some comfort if you find a platform that does.

Getting the answers you want about FSCS protectionAs discussed, the FSCS expects you to contact your broker for reassurance that they are properly protected by the compensation scheme.

However, investment platform support staff are often inadequately trained in this area.

You may get a vague, confusing, or inaccurate reply. Ask two different people at the firm and their responses can be worryingly inconsistent.

Moreover, while some brokers clearly explain their level of FSCS protection on their website, others do not. Even when their coverage is perfectly fine!

So you might have to persevere.

A line like this may do the trick:

“Is my investment account covered by FSCS protection up to £85,000 if your firm becomes insolvent?”

Then make sure they specifically answer that question without fobbing you off with talk about cash protection, client money, or segregated assets.

The answer you need is that your investment holdings are covered by the FSCS.

Take it steady,

The Accumulator

Think BlackRock, Vanguard, or L&G, for example.

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What caught my eye this week.

The ‘proper’ savings rate for a pursuer of financial freedom is one of those perennial hand grenades lobbed into the otherwise cozy and supportive world of personal finance blogging.

Partly that’s because of fundamental differences in philosophy when it comes to how many fingers to raise – and how vigorously – when faced with the endless temptations of consumer culture.

But mostly it’s because we all have different values and financial situations. We’re at different stages in our journeys, too.

Hence we see the spectacle of comfortably retired Boomers berating 20-somethings for ordering a bit of avocado on toast, while other 20-somethings shame their own for getting a latte from Starbucks (shameful, true, but not for financial reasons) – and everything in-between.

When I bought my flat, I also bought a fancy coffee machine. I’d wanted one for at least a decade and for me it was part of the home ownership dream.

But to some readers it was akin to Bob Dylan going electric at the Newport Folk Festival.

Never mind that I could easily afford it – and I’d waited until I could, too – or that my savings rate had been 20-50% for 20 years. That I’ve never bought a car, let alone several cars, in my life. Or that a good coffee is one of my top ten hedonistic pleasures.

They didn’t like it – and yet other readers slapped me on the back.

Enjoy yourself, they smiled. Ignore the haters!

Comparison shoppingFunnily enough I didn’t feel massively more kinship with the latter than the former.

That’s because we all had – and have – a lot more in common with each other than could be divided by a homemade espresso.

While others read the footie results or catch up on Love Island, here we find ourselves on a pretty niche money and investing blog. We’re all looking to put or keep our finances on a decent footing. And making our own decisions daily about what to splurge on and what to eschew.

The only contention is that one person’s luxury treat is another person’s wasteful squandering. That his cost-saving gambit is her unthinkable sacrifice.

A luxury you just can’t forfeit might not even register for me.

You drive a BMW Coupe 343 B-Liner Sedan Thingywotsit? Really?!

At least I think that’s what you said. Knock yourself out.

I don’t do cars. Maybe you don’t do espresso machines. It’s silly arguing over the specifics.

The big picture – money in, money out, investing the rest – is what matters.

Better latte than neverIt’s a similar story with savings rates.

If you’ve no money socked away at 50 and you tell me you’re going to start saving 5% of your salary into a SIPP, then I’m going to tell you it’s not enough.

Until, that is, you tell me you’re earning £500,000 a year…

At the same time a 22-year old saving 5% of their fairly ordinary professional salary – topped up by the company and the government – might well be on their way to becoming a millionaire by the usual retirement age without ever feeling they sacrificed anything.

Which in turn leads to those circular arguments about whether compound interest matters or not.

If you only start saving properly when you’re a decade away from retiring, I agree it’s not going to do much for you.

If you began in your early 20s and now you’re in your 50s – seeing a good year in the stock market bolt more than your annual salary onto your portfolio – well, it’s hard to know where to begin.

It all adds upNick Maggiulli over at Of Dollars and Data therefore did everyone a great favour this week by pinning some numbers onto this age-old drama.

By showing how the impact of saving a bit extra varies depending on how much you’re already saving – and for how long you intend to keep at it – Nick has revealed the mathematics behind the emotions in these debates.

For example, let’s say you are currently on-track to retire in 30 years. Nick’s table below shows how many years of work you could avoid if you increase your savings rate by three different amounts:

So if you’re already saving 20% of your salary, for instance, then save 5% more for the rest of your working years and you could actually retire three years and a bit earlier.

What’s striking about this table is actually how little difference saving even more money makes once you’re already putting away a healthy 20% or more of your income. That’s the long time horizon at work.

Have all the avocados and lattes you like, my young and disciplined friends!

In contrast, if you’re only currently saving 5% to be on-target to retire in 30 years, then tripling your saving rate could nearly halve your remaining years in the office.

There’s plenty more insights unearthed by Nick’s tables and graphs, so go read it.

And have a great weekend!

p.s. Thank you to everyone who has already signed up to become a Monevator member. It’s truly gratifying and the strong start has encouraged us to think we can eventually become a sustainable operation. What’s more, many of you shared some generous words, too. If you haven’t already read the more than 130 comments from readers on last Saturday’s post, please do! And thanks again.

From MonevatorWhat do rising rates mean for our portfolios? – Monevator [For members]

Mortgages and emotions: 2022’s interest rate mayhem – Monevator

From the archive-ator: The obvious thing we all forget when we borrow money – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Bank of England raises key interest rate by 0.25% to 4.5%… – Sky News

…and warns UK inflation will stay higher for longer it thought – BBC

Meanwhile UK economy expanded by just 0.1% in Q1 2023 – BBC

What do higher interest rates mean for your finances? – Which

Government drops plans to scrap leasehold property system – Guardian

Grocery chiefs warn new Brexit red tape could empty shelves – Independent

London: a “very problematic” stock market – CNBC

Global prime property index falls for the first time since 2009 [PDF] – Knight Frank

Products and servicesCheap and free things to do over the holidays – Which

Skipton launches first 100% mortgage since 2008 – MoneySavingExpert

Blackrock and Vanguard ETFs will dominate for years – ETF.com

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Consumers on ditching gas central heating for heat pumps – Guardian

Backlash grows over new efficiency rules for landlords – This Is Money

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

What are your supermarket loyalty points worth? – Be Clever With Your Cash

‘Reverse ATMs’ at some US stores swap cash for pre-pay cards… – Axios

…while also in the US, a new fintech is targeting the over-60s – TechCrunch

Homes for sale in the super-suburbs, in pictures – Guardian

Comment and opinionShould you save more to retire earlier? – Of Dollars and Data

Three lessons from the 60/40’s stumble – Morningstar

Defined benefit pensions: not dead yet [Search result] – FT

Asking the wrong questions – Oblivious Investor

The future will be… something – Fortunes & Frictions

Tim Harford: not everyone can substitute away inflation [Search result] – FT

Free to be – Humble Dollar

Revisiting the Permanent Portfolio – DIY Investor UK

The use case for FOMO investing – Think Advisor

Debating nationalizing the UK water companies [Podcast] – ALTIF

“We won’t be able to pay this much”: higher rates hit home – Guardian

Be an emotional person, just not with your money – Darius Foroux

The harvest that matters – Simple Living in Somerset

Pay’s the issue, but don’t forget public sector pensions – David Smith

US recession obsession mini-specialWhat’s the best asset type to hold during a recession? – Morningstar

Gold versus inflation, stagflation, and recession – Institutional Investor

Swap and credit spreads still say no US recession – Califia Beach Pundit

US interest rate hiking cycles compared [Infographic] – Visual Capitalist

Naughty corner: Active anticsBe glad short sellers exist and [sort of] conspire – Capital Gains

Should investors trust their gut? – Behavioral Investment

Mayday for Interactive Broker margin lending – Fire V London

Boost your returns with a very, very long vacation – Morningstar

Diversification or di-worse-ification? – Verdad

The physical world can affect an investor’s returns – Institutional Investor

Kindle book bargainsThe Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle

200 Years of Muddling Through: The British Economy by Duncan Weldon – £0.99 on Kindle

A Journey Through Labour’s Lost England by Sebastian Payne – £0.99 on Kindle

Too Big To Jail: The Greatest Banking Scandal of the Century by Chris Blackhurst – £0.99 on Kindle

Environmental factorsThe people living ultra-low-carbon lifestyles – BBC Future Planet

A patch of seaweed is growing to record size in the Atlantic – Vox

Seaflooding – Uncharted Territories

How wild pigs retook Singapore – Hakai

Why climate change is not an environmental issue – The Walrus

Robot overlord roundupSchooled – Indeedably

How AI knows things nobody told it – Scientific American

Google reveals AI updates as it vies with Microsoft – BBC

Artificial Intelligence is not going to kill us all – Slate

ChatGPT fever is attracting billions in VC funding – Wall Street Journal [h/t AR]

Will a robot take YOUR job? [Data, US] – Will Robots Take My Job

Off our beatThe star athlete family office – Profluence Sports

Zelda: Tears of the Kingdom is the best Switch game ever made – Inverse

Should we abandon the ‘war’ on cancer? – Aeon

Read The Economist backwards [Podcast, or scroll for text] – Russell Clark

Who better to sing old Brexit tunes than this over-hyped new act? – Marina Hyde

Monkeys and the ‘reverse salient’ – Annie Duke

A 102-year old doctor on letting go to be happier – CNBC

How Russia’s invasion transformed one Ukranian city [With graphics] – Vox

R.I.P. Metaverse – Business Insider

And finally…“People will choose unhappiness over uncertainty.”
– Tim Ferris, The 4-Hour Work Week

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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You don’t need to be paid-up member of the Monevator mafia to recognize the pain of rising interest rates.

All you need is a mortgage.

Rates soared in 2022. And anyone coming off a fixed-rate mortgage they’d bagged in the near-zero era found they were on the queasiest roller-coaster ride since a post-beers jaunt at Munich’s Oktoberfest.

That includes me. I got my mortgage in 2018. The rate was 2%, interest-only, fixed for five years. Due to my unusual income and asset profile I had to literally write to the CEO of a bank to secure it.

Thankfully, the CEO immediately saw the sense. But please do keep this in mind with what follows.

If you’re a vanilla mortgage customer, then you’ve far more options for dealing with rate volatility than me.

I wrote about stress testing your mortgage in June 2022. We also ran through a mortgage risks checklist. After doing your sums, you might well have concluded an early repayment charge was worth paying to lock in a new deal before rates rose further.

But I was too nervous to prod my bank. In fact, I wasn’t 100% sure what would happen when my deal expired. The CEO had left. The bank seemed more risk averse. Would it do something mad like ask me to repay in full? (On the face of it against the 25-year term, but you never know.)

A few inquiries established that other banks still didn’t want my custom – not any more than five years ago. Shopping around like most people wasn’t an option for me.

So I waited for my automatic three-month ‘remortgaging window’ to open. I hoped to snag a new rate with a few clicks via my bank’s online platform. All without a human staffer raising an eyebrow.

But then came Liz Truss.

Budget bazookaThe Tories have given me many reasons to regret my rare vote for them in 2010.

The Referendum. The hard Brexit interpretation of the close result. Boris Johnson.

“Hold my pint,” said Liz Truss, before unleashing her Mini Budget.

Already climbing, bond yields and swap rates soared just as my remortgage window opened. Every time Kwasi Kwarteng spoke, I needed to find another £100 a month for the next five years.

Can you spot the Mini Budget below?

Truss and Kwarteng weren’t responsible for all that climb. And yields remained elevated even after they got their marching orders.

But that extreme spike, with no signs of stopping? Lenders slashing their mortgage ranges and hiking rates on what was left? Pension funds on the point of blowing-up?

The worry felt by ordinary people having to make a huge long-term decision with the serenity of an engineer using a slide rule on the dodgems?

That was made in Whitehall.

Up, up, and awayEven before my remortgage window opened, I was watching swap rates and daily visiting my bank’s (admirably transparent) mortgage website page.

For a good while its relatively low rates didn’t budge.

I wondered why.

Were customers truly being offered these rates? Did it have some tranche of cheap funding to work through? Was it desperate for market share?

All very interesting. But what I should have been doing was grabbing its five-year fixed-rate – then under 4% – with both hands.

Sure enough, one day I refreshed the rates tab to find all its mortgages had jumped up by more than a full percentage point.

Indeed at its worst, a five-year fixed rate for my loan-to-value rose to well over 5%. That compared to the 3.5% I was modeling in summer, and of course the (now fantasy land) 2% I was coming off.

The rate hike would pump-up payments on my chunky interest-only mortgage overnight from much less than £1,000 a month to more than £2,300.

Now, it’s worth reminding readers – especially if you haven’t read my mortgage origin story above – that at all times I had far more than sufficient assets in my ISAs and elsewhere to pay off the mortgage completely. I could use my assets to pay the monthly repayments too.

So this wasn’t an existential threat.

It was, however, a sucker punch.

Like most stockpickers I’d gone from giddy markets and a frothy portfolio in summer 2021 to a seriously battered warchest. Now I faced a squeeze on my cash flow too.

To compound things, I’d eased off freelance work in those heady 2021 days. So I had less cash coming in to call upon. Maybe I’d end up drawing down my portfolio years ahead of schedule.

Thankfully, while I fretted about all this Truss was ousted and swap rates finally eased. That implied mortgage rates would soon come down, too.

I decided to wait a while longer. I even gamed out paying my bank’s Standard Variable Rate (then well north of 7%) for a few months if it looked like rates would fall rapidly – though going on to the SVR would be heinously expensive, at more than £3,000 a month.

Mortgages and emotionsDespite seeing light at the end of the tunnel, I had to concede all this was stressing me out.

Which surprised me. I’ve many years experience of juggling my net worth and more recently running a portfolio an order of magnitude (and then some) bigger than my best-ever annual earnings.

One time I liquidated half my tax-sheltered portfolio in a morning – and then headed out for a jog.

I’m not saying this as a flex. It’s just to highlight that I’ve done my shift in the trenches with big financial decisions – and I’m usually pretty rational about finances and investing.

But this mortgage rate volatility had given me the willies.

I even called The Accumulator. His sage advice was to pay off some of the mortgage while I waited to see where rates went. And to pay attention to how it made me feel.

Maybe I could pay down some more if I felt an overwhelming sense of relief?

Or maybe not, if I didn’t.

Fortunately, I still had a big chunk of cash lying around from my sale of unsheltered shares in Spring 2021 – especially from dumping a massively over-sized Amazon position.

I had done this selling partly fearing a capital gains tax hike, and regretted it when CGT rates were left unchanged.

That regret was eased when tech shares plummeted later in the year.

Now I was actually grateful to my former self.

I paid off 10% of my mortgage balance and sat back to enjoy the endorphin rush.

But there was none.

The projected monthly mortgage payment amount dropped by a couple of hundred quid or so, but to me it still looked like I would be paying out the equivalent of a foreign holiday a month out of sheer bad luck, given how I’d unwittingly anchored to my previous lower rate.

Also, I missed having all that cash to hand. It had stood ready to help with those higher bills, for one thing.

And there were other dramas on my way to remortgaging.

For instance, the bank’s online platform borked, and for a few days I thought my account had perhaps been flagged for investigation. I’d discovered I could ‘bank’ a mortgage offer and then wait to see if rates fell further, but these technical issues complicated even that.

I ended up talking with staff after all. At least they reassured me that I was definitely going to be able to remortgage.

Finally – after just a month on that ball-breaking Standard Variable Rate – I refreshed the mortgage page to saw a new five-year fix at just under 4.5%. I’d pay a little over £1,600 a month.

I checked the URL and reloaded. It was still there. So I did the necessary, and finally felt some relief.

Of course a few weeks later my bank was offering well below 4% for the same fix! Which is entirely on-brand for this saga.

But at least the 10% I’d paid off wasn’t a wasted experiment.

Only by making this payment had I put myself into the bank’s best loan-to-value band. Which was what had enabled me to bag its best five-year fixed rate.

Small victories.

Late to the partyI’ve gone into all this biographical detail because some of you have been reading about my mortgage adventures for many years now. A few of you asked about my remortgaging, too.

In fact I’ve previously had to explain in Monevator comments why I wasn’t remortgaging in Summer 2022.

While we do always need to beware hindsight bias – almost no-one predicted what rates did last year – I believe if I hadn’t been nervous about rattling my bank, I would have remortgaged early in June or July.

After all I was writing those stress-test articles (linked to above), and I’d warned about the regime change to higher rates several months before that.

Remortgaging in summer would have secured 3.5% fixed for five years – and maybe more sleep.

And it’s that sleep point which is motivating my slightly self-flagellating tone today.

A mortgage is still a debtTo be clear, I have never been against paying off a mortgage. My articles on investing instead have invariably noted that paying down the mortgage is usually a sensible decision for most people.

That’s true even when the mathematics say otherwise – inspiring more risk-hungry souls like myself to see mortgage debt as cheap funding for investment.

And I knew a big reason to pay off early was the emotional dividend. Not being stressed about being on the hook for a mountain of debt – nor even worrying about the monthly repayments.

However it’s one thing to know something and another to live it.

I’d already learned that carrying a big mortgage potentially affected my investing. (I partly blame my huge Tesla investing misstep on getting used to being a borrower.)

But that dread I felt during the remortgage process, of being at the mercy of chance – and political ideologues – was far more unpleasant than I expected.

As a lifelong debt hater, I’d highlighted to a skeptical friend when I took out my mortgage in 2018 that for the first time I’d opened up a path to going bankrupt (however unlikely). The potential was now there for my mortgage to outweigh my assets in a 1930s-style crash, putting me underwater.

So I was alive to my aversion even to mortgage debt, which is by far the most palatable kind of borrowing.

Yet when things got hairy, I’d discovered I felt threatened by the mortgage in a way that I’ve never been worried by, say, a bear market.

Admittedly, paying down £50,000 didn’t do much to alleviate things. I’m guessing there’s something binary going on between having any debt and none.

But that was a lesson too.

Again, I’ve long known retaining a big cash cushion was reassuring, even if it’s theoretically sub-optimal.

But I missed it more than I anticipated once it was gone.

So I’ve changed my mind about some thingsDespite this rather emotional journey, I’ll keep running my mortgage for the foreseeable.

However the episode did result in some changes to my portfolio – I now maintain an explicit buffer of lower-risk assets, partitioned from my usual investing antics – and also to my long-term thinking.

I can’t now imagine going into true retirement with the mortgage, for example. Before I’d wondered whether I’d ever pay it off, versus letting it dwindle into inflation-adjusted insignificance if I could.

So let this be a moment for you pay-off-the-mortgage militants to enjoy a bit of schadenfreude.

Like I said, I never thought paying it off was the wrong decision for anyone.

But I do now feel it’s a bit more right than I did before.

Why I stayed invested and kept the mortgageGiven the finer margins of investment returns versus the higher cost of debt – not to mention my remortgaging drama in the midst of market chaos – why didn’t I just get shot of the thing?

Again, paying it off would be perfectly sane.

However for various reasons I didn’t.

It’ll probably still* *be more profitable to invest. Even on standard expected returns, my portfolio should still outperform over the next 20 years if tax-sheltered. However it’s a far closer call – and paying off a mortgage is a sure thing, versus uncertain investment returns. So it’s my own active track record I’m looking to, personally. This is holding well into double-digits per annum even after a terrible 2022. Fingers crossed. (Try our spreadsheet to explore the maths for yourself.)

Retaining tax shelters (ISAs). This has always been a prime motivation for my having a mortgage. If my portfolio couldn’t be tax sheltered in ISAs, I’d probably ditch the debt. I’d also consider doing so if annual ISA allowances were unlimited, on the grounds I could rebuild the shelter later. But the ISA allowance is a use-it-or-lose-it affair. Who knows where my finances will be in a decade or two? If I’m lucky though and I continue along the same track, I’ll be pleased to have built up a seven-figure tax-shielding ISA fortress. (See Finumus’ article on borrowing just to fill your ISA each year.)

It’s a hedge against hyper-inflation. We need to do a proper article on this, because you can tie yourself in knots. High inflation quickly erodes the ‘real’ value of debt in today’s terms. Hurrah! But what if whatever you spent the mortgage on languishes? If house prices fall or are stagnant, was it still a hedge? (I think so…) But I’m invested, too – so what about market returns? Or what if incomes rise fast, making it easier to pay off? Where do taxes fit in? (Inflation ‘gains’ on eroding debt aren’t taxed…) Broadly, I see my big mortgage as a hedge against high inflation. It aligns me too with the government, which also has a debt problem. The cost is extra risk – though inflation does diversify my need to achieve high investment returns. (Everyone with debt ‘earns’ when higher inflation erodes its real value, regardless of skill.)

I might not ever be able to get another mortgage in size. This won’t apply to most. But unless I decide to ramp up my income massively, I’ll never be able to replace this mortgage. (Recall: I had to go to a CEO for it.) Even if I was earning the six-figures required, I’d more likely put most of my earnings into my SIPP – at least while the lifetime allowance is in abeyance.

I’m not running a fund professionally. Very personal. A few years ago I threw in the towel on the idea of running money professionally. A story for another day. Anyway, I sort of see the mortgage as my nod to running Other People’s Money. My bank’s money! It’s my small way of using external assets to grow my wealth.

More than a feelingI don’t fault anyone whose response to 2022 was to pay down their mortgage, pronto.

Even more power to you if you saw this coming and did the deed earlier.

For now I soldier on – though this may change if and when the facts and my finances do.

Or if Liz Truss somehow gets back into office. (I think I’d sell my flat and emigrate.)

Having dealt with the emotional and personal side, I’ll look at the numbers more generally in a fortnight or so. Subscribe to our free email updates to ensure you see it!

The post What I learned about mortgages and emotions from 2022’s interest rate mayhem appeared first on Monevator.

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Rising interest rates impact on every part of our financial lives, from mortgages to credit cards to business loans. Our investments are no exception.

And with the Bank of England widely expected to raise Bank Rate (yet) again on Thursday, we’re all continuing to get a personal taste as to how painful that impact can be.

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What caught my eye this week.

Today marks a new era for the somewhat United Kingdom. Long live the King. Or at least let nobody begrudge Charles III the 13 years the ONS reckons he’s due.

Likewise, it’s also time for something new at Monevator.

Because today we’re launching a Substack-style membership tier. For a small recurring fee, you can be the proud(ish) recipient of either one or two members-only emails a month. With on-site benefits too.

And by signing up you’ll help keep Monevator going for… perhaps another couple of decades?

More below, or else jump over to our sign-up page to be an early adopter. (With our thanks!)

I’ll level with you. These member emails won’t suddenly transform your life. They’re not going to make you a millionaire in a year or rule your retirement or supercharge your salary.

But if you already know and like what we’re doing around here, then you’ll enjoy them. We’re certainly not embarking on a divergent path as Internet influencers or anything like that.

So why are we doing it? And why do I hope you’ll consider joining?

A bit of background.

Tiny violin orchestraMonevator has never been a big money spinner, to put it mildly. Cultivating an audience keen on cutting costs and saving for an early retirement is not very compatible with minting the readies.

I began posting in 2007 and for the first five or so years the site was entirely a passion project. Which, given the hours I (and soon enough my co-blogger) put in made Monevator what dating coaches call a high maintenance relationship.

Things did pick up. Advertising and some affiliate sales grew with traffic. But I turned down lucrative requests every day to do paid-for posts or links, and we’ve never gone down the ‘Make Money Online’ path that so do.

Still, we were edging onwards and upwards.

Indeed by summer 2021, if you squinted, we almost looked like a real business. On leaving the workforce, my co-blogger The Accumulator was able to devote himself more to the site – having written his articles during his weekends for a decade – and there was a budget for it too.

I began to daydream about having a designer revamp Monevator so my younger friends wouldn’t laugh at it.

But these halcyon days didn’t last.

I won’t belabour the story: basically a one-two-three punch of the end of lockdowns, a Google algorithm thwack, and the collapse in ad rates hitting everyone from Facebook to, well, us, slashed our inbound search traffic (the transient visitors who actually click on ads) and crashed our income.

Back down the snake we slid, after only just climbing that ladder.

The Accumulator was dialed back again. We’d been making good progress updating the articles that needed it, but that also went on hold.

And the mooted design revamp? Well this is why Monevator still looks like you’ve just woken up the day after Lehman Brothers failed in 2008…

Subscribe and saveYou may have noticed many big media sites – let alone indie blogs – shutting down or else getting covered with clickbait in recent years… What This Woman Learned When She Gave Up Wearing Her Bra. How Nigel Farage Keeps Slim Thanks To This One Simple Trick.

The social media platforms long ago gutted most of the alternative online media. YouTube, Instagram, and TikTok have done a number on what was left.

Fair enough, I suppose. We get who we vote for and what we pay for. Perhaps most people can live without verbose wonky articles, and prefer a 20-second video of somebody raving about the FTSE while standing in a bucket of iced water wearing a Superman cape.

Who am I to judge?

However not everybody does. Email subscription platform Substack has shown people will pay to support quality content. This model is appealing to us, because it aligns with what we believe you prefer too. Authentic and trustworthy info – not us selling products, or writing top ten lists for the eyeballs.

One option then was to move Monevator to Substack. (It’d also solve the 2008 chic issue.)

However many of you add a lot of value to our articles via your own comments, and countless more benefit when you do so. That works best on blogs. Besides, I still believe in independent websites.

Hence we decided to instead add subscription and membership features to Monevator.

The perks of being a Monevator memberThe result is a little clunky, but it works. You’ll see a sign-in link on the top-right of the Monevator website. When you log-in as a member, you also see a little box in the sidebar, from where you can take ownership of your commenting ‘nickname’ and your avatar displayed alongside comments.

Baby steps.

You’ll also notice Monevator has no ads when you’re logged in as a member. This is another benefit to signing up. While I’m grateful for the revenue advertising does still bring in, it’s obviously a more peaceful experience without them.

(Yes, we all know you can use an ad blocker. But too many people do that and we – and other content creators – may have to shut up shop. There’s a cost to making everything free.)

Our membership and subscription emails are delivered with software from Memberful (owned by Patreon). The financial stuff is handled by the ubiquitous payments juggernaut Stripe.

Indeed we don’t process your credit card details at all. So don’t worry about that.

As for those member emails, I’m not going to over-hype them. (Why do I sense buzzers and lights going off, Take Me Out style? Where’s Paddy McGuinness when I need him?!)

The Accumulator’s monthly ‘Mavens’ email will be passive and FIRE-focused. Business as usual but maybe with a slight tilt more towards de-accumulation. (Hey, we oldies can better afford it.)

An additional monthly email – which you get if you sign up for ‘Mogul’ membership – will be by me, and it will be for like-minded active investors and market maniacs.

This is the stuff I first set the website up to share but I’ve stopped posting in recent years. In part because I haven’t wanted to dilute the key Monevator message that’s evolved – that most people should use index funds – but also because I grew tired of writing endless caveats and disclaimers.

So expect heretical emails flagging up interesting stocks and funds, others on market conditions or new strategies – the content will evolve as we find our feet, but it will be unapologetic in being for those who know better but who love the game.

Oh, and it is definitely NOT going to be personal investing advice. Nor will I guarantee Five Stocks To Beat The Market or the like. (If I could promise you that, I’d charge a lot more for it.)

However I will do my best to create a monthly email that subscribers actively look forward to, as we explore together the perplexing challenges of active investing.

Your investing website needs YOUSo that, in too many words, is what our new membership service entails. (Summary here).

But let’s be honest, this is also us asking you to help support the 80% of new content that will still be free – and the more than 2,000 articles we’ve published in the past and continue to update.

We hope you’ll see the monthly tariff as more reasonable in that light.

In fact over the past 17 years I’ve had literally hundreds of people ask me how they can give us a bit of money. This hasn’t happened with anything I’ve been done before (except for being a grandchild!)

You’ve suggested Patreon support, tip jars – even my Bitcoin address at the end of every post.

But I wanted to do it properly. Belatedly, this is our stab.

We probably need roughly 1,000 of you to become members – not all on the cheaper Maven tariff – for us to become relatively safe from Google’s whims or the pressure to turn more articles into affiliate pitches or whatnot. (At least until the AIs rip-off all our content and kill us anyway.)

With enough members, we will be free to create more – and sometimes deeper – articles. As well as revamping more of the good stuff in the archives and making it all more accessible.

Above all we can strive to make Monevator the only place that the average person needs to visit to become a successful – and self-directed – investor, in control of their own financial destiny.

In short, we all win!

Will we achieve escape velocity? I have no idea. But it’s partly down to you.

So please do check out our sign-up page and consider becoming a Monevator Maven or Mogul.

And have a great coronation weekend!

From MonevatorHistorical asset class returns (UK) – Monevator

Investment costs: how low can we go? – Monevator

From the archive-ator: Can you commit to your investing strategy for the long term? – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

FCA to simplify the UK’s stock market listing rules – FT Adviser

Britons pull £4.8bn from bank accounts on banking fears – This Is Money

JP Morgan acquires failed First Republic, CEO says this stage of crisis over – CNBC

Government plans shake-up to tackle fraud epidemic [Search result] – FT

Mortgage costs for first-time buyers up c. £200 a month on a year ago – Guardian

Forge Global launches index of pre-IPO firms. Could an ETF follow? – Semafor

Rejoin the single market, says Tory MP Tobias Ellwood [Video] – Peston via Twitter

Bitcoin just processed more transactions than ever before – BlockworksThe Covid downturn still lingers downtown – Carl Quintanilla via Twitter

Products and servicesWhy ‘investing’ in coronation coins is a costly mistake – Which

Britons with valid passports barred from flights over Brexit rules – Guardian

Are Isle of Man and Guernsey-based banks worth it for higher rates? – This Is Money

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Gap between the best and worst annuity rates widen – Which

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Homes for summer socializing, in pictures – Guardian

Comment and opinionThe best-ever quotes from Buffett and Munger’s jamboree – Neckar Substack

Man U and the football South Sea Bubble [Podcast] – ALTIF via Apple

How long will you live? – Best Interest

Succession: does it add up? [Podcast, and beware spoilers!] – ALTIF via Apple

The granny tax: coming to a family near you [Search result] – FT

Escaping the waiting place – Joseph Wells

Find the torture you’re comfortable with – A Wealth of Common Sense

Early retirement devotees rethink after ‘dicey times’ – Yahoo Finance

It never stops raining – Humble Dollar

Five insights from Christina Wallace’s Portfolio Life – Next Big Idea

“Humility is the hallmark of people who are financially successful” [Podcast] – Morningstar

Naughty corner: Active anticsInvesting’s big blindspot – Sapient Capital

On vinyl flooring firm James Halstead [Podcast] – Maynard Paton

Selling Hikma Pharma after a 40% share price gain – UK Dividend Stocks

Cancel culture: a new monetary phenomenon – Bond Vigilantes

The Fed will not pivot – Stay At Home Macro

Late-stage VC funding has completely dried up – Crunchbase

Kindle book bargainsThe Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle

200 Years of Muddling Through: The British Economy by Duncan Weldon – £0.99 on Kindle

A Journey Through Labour’s Lost England by Sebastian Payne – £0.99 on Kindle

Too Big To Jail: The Greatest Banking Scandal of the Century by Chris Blackhurst – £0.99 on Kindle

Environmental factorsUK firms face delays of up to 15 years for solar installations – Guardian

The renewable transition in adolescence [PDF] – JP Morgan

An invasive coral is causing havoc in Venezuala – Reef Builders

Direct lithium extract: a potential game changer [PDF] – Goldman Sachs

Robot overlord roundupChatGPT ‘portfolio’ outperforms leading UK funds [Search result] – FT

Why AI pioneer Geoffrey Hinton is now scared of AI – MIT Tech Review

The looming threat of AI to Hollywood, and why it matters to you – Vox

A good news story about AI and workers – NPR

AI is a waste of time – The Atlantic via MSN

Microsoft opens Bing AI for public testing; no waitlist – Engadget

Can ChatGPT help investors process information? [Research] – SSRN

Off our beatThe coronation of King Charles explained – Vox

Charles, our mournful monarch: in his pomp but out of his time – Marina Hyde

Here comes… India! – Noahpinion

How technology reinvented chess as a global social network [Search result] – FT

The unexpected wholesomeness of ‘The Boys’ chat groups – Slate

Quantum computing could break everything [Cool graphics, search result] – FT

Brexit: we’re all worse off – The Atlantic via MSN

“I spent a decade eating scones in every National Trust tearoom” – Guardian

When private equity firms bankrupt their own companies – The Atlantic

Vicious traps – Morgan Housel

This is why you can’t wait until later – Ryan Holiday

And finally…“Do not spoil the wonder with haste.”
– J.R.R. Tolkien, The Return of the King

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: Become a Monevator member! appeared first on Monevator.

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There’s been a recount, and it turns out there are three certainties in life: death, taxes, and fees for investing. Let’s see what we can do to reduce our investment costs as far as humanly possible.

Here’s the hypothetical scenario. We’ve got £1,000,000 in our ISA. [Hey, this is a Finumus-branded article – Ed.]

And we want to create a 100% global equity portfolio as cheaply as we can.

We obviously don’t believe in active management, stock picking, factor tilts, home bias, or any of the other nonsense.

We just want to get pure, market cap-weighted, global equity beta at the lowest possible cost.

What broker / platform are we going to use?Of course, we’re first going to consult the excellent Monevator broker comparison table.

With £1m to invest, we will want a fixed / capped cost broker. (As opposed to paying a fixed percentage on all that lolly.)

I’ve decided we’re going to use Exchange Traded Funds (ETFs), rather than funds (or Unit Trusts as we used to call them). That’s because many platforms charge extra fees for holding funds, but not for shares. And ETFs – despite their name – count as shares, not funds.

Moreover I’m more comfortable with ETFs than I am with funds, just because of my own biases.

Let’s plump for iWeb. There’s no annual fees to pay, it’s only £5 a trade, and it’s owned by the sizeable Halifax, which is owned by HBOS, which is owned by Lloyds. (iWeb doesn’t charge extra fees for holding funds. Not that it will matter to us with our ETFs.)

Furthermore we’ll need our ETFs to be traded on the London Stock Exchange (to start with) and have a GBP share class (trading currency).

Let the investment costs crunch beginIf you pull up JustETF and apply a few filters, you will see that the cheapest all-in-one world equity ETF is the Amundi Prime Global UCITS ETF DR (D). (Ticker: PRIW.L).

This will be our ‘straw-person’ to benchmark against:

Now, we could stop right there to be honest. With this fund and its tiny Total Expense Ratio (TER), we’d likely outperform 95% of all other investors already.

Do any of those cons matter? If you’re investing a small amount, the answer is no.

Go out and enjoy the sunshine. Take your umbrella, just in case.

What about the emerging markets?It may come as a surprise – especially to those who live there – that poor countries, according to the financial markets, are not considered to be in ‘The World’.

To City professionals, ‘The World’ only includes rich countries (developed markets, or DM). It does not include poor countries (emerging markets, or EM), or even poorer countries (frontier markets, FM).

It is only the ‘All World’ label that includes EM (but still not FM).

The ‘W’ in the ticker PRIW denotes the World, not All-World. We’re therefore missing out on emerging markets.

Sometimes you’ll see descriptions like ‘All Country World Investable Market (ACWI)’ to signify the inclusion of EM.

Does this matter? Not really. EM is only about 10% of global market capitalization. In truth we could just ignore it.

One would like to think that poorer countries have higher economic growth rates that feed into improved stock market returns. But the evidence for this is scant. Rather, so far they’ve had periods when they did really well (1980s /1990s) and really badly (2000 onwards,) compared to DM.

The best way to think about EM is probably that there are idiosyncratic risks (such as wars and coups) for which one ought to be compensated with some sort of risk premium. Theoretically.

Adding in EMYou say you want a bit of coup and war exposure? Well, the cheapest All-World ETF is 20bps:

That seems like an expensive way of adding a 10% EM allocation.

But what if we stuck with mostly PRIW and did the EM allocation ourselves? Just ETF throws up a few options around the 15 bps mark, including:

Holy Saint Scrooge! We’ve saved ourselves £1,400 by doing our own EM allocation.

Do we need small caps?We could make a similar argument about small caps. (Though usually the only coups here are in the boardroom.) Do you really need them?

The thing about small caps is that, well, their market capitalization is small.

Again, you’d like to think that small companies grow up to be big ones. Whereas larger companies as a class have nowhere to go but down. Small caps should therefore make a better investment than large caps. And in fact in Fama-French’s famous Three Factor Model there is very much a size premium. Albeit one that once widely publicized in the early 1990s promptly disappeared.

Small caps are a lot more expensive to deal with, too. And we can only easily get DM ones.

But if we must?

Was it worth increasing our costs by 50% just to include a 10% allocation to small caps?

Hmm.

What about emerging markets small caps?Seriously, you are kidding me, right?

No joke:

Personally I would argue the marginal diversification benefits of including both EM and small caps only truly matter once you’re investing really substantial sums.

Distributions: sneaky platform FX chargesPRIW is a ‘Distributing’ ETF. This means it distributes its dividends to you, rather than retaining them for re-investment (‘Accumulation’). See our previous deep dive on the difference.

The problem here is that PRIW’s distributions are in US Dollars (USD). And most platforms only allow you to hold Pound Sterling (GBP) as cash. (In ISAs you’re not allowed anything else).

So when the USD dividend comes in from the ETF, your ISA platform is going to convert it from USD to GBP for your convenience. Most platforms charge an FX fee of ~1% to do this.

(Although who knows what actual rate you’re getting? I’m sure they would not specifically use an FX broker that charged an egregious spread and kicked back some of their internalization profits to the platform. Because this is not the sort of behavior you ever see in financial markets. Ever.)

Now 1% of the dividend yield sure doesn’t sound like much, does it?

Let’s see:

Adding in the currency conversion cost is like increasing our TER from 5 to 6.8 bps.

That’s a 36% increase in costs! WTF?

What we’d really like is an accumulating version of this ETF. Luckily, Amundi actually has one…

But it doesn’t have it as a GBP share class.

Dividend withholding taxPRIW has 63% of its exposure in the US. It’s domiciled in Luxembourg. It will be having 15% of distributions from North American companies withheld at source by the IRS in the US. The dividend yield on US equities is about 2% right now.

2% * 63% * 15% * £1,000,000 = £1,890

This represents nearly 19bps of annual investment costs applied to our portfolio. It raises our TER including US Dividend Withholding Tax (or as I like to call it: TERIUSDWHT) to 24bps.

Which isn’t something that ETF providers are keen to draw your attention to, surprisingly.

But can we do anything about this?

We have two options:

Use swap-based ETFs
Make use of our SIPP

Avoiding US WHT with swap-based ETFsAs an ETF, you can avoid US Dividend WHT by employing a financial instrument called a swap.

Exactly how they do this is beyond the scope of this post. (As you should be relieved to hear. Because I used to help structure this sort of thing for a living, and I can be a real bore about it).

For now let’s just check by comparing two UK-listed ETFs.

They both track exactly the same US index, have similar TERs, and are both accumulating. The only difference is one (from Invesco) uses a swap and the other (Vanguard) doesn’t.

We’d expect a 2% * 15% = 30 bps annual out-performance from the swap-based one.

What do we see?

The swap one outperforms by about 33bps p.a. after accounting for the fee difference.

Now it would be nice if there was a World ETF that did only the US leg as a swap, and the rest normally. Sadly, there is not. Arguably, if someone came along and created such a thing we could pay 24bps for it to be cost equivalent with Amundi’s PRIW.

There are, however, ETFs that do the whole (developed) world as a swap.

For example, Invesco MSCI World UCITS ETF (MXWS.L). Which has a 19bps TER.

Let’s just run our comparison on returns again, to make sure that what is happening in the swap is to our benefit, not theirs:

Yeap. Looks reasonable.

Notice that 63% (US Weight) * 33 bps (what the US only swap ETF saved) = 21 bps.

The only WHT saving is on the US leg; the swap trick doesn’t work in the other countries.

If you’re investing less than £1m, you could sensibly just go with this. Because we’re about to get complicated and – for smaller amounts of money saved – why bother?

An extra 12bps (19 vs 5) seems like a lot to pay to do some stuff in a swap, especially when a swap is actually cheaper for the ETF provider than either full or sampling replication.

And where is my All-World including small caps done as a swap – or a mix of swap and whatever – for, like 10bps?

There isn’t one.

Swapping that for a DIY jobbieCan we build one ourselves? Use a swap-based ETF for the US stuff and then other, regional ETFs for the other markets?

In fact could we just add a World-ex-US ETF?

Alas, that would be too easy. There also isn’t one of those.

Instead:

We’ve also accounted for dividend FX costs for those ETFs which aren’t accumulation units.

A TER of 8bps is pretty good – and that’s also the TERIUSDWHT, because we’ve avoided US WHT.

Notably, it compares well with 24bps, which was where we began with Amundi’s PRIW.

(No, I don’t know why we’re bothering with Canada either.)

Plan B: avoiding US WHT with your SIPPThe US tax authorities recognize UK pensions – including SIPPs – as tax exempt under a tax treaty.

Astonishingly UK platforms also seem to be able to handle this. Such that, if you’ve filled in the right forms and hold US stocks in your SIPP, you’ll receive the dividends tax-free (in the SIPP).

This also applies to US-listed ETFs, like, for example, the BNY Mellon US Large Cap Core Equity ETF (BKLC), which has an expense ratio of 0%.

Yep, you read that right: 0%.

But in a typical piece of joined-up thinking that will surprise nobody, you likely can’t buy this ETF in your SIPP. Why not? Because under the EU’s PRIIPs regulations, unless you are a ‘professional’ or ‘High Net Worth’ investor you can’t buy a fund that doesn’t issue a PRIIPs Key Information Document (KID), which US ETFs don’t.

Now, you might have thought that having left the EU, the removal of this pointless restriction for Brits might be the one tiny silver lining to the Brexit debacle.

Of course not.

You might also think that you’re a professional / HNW investor. And you may well be.

Sorry, most platforms don’t support declaring yourself such as part of their business model. At least in my experience Hargreaves Lansdown, AJ Bell, and Interactive Investor don’t. Others do, but in any case you’re going to want to save more than a few hundred quid for it to be worth the hassle.

But let’s say for a minute that you’ve got enough money to make this a worthwhile exercise, and you’ve somehow extricated yourself from PRIIPs.

We might have our US Equity ETF in our SIPP, and all others in our ISAs. Or else some mix of this arrangement and using a swap-based ETF in the ISA.

Either way it’s a little messy:

On a bright note, we’re truly crushing our investment costs.

And since we’re all about marginal gains here, let’s fix Canada:

Ladies and gentlemen, I give you the world – for 3bps.

You might immediately decide to spend some of those gains on adding back emerging markets and small caps. (This is called the ‘bounceback effect’).

For bonus points, if you were including small caps you might observe that the US makes up about 60% of global cap weight.

In my PRIIPs-free SIPP I could buy the Schwab U.S. Small Cap ETF (Ticker: SCHA) with a 4 bps fee, and then roll-my own regional small caps. But we are getting seriously diminishing benefits here.

RebalancingThe nice thing about having everything in a single ETF like PRIW is you don’t have to worry about rebalancing. Conversely, once we’ve separated everything out we have to do rebalancing ourselves.

But not much. This is because – contrary to what the ‘index investing causes bubbles’ people will tell you – market moves do your rebalancing for you.

If Europe outperforms the US by 10% in a year, then my target Europe weighting will be 10% higher. But the value of my Europe ETF will be 10% higher too. So long as I update my target weights to current market cap weights then no rebalancing is required.

On the other hand if I fix them forever then active rebalancing is required. As does any weighting scheme that is not market-cap weighted.

Distribution units also complicate this somewhat. Over time I’m going to be underweight those and overweight my accumulation units. But we can probably just do one or two trades a year to bring things back into line. Call it £20 of trading costs (and the spread).

Not all platforms carry all ETFsIt’s not clear to me why, but platforms generally don’t carry all London-listed ETFs. Not even the plain vanilla ones.

Indeed as a rule of thumb, once you’ve identified the cheapest ETF for a particular asset class and you log onto your broker to grab a bagful, you’ll find they’ll deny its existence.

Strangely, they’ll be happy to point to the one that costs twice as much. Or they’ll only carry the USD trading currency one.

Whether this is…

Cock-up: they used the ISIN as the Primary Key in their systems, and so can only support one traded currency listing per underlying ETF.

Conspiracy: If you buy the USD one, you’ll have to pay them a load of FX fees.

…I’m not sure. In general their excuse is that they only carry ‘the most liquid one’.

High investment costs are optionalSumming up, let’s run through what we’ve learned, Rain Man style:

We can track global equities for 5 bps p.a. (but add in paying our platform FX fees on distributions, which brings it up to 6.8 bps)
If we add a small EM allocation ourselves it’s 6 bps. That’s a lot cheaper than using the ‘All-World’ ETF (20 bps)
US dividend withholding tax is a (19 bps) problem that we can get round:
- It requires us to get a bit messy rolling our own.
- But can save up to 10 bps (without SIPP)
If you’re not investing a lot of money buy PRIW.L or MXWS.L and go play outside
The perfect global equity ETF doesn’t exist (in Europe). If it did it would:
- Do US equity exposure as a swap to avoid US dividend WHT
- Have appropriately weighted EM and small cap exposure
- Have an accumulating / GBP traded share class
- Cost about 10 bps, to be competitive with rolling our own
- (Over to you, Blackrock!)
If you’re only using your SIPP and can avoid PRIIPs, you could just buy Vanguard Total World Stock Index Fund ETF (VT) – which both avoids US WHT and includes EM, for 7 bps.
If we hyper-optimize using a SIPP and somehow bypass PRIIPS, we can actually get the full global+EM+small-caps down to 7 bps and avoid US WHT
Some things we didn’t mention:
- Risks of swap-based ETFs (low, but not zero)
- Bonds

Finally, it’s worth noting how cheap all this is compared to other investments.

For example, the managing agent for my London buy-to-let charges me what amounts to 1.34% of its capital value per annum. That’s about 20 times more than this fully-diversified global equity portfolio.

If you enjoyed this, follow Finumus on Twitter or read his other articles on Monevator.

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Here’s some handy data on historical asset class returns for the UK. The chart below shows UK asset class returns – with income reinvested – since 1870:

Data in this article from JST Macrohistory1, FTSE Russell, and JP Morgan Asset Management
April 2023

As you can see, over the long-term equities (shares) have done much better than gilts (UK government bonds) and cash (here the return on UK treasury bills).

Gilts meanwhile beat cash. But the lead has changed hands a few times – most recently during the 1970s inflation outbreak towards the end of the UK’s biggest bond crash.

A few other things to note:

The chart shows real historical asset class returns. So the returns strip out inflation, which gives us a more realistic understanding of capital growth in relation to purchasing power.
The huge 2008/9 bear market and others seem irrelevant on such a long-term graph, yet such corrections are painful at the time and can last for years.
The lines include divots when all three asset classes trended down simultaneously. Most obviously during the catastrophe of World War One, the 1972-1974 crash, and just last year in 2022. You can deal with this possibility by using an even more diversified portfolio.
The returns are total returns. That is, you got them so long as you reinvested dividends and interest. If you don’t reinvest income – perhaps because you’re understandably spending it to support a modestly lavish income in your old age – then those stupendous returns come down a lot.

Incidentally, if you’re wondering whether UK historical asset class returns have much relevance to global portfolios, I’d argue that they do.

Firstly, long-run returns of the main UK asset classes are correlated with their global counterparts.

Secondly, few other financial markets can offer such a rich a seam of historical data as the UK’s. Global data is particularly scant before 1970 for equities.

Finally, paying attention to UK historical returns is more pragmatic than relying on US data biased towards the century that the Americans won.

A number of analysts warn that even the US market may struggle to deliver such outstanding results in the future. UK historical asset class returns still rank highly, but are perhaps more reflective of a world in which it’s impossible to pick the winners and losers in advance.

Historical asset class returns: annualised resultsFew of us are going to live a century or more (though Gen Z-ers who eat their greens have a decent chance), so let’s break down those historical asset class returns into more manageable chunks:

Historical asset class returns (% annualised)

| 2022 | 10 years | 20 years | 50 years | 152 years | | Equities (shares) | -8.1 | 4.0 | 4.9 | 5.3 | 5.3 | | Government bonds (Gilts) | -30.2 | -2.2 | 0.9 | 3.2 | 1.4 | | Index-linked bonds | -15.8 | -0.8 | 1.7 | | Cash (Treasury bills) | -6.4 | -1.8 | -0.8 | 1.1 | 0.9 |

Note: the longest annualised return available for index-linked bonds is 2.9% over 40 years.

Again, the table shows real total returns – the annual rate at which the asset class grows (or shrinks) over any particular period after inflation – and with income reinvested.

Equities had a poor 2022. But they typically deliver superior long-term returns as the timeline stretches beyond a decade.

However, nothing is guaranteed.

The longest period of negative annualised returns suffered by UK equities was 25 years.

A combination of World War One, Spanish Flu, overhanging war debt – and the financial and social trauma that followed – kept the stock market suppressed for quarter of a century.

Which is why every investor should be diversified, despite 2022’s harrowing fixed income returns that turned the last ten year’s returns negative for gilts and index-linked bonds.

Gilt returns across the decades seem particularly variable, given this is meant to be a relatively stable asset class.

A glance back at the orange line in the first chart shows that government bond returns seem to be subject to long-term super-cycles that correspond to eras of falling or rising bond yields.

For example, gilt yields peaked in 1975 and drifted down thereafter until 2021. That trend of falling yields – and hence rising prices – pepped up bond returns with capital gains adrenaline shots, until 2022’s rapid interest rate hikes ended the party.

Thus, while the historical 50-year return for equities doesn’t look unachievable in the years ahead, we should be probably be much less hopeful about equalling that 3.2% 50-year return for bonds.

Our post on expected returns offers a realistic perspective on the potential of bonds right now.

Finally, cash is often thought of as a safe haven, but it’s delivered the worst long-term returns of all.

Notice that cash has a negative return for the past 20 years after inflation. The end of the low interest rate era has prompted many Monevator readers to switch out bonds for cash. But there can be significant long-term consequences if you take this too far.

Treasury bills as cash proxy – Treasury bills are ultra short-term UK government debt. Academics use the total return of bills as a stand-in for cash interest rates. One reason being that treasury bills are often a big component of cash-like holdings such as money market funds.

Historical asset class returns: the long and short of itIt can be misleading to look at just the last couple of years of asset class returns when you’re deciding how to invest over the long-term.

Returns from asset classes are volatile, so a few years of history gives you no useful information.

Shares may do very well one year and bonds do poorly. The next year the returns may be different, or it may take years before their relative performance changes.

Equally, looking at the long-run, historical asset class return averages can leave you unprepared for the wild swings in fortune regularly inflicted by equities, sometimes by bonds, and once in a blue moon by cash.

But we can get a sense of how tempestuous each asset class is by looking at the distribution of its annual returns. That is, how widely dispersed returns are and how violently they skew towards large gains or losses.

EquitiesAnnual UK equity returns range widely and wildly – anywhere from -57% to 103%. The positive, overall return of equities is revealed by the right-ward bias of the columns. But low and negative returns are still a frequent occurrence. (Statistically-speaking, we can expect equity returns to be negative every one year in three on average.)

BondsThe dispersion of gilt returns is much tighter than equities. Lower, positive returns are common, and negative returns quite frequent. But left-tail / right-tail outlier events are fewer and less extreme than in the stock market.

Treasury bills / cashFinally, here’s why we all love cash. Those steady, if low, returns keep trickling in. Additionally, the chance of a hideous car-crash is minimal.

Different strokesThe historical asset class return distribution charts help illustrate that different assets are good for different purposes:

Cash is king for short-term requirements. Think paying bills or saving up a house deposit.
Government bonds are most useful for planning outgoings in 5-10 years. That’s because you can know the return you’ll get in advance, so long as you hold them until they are redeemed. Bonds are also used to dampen down the volatility of your portfolio, according to your risk tolerance. A young and brave investor might hold no bonds. A 65-year old might be advised to have 50% of their money in bonds.
Shares are best for long-term investing, since they deliver the highest real returns over longer periods. Adding new money regularly, holding for many years, and reinvesting the income can help you manage the volatility.

By owning a simple portfolio of different assets you can benefit from diversification. When one asset class has a bad year another will likely have a good one. As a result you dampen the ups and downs of your portfolio’s value.

Moreover rebalancing can help smooth out the zigging and zagging of the different asset classes.

The price you pay for this reduced volatility is a potentially lower overall long-term return. That’s because your holdings of lower-risk assets like bonds and cash will typically deliver less in the way of gains than shares.

If you’re investing for the long-term into a pension, say, it may make sense when you’re young to pound-cost average into shares alone. Try to ride out the volatility to maximise your returns.

But whatever you do, never take more risk than you’re comfortable with. Always think about your personal risk tolerance.

And remember that a stock market crash can hit you hard if it strikes as you approach retirement.

Returns and tactical asset allocationA final – and riskiest – option in deciding how to allocate your money is to take a view on what assets look cheap and expensive at any point in time.

You then tilt your portfolio to try to capture a reversion to the mean. That is, you invest presuming that asset classes will tend towards the average historical returns we saw above.

I do this to some extent. But I wouldn’t recommend it unless you’re sure you can avoid following the crowd – and you understand your poor calls could cost you by actually reducing your returns.

Wealth warning: There’s no proven method for forecasting long-term stock market returns. Studies show even the best predictive metric (the longer-term CAPE ratio) only explains about 40% of future returns.

Anyone can see that different asset classes have good and bad years. It’s obvious from tables of discrete annual returns.

But timing when reversion to the mean will happen is very different from just predicting it will happen someday.

Historical asset class returns: a brief historyThese things do tend to sort themselves out over time – even if such a reversion feels unthinkable at any given moment.

Just look at the following table from the 2010 edition of the Barclays asset class report:

1899-2009: UK real asset class returns (% per annum)

| 2009 | 10 years | 20 years | 50 years | 110 years | | Equities (shares) | 25.9 | -1.2 | 4.6 | 5.2 | 5.0 | | Government bonds (Gilts) | -3.3 | 2.6 | 5.4 | 2.3 | 1.2 | | Index-linked bonds | 3.1 | 1.9 | 3.8 | | Cash (treasury bills) | -1.7 | 1.8 | 3.1 | 1.9 | 1.0 |

Source: Barclays Capital Equity Gilt Study 2010

From this table, it’s again pretty clear that different asset classes can deviate from their long-run returns for substantial periods of time.

Moreover equities were showing a very unusual negative real return over the decade to 2009.

As I wrote in the 2010 version of this very article:

UK shares have struggled to advance over the past 10 years, as the markets have been felled by the dotcom crash and the financial crisis.

You wouldn’t normally expect shares to deliver a negative (-1.2% per year) real return over a decade, or for them to be beaten so handsomely by safe and secure Government bonds.

Over the long term such periods even themselves out, which is one reason why a strong decade for shares may follow the terrible 2000-2010 period.

The FTSE did indeed go on to rally nicely for several years. You did even better with dividends.

Yet in 2009, in the midst of the greatest buying opportunity for a generation – and with the table above showing how badly shares had done for a decade – buying them was not easy.

Take comfort from historyMany people said they had sworn off shares for good by 2009.

But you should never say never again if you want to be a successful investor.

You might also like my article on US asset class returns.

Remember if you’re using an investment return or compound interest calculator then it’s legitimate to use long-term historical returns as a proxy for the interest rate function in the calculator.

Note: Comments below may refer to a previous version of this article, so please check their date.

Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.

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What caught my eye this week.

One of my least favourite articles on Monevator is the stab I had at explaining Lifetime ISAs.

In fact it was my second stab. I’d updated an even flimsier first effort just a couple of years later.

But I’d left a 2,500 word version 3.0 unpublished. Mostly because I felt it needed another 2,000 words to be comprehensive. And did anyone want to read that?

My published take is not a terrible article. But it doesn’t do a truly great job at explaining why the Lifetime ISA is a terribly confused addition to the ISA lineup.

And there are now better articles out there explaining exactly who might want to use a Lifetime ISA. Complete with the couple of dozen or more caveats and complications that such an article requires.

Fleas on fleasMy Lifetime ISA excursions triggered a bit of a crisis of confidence at Monevator Towers.

How comprehensive could or should we try to be?

We have perhaps the best reader comments on any financial site in the UK. And I knew that regulars would (constructively and rightly) point out the gaps in my explanation.

I didn’t mind that – indeed I welcomed it – but I also knew I’d be a bit miffed by some of them. That’s because it’s hard to explain how one-size-fits-nobody once you get beyond the basics of personal finance and investing to someone who hasn’t tried giving the complete picture themselves.

You need to write about something – whether ISAs or particle physics – to see that very often, the one thing you believe is of most importance is very often somebody else’s superfluous detail.

The Lifetime ISA experience ultimately nudged us towards doing fewer and deeper articles – especially for my co-blogger – and I feel we lost some of the breezy accessibility of an earlier Monevator in the transition.

But that’s the trouble with knowledge. The more you know about something, the more you’re aware of all the edge cases, contradictions – and everything you don’t know.

It was easier to write Monevator 15 years ago when we had less to share but didn’t really appreciate that. Knowledge is labyrinthine.

For whom the bell tollsAnyway this isn’t all just me getting the tiny violins out about the hard lot of being a blogger.

It’s more a rambling Bank Holiday prelude to say I have sympathy with Andy Bell’s views on ISAs, which he’s been floating in the media recently.

Bell – the founder of the SIPP platform that carries his name – told the Financial Times this week that his company proposed:

…scrapping separate cash and stocks and shares Isas to create a single new offering.

It also wants to reform the Help to Buy and Lifetime Isas, which offer a tax-free bonus to people aged under 40 saving for a home. The platform is also urging the abolition of the Innovative Finance Isa, a type of peer-to-peer loan.

Bell said plans had been presented to chancellor Jeremy Hunt and reflected an ambition to simplify Isas to motivate savings and investment.

While he acknowledged the plans could narrow consumer choice, he insisted that the range of products currently on offer were too complicated.

“The proliferation of Isa products worries me. If you’ve got six Isa products to choose from, you almost give up,” said Bell. “If you were starting with a blank sheet of paper you wouldn’t design what we’ve got today.”

As somebody who did my time in the trenches on the ins and outs of various ISA products, I agree.

It’s true that a Monevator maven – someone who reads every article and pulls us up on our errors and omissions – no doubt enjoys nothing more than shifting from optimal savings product to tax-efficient vehicle to tax defusing like a freestyle skateboarder doing tricks.

I’m one of those too.

But in the profusion of ISA types, the average person just sees more jargon layered on top of the already murky world of saving and investing. And they have a point.

Ideally we’d have just one kind of savings account. Flat tax relief at 30%. With some curbs or outright restrictions on withdrawing and replacing all the money, to incentivize saving for old age. But those guardrails as clear as possible too.

The complexity we have today in ISAs and pensions1 is more a result of politicians looking for rabbits to whip out of hats – or sneaky opportunities to take back what they gave us before – rather than joined-up thinking.

True, simplified ISAs would do Monevator out of a few opportunities for articles. But after my experience with the myriad (don’t-) use cases for the Lifetime ISA, I’ll live with that.

Have a great long weekend!

From MonevatorHow to think about Junior SIPP asset allocation – Monevator

The Warren Buffett hedge fund that wasn’t – Monevator

From the archive-ator: Holiday strategies to refresh a frugal soul – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Average monthly rent hits £2,500 in London and £1,190 in rest of UK – Guardian

73% surge in current account switching in 2023 – Independent

Just 800 of 4,000 laws to be scrapped in ‘Brexit bonfire’ – Sky News

SIPP operator Gaudi is in administration; no impact on clients – FCA

Thousands missing out on heat pump subsidies worth up to £6,000 – This Is Money

Plans approved for UK’s first women-only tower block – Guardian

‘Brushing’ scam: Amazon sellers sending stuff to random addresses – Which

Only 4% of 2m UK voters without Voter ID apply for ID through scheme – BBC

The UK faces a steep climb out of a deep hole – Spiegel International

Products and services40-year mortgages on the rise, but what are the risks? – Which

£100 offer ends 1 May Last chance to claim an additional £100 bonus when you open an account with InvestEngine via our link and transfer an ISA valued at £10,000 or more. All new accounts also get a £25 bonus on investing at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Nearly 5%… Al-Rayan touts 4.9% three-year fixed rate savings – This Is Money

A shed office adds £22,000 to your home’s value – This Is Money

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Should you share TV streaming accounts? – Be Clever With Your Cash

The UK’s best and worst seaside towns – Which

Will Apple take a big bite out of the banks? [Search result] – FT

Homes to tempt British buyers this spring, in pictures – Guardian

Comment and opinionThe mortgage dilemma: to fix or not to fix [Search result] – FT

Why the pensions Triple Lock has to go – Tom Jones via Twitter

Frugal man buys $52,000 car – Mr Money Mustache

You’re neither as smart – nor as dumb – as you think – Humble Dollar

How much of your salary is punitive damages? – Klement on Investing

You have to own – Dror Poleg

Discombobulated – Indeedably

Beware ETFs with a ‘new edge’ – Citywire RIA

Get ready for Retirement 3.0 – A Teachable Moment

Market cycles mini-specialUnderstanding the basics of market cycles – Darius Foroux

When market volatility creates opportunity – Janus Henderson

After a bad year in the market – A Wealth of Common Sense

When, where, and for how long? – The Big Picture

Naughty corner: Active anticsBuy Sweden – Verdad

Returns from the oldest investment trusts – IT Investor

Larry Swedroe: expenses matter with active funds – Advisor Perspectives

Is the Bitcoin comeback for real? – Institutional Investor

Downside betas vs downside correlations – Finominal

The sell-side is harder than the buy-side… – Behind the Balance Sheet

…or is the buy-side harder than the sell-side? – Klement on Investing

Kindle book bargainsInfluence Empire: Tencent and China’s Tech Ambition by Lulu Yilun Chen – £0.99 on Kindle

The Missing Cryptoqueen by Jamie Bartlett – £0.99 on Kindle

The Nowhere Office: Reinventing Work and the Workplace by Julie Hobsbawm – £0.99 on Kindle

Cooking on a Bootstrap by Jack Monroe – £0.99 on Kindle

Environmental factors‘Endless record heat’ in Asia – Guardian

Cities are reclaiming land at risk of extreme sea level rise – Hakai

How South East Asia is fighting back to save corals – Guardian

The flawed logic of extreme climate solutions – MIT Tech Review

Why cutting your personal carbon footprint matters – Semafor

Robot overlord roundupInside ‘the mind’ of ChatGPT, with Cal Newport – Range Widely

There’s a new AI unicorn that will make coders faster – Semafor

Welcome to the age of AI-assisted dating – Washington Post

Microsoft nearing a $1bn-a-year run-rate AI business – Tom Tunguz

AI is taking work from Kenyans who write essays for US students – RoW

Off our beatSome things I think – Morgan Housel

How shady companies guess your religion, sexual orientation, and mental health – Slate

Pour one out for the notion of healthy alcoholic drinking – Slate

The underground city found in a man’s basement – Atlas Obscura

Magnus Carlsen: the winner’s edge – Farnam Street

Kevin Kelly on excellent advice for living, universal AI assistants, time machines, and the power of fully becoming yourself [Podcast] – Tim Ferris via Apple

And finally…“Three things ruin people: drugs, liquor, and leverage.”
– Charlie Munger, Charlie Munger: The Complete Investor

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

Especially with the recently abolished Lifetime Allowance.

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There are many things that make Warren Buffett remarkable, as you’ll know if you’ve read his biography The Snowball.

There’s his appetite for junk food, and how his first wife chose his second.

There’s his longevity – Buffett is still happily working at 92.

And there’s the fact that there’s no Warren Buffett Hedge Fund.

Instead, Buffett’s investment vehicle Berkshire Hathaway was born out of nearly a dozen partnerships that Buffett first created and ran for family and friends.

When these partnerships were wound up, most of the partners rolled their money together with his, on equal terms as shareholders. They were then made fabulously wealthy over the decades as the greatest investor ever compounded their shareholdings to the moon.

Buffett’s investing and business activities made Buffett rich, too.

At his peak in 2008 – before he began giving his money away – Buffett was the richest person in the world. His fortune stood at $62bn.

By 2023 Warren Buffett was merely fifth on the Forbes list, overtaken by upstarts like Jeff Bezos and Elon Musk.

But don’t worry! Buffet’s net worth has still nearly doubled since 2008 to $106bn.

The Buffett Hedge fund that wasn’tAll this success was a win-win scenario for Buffett and his partners, you might think.

But it still wouldn’t be good enough for a hedge fund.

While hedge fund fees have come down in recent years, these funds historically charged 2% annual fees for managing your money, as well as taking 20% of any gains. As a result they devour their investors’ returns.

Just how much could you lose from such high fees?

Terry Smith – the fund manager sometimes touted as the UK’s answer to Buffett – once did a worst-case analysis of hedge fund fees versus Buffett’s first 45 years as an investor.

Smith found1:

Warren Buffett has produced a stellar investment performance over the past 45 years, compounding returns at 20.46% pa.

If you had invested $1,000 in the shares of Berkshire Hathaway when Buffett began running it in 1965, by the end of 2009 your investment would have been worth $4.3m.

However, if instead of running Berkshire Hathaway as a company in which he co-invests with you, Buffett had set it up as a hedge fund and charged 2% of the value of the funds as an annual fee plus 20% of any gains, of that $4.3m, $4.0m would belong to him as manager and only $300,000 would belong to you, the investor.

And this is the result you would get if your hedge fund manager had equalled Warren Buffett’s performance.

Believe me – he or she won’t.

Let’s repeat that money shot. After 45 years, the Berkshire The Counterfactual Hedge Fund would have turned $1,000 into $300,000 for its investors. Which actually isn’t bad.

But it would have generated $4m for manager Warren Buffett.

How the Warren Buffett hedge fund rankledSmith’s analysis has been criticised because a hedge fund wouldn’t usually reinvest the 2% management fee back into its own fund and compound that over time.

And it’s this compounding of the fees that really drives the huge gains for the would-be Buffett hedge fund in Smith’s example.

But I don’t agree with this criticism. Buffett’s own record sees all invested money compounding at 20.46%, so it seems reasonable to assume the fund does the same to make a comparison – even if in reality hedge fund managers would spend their fee money on Monaco bolt holes and Lamborghinis.

Another criticism is Smith assumed the hedge fund always gets its 20%, whereas in reality there would be a high water mark. This means in years where the hedge fund underperforms, it would ‘only’ get its 2% management fee – until the portfolio breached the previous high.

As far as I can see this is a mathematical shorthand though. (Unless you’re prepared to download Buffett’s returns every year and plug those into a hedge fund modelled on the 2/20 structure.)

Buffett did and they didn’tOn balance, I think Smith’s point is well made. Not least his throwaway last line – about whether your hedge fund manager would match Buffett’s record.

Don’t hold your breath! Even back in 2010 the average hedge fund was delivering the same performance as a simple basket of index-tracking ETFs. Such vanilla ETFs typically charge less than 0.5% a year.

There are certainly a handful of stellar hedge funds out there (which you and I mostly can’t invest in) that justify their fees.

But as a class, in the past decade the track record of hedge funds has only gotten relatively worse since Smith did his analysis.

Study this table of returns from respected commentator Larry Swedroe:

Swedroe comments :

Over each of the one-, 10- and 20-year periods, hedge funds destroyed wealth because their returns were below the rates of inflation.

Over the last 20 years, hedge funds barely managed to outperform virtually riskless one-year Treasury bills, and they underperformed traditional 60% stock/40% bond portfolios by wide margins.

Hedge fund defenders typically retort that it’s not fair to lump all hedge funds together like this.

And as I note above, it’s certainly true that some funds have delivered extraordinary gains to investors.

However by the same token some individual stocks have done well, and some markets tracked by certain index funds have smashed others.

So that argument doesn’t really hold water for me.

Another push back is that many hedge funds don’t aim to beat the market. Rather they offer diversification and hedging benefits by following alternative strategies.

Again, I’m not massively persuaded – at least not enough to get the whole pseudo-asset class off the hook.

As Nicholas Rabener at Finominal noted recently, hedge funds tend to be more correlated with market downside than the upside – a very undesirable characteristic. In Rabener’s analysis, investment grade bonds offered superior diversification.

Swedroe also shoots down the counterarguments before concluding:

Why have hedge fund assets continued to grow and why have investors ignored the evidence?

One possible explanation is the need by some investors to feel ‘special’, that they are part of ‘the club’ that has access to those funds.

Those investors would have been better served to follow Groucho Marx’s advice: “I wouldn’t want to belong to a club that would have me as a member.”

Another explanation is that investors were not aware of the evidence.

Full disclosure: Buffett’s returns – as represented by the growth in Berkshire’s share price – have slipped in recent years, too.

I mean, as per his 2022 letter Berkshire’s compounded annual gain from 1965 to 2022 is now a mere 19.8%. That’s versus 9.9% for the S&P 500 over the same time period.

(I’m being facetious. Berkshire’s return is bonkers, equivalent to an overall gain of 3,787,464% since 1964.)

How to make $81 million before you’re 40Returning to Warren Buffett, you might ask why if he’s so smart did he not start a hedge fund instead?

There were plenty of active funds in existence by 1965. Buffett’s first employer, Graham Newman, was essentially a hedge fund.

Well, the answer is – Buffett did!

In the days before Berkshire Hathaway, Warren Buffett ran his partnerships I mentioned along hedge fund lines. Yet even these weren’t run following the 2/20 standard of hedge funds.

To quote Buffett from The Snowball:

“I got half the upside above a 4% threshold, and I took a quarter of the downside myself. So if I broke even, I lost money. And my obligation to pay back losses was not limited to my capital. It was unlimited.”

Normal hedge funds fees take no punitive hit in negative years, so Buffett was again doing things differently.

Also, Buffett then did exactly what critics of Smith’s calculations say no hedge fund would really do. He reinvested the fees he drew from his partners back into the partnerships, compounding his share of the capital year on year.

Like this, between 1956 and 1967 Buffett increased his net worth from $172,000 to over $9 million.

That’s well over $80 million in today’s money. Buffett earned it by the age of 37.

This was how Warren Buffett first got rich.

Don’t bank on finding another BuffettBuffett’s supreme confidence in his investing techniques and a favourable market meant he never took the downside of his unusual fee structure. There were no years where he made less than 4%!

The legend of Buffett might be very different if he’d had a bad year. We’d probably never have heard of him today if he’d had a few bad years in a row.

Perhaps Buffett, too, had realized this by the 1970s. That was when he wound the partnerships down and instead lumped his money in with that of his faithful investors to co-own the collection of companies that became the modern Berkshire Hathaway.

These first investors and those that later bought Berkshire stock were fortunate Buffett didn’t foist the 2/20 rule on them. They were made immeasurably wealthier by being on the same terms in Berkshire.

Yet I suspect from my reading of Buffett that he’d say luck had nothing to do with it. They were his partners, not his clients, and it was having their backing that enabled him to act with the confidence and boldness that has defined his long career.

The bottom line: There is no Warren Buffett Hedge Fund because while he is an implacable acquirer, Buffett doesn’t think like a hedge fund manager. He thinks – and always has thought – like a business owner, and a shareholder.

The other bottom line: avoid high fees like the plague. Most people should use index funds instead.

(If you don’t believe me, believe Buffett!)

Terry Smith has closed his blog where his article was first published. I’ve linked to an Investment Week report on this maths above.

The post The Warren Buffett hedge fund that wasn’t appeared first on Monevator.

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Monevator reader James has a question about Junior SIPP asset allocation as follows:

In the good times I opened SIPPs for my children and I followed my standard policy of buying Vanguard Lifestrategy 60/40.

However, buying an investment to hold for 50 years or more is obviously very different from buying one for my elderly self. What are the considerations and options?

The Internet is weak on this one. But I have strong views!

Invest 100% in a global equities tracker fund. Then leave it to grow knowing you’ve done the best you can.

My reasoning is straightforward.

A Junior SIPP banks on the power of compound interest to multiply the pounds you invest with love into a legacy your child can enjoy when you’re gone and can do no more.

Play with our compound interest calculator. You’ll see that this money multiplier is twin-engined. Compound interest needs both time and a suitably high rate of return to truly work its magic.

The most exciting stuff begins to happen after 40 years. That is when the trail of wealth arcs up like the trajectory of a rocket ship – rather than a biplane bumping along the turf.

Even then, you’ll want to target the highest rate of interest (or rather investment return) you can reasonably hope for – without resorting to magical thinking.

And as far as I’m concerned that amounts to the 5% annualised return (after inflation) delivered by world equities for over a century.

Investing returns sidebar – All returns quoted in this piece are real annualised total returns. That is, they’re the average annual return (accounting for gains and losses) realised in a given time period. These returns include the impact of reinvested dividends and interest, but strip out the vanity growth delivered by inflation that does nothing to grow your actual spending power.

Bonds have historically generated an annualised return of 1.5% after inflation. That rate of return will not compound quickly enough to make your kid comfy in their old age.

Here’s the graph of compounding bond returns. You’ll notice there’s no magic hockey stick effect – even after 60 years:

Time is on their side It’s natural to be protective of your child’s money and to be more cautious with it than with your own.

But your child should have a lifetime of investing ahead. That makes their risk tolerance and time horizon very different from yours.

The kiddiwinks can’t touch their SIPP money until their late-fifties at best.1 The way the political weathervane is spinning, they may even be in their sixties by the time they’re permitted their allowance by our benevolent AI carers in the far future.

Tack on a 40-year long retirement and the contributions you put in now could still be making a difference in 90 to 100 years’ time.

Gulp.

The key point is that your child does not have a short-time horizon problem. So they don’t need to diversify like you do.

Most adults save for retirement over 30 to 40 years, tops. Even if you eat risk for breakfast, you should be easing back on equities for the last ten to 15 years.

Otherwise, cop a lost decade or two in the middle and the time-pressure is enough to make anyone panic. Hence the investment industry hit upon bond diversification to hold the crazy in check.

But this rationale does not apply to a child who doesn’t need the money for half a century or more.

If a big, bad bear market comes along – it won’t touch them in the long run. Junior’s pension money can be underwater for ten, 20, even 30 years and it doesn’t matter.

In fact, it may even help. The shares you bought will keep spinning-off dividends, which will be reinvested to rack up even more shares bought at bargain prices.

Meanwhile, lower returns in the present mean higher expected returns in the future – hopefully as your child hits their peak earning years.

Who’s gonna freak out? Think about this, too: when your child’s equities are hit by a market convulsion, who’s gonna hit the panic button?

Not them.

They’re playing with Peppa Pig when it happens, or their mobile – or later with somebody else still many decades away from even thinking about thinking about retiring.

And when they do start work, they’ll be auto-enrolled into a pension fund that handles diversification automatically.

What are the chances they’ll even pay attention to the annual statements until their thirties begin to wear thin?

All you have to do is remain a steadfast steward of their SIPP until they hit 18. From that point on, they take charge. But they’re going to have better things to do. Much better.

If a temporary -50% portfolio blast probably isn’t going to bother them, then there’s no need to let it bother you. Historically, the market has recovered.

There’s a useful side argument here, too. Even with compounding, your efforts are likely to be the icing on a cake paid for by your child’s own lifetime of labour. And as mentioned, the bulk of their funds will be diversified by their friendly workplace pension company pals.

That relieves you of the pressure to play it safe. You may as well use your money to swing for the fences. (While still taking the sensible precaution of diversifying across every major stock market on Earth with that global tracker fund. I’m not suggesting taking a mad punt on crypto here).

It may help to conceptualise your child’s own future saving efforts as providing the floor that will underpin their retirement prosperity. In this model, your ultra-early contributions can form part of an ‘upside portfolio’ that will go towards the fun stuff.

Seen like this, you can again afford to take more risk on their behalf.

Take comfort in capitalism Market history shows that the longer the time period, the more likely it is that investment returns will converge upon their historical average:

Data from MSCI. April 2023.

The chart shows the best, worst, and the simply average annualised results for every MSCI World rolling return path since the index launched in 1970.

The average annualised return across all 53 years is 4.5%.

But you can see on the left-hand-side that the average result exists within highly volatile polar extremes in the short-run. Returns range anywhere from 62% to -46% for a single year.

However these extremities are planed-off over time. There isn’t a single, negative timeline that lasts longer than 14 years.

Simply put, the longer your child remains invested, the more likely it is that they’ll get the average return.

Of course, there are markets with worse rolling returns out there if you want to frighten yourself.

We could talk about Japan’s shocking losses.

Or the German equity path that remained in the red for 79 years. Two devastating defeats in World Wars and hyperinflation will do that.

Less obviously, there’s an unbelievable French stock market timeline where you didn’t make money for 135 years.

The whole world is rooting for your kidThe solution in those grim outlying cases wasn’t to invest in the bonds of the blighted countries. Bonds were devastated, too.

The answer was to invest in the world.

Throughout history, someone somewhere has always held the baton for progress and kept humanity moving forward.

Whether it be the Greeks, the Romans, Byzantines, Arabs, Chinese, Enlightenment Europeans, or the Americans.

(Full disclosure: the author may or may not hold positions in some of these civilisations. Past performance is no guarantee of future success. Just ask the nearest moai.)

We can only focus on what we can control. If there is a global bear market that lasts 50 years, then 30% bonds and 10% gold almost certainly isn’t going to rescue anyone’s pension.

And so I circle back to 100% global equities and backing three wonders of the modern world: Capitalism, compound interest, and a low-cost index fund.

Take it steady,

The Accumulator

The Minimum Pension Age is currently 57.

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What caught my eye this week.

A decade ago the UK had barely come down from the buzz of the 2012 Olympics. Riding high on the global stage, we attracted bright young things from across a moribund Europe. A start-up culture was catching fire in London that finally offered an alternative to decamping to Silicon Valley.

The UK was not without problems, but it was easy to feel lucky to live here.

Sadly, for every advance in this life there seems to be a counter-reaction.

Within a few years, the US had followed the triumph of electing its first black President by sending to the White House a dangerous blowhard better suited to the side of a box of fried chicken.

Meanwhile, a slim majority of Britons were convinced by a Band of Bullshitters into voting for Brexit – the most bone-headed policy since that Roman Emperor made his horse a consul.

And slowly, surely, the economic consequences of leaving the EU have been coming through.

Not with a bang, but a whimper.

Falling investment, perpetually slower growth, dire politics, and what is starting to look like the return of Britain’s age-old inflation problem.

Cost of Brexit: over £100 billion a year in lost economic output and counting.

All bad enough. But it seems some people now want to throw our pensions onto the bonfire too.

London’s gurningStepping back, there’s been lots of talk recently about the plight of the London Stock Exchange.

The LSE seems unable to win big new listings. Most recently chip design giant ARM said it will float in New York – despite direct ~~pleading~~ intervention from successive UK Prime Ministers.

Other London-homed companies are moving their listings. There appears to be a gloomy acceptance that the LSE should give up on having a listed tech sector at all.

In November the London Stock Exchange’s total market capitalization fell behind Paris for the first time since Bloomberg began crunching the numbers in 2003.

We’re also losing much of the less-glamorous but highly functional activities that helped the City boom for 30 years, with euro banking and clearing operations migrating to the EU.

Brexit fans may snicker at London’s plight. But City salaries help support a higher tax base and more generous welfare state than would be possible if London were “taken down a peg or two”.

As I’ve noted before, Britain is relatively poor for an advanced economy, on a per capita basis.

Yet for nearly a decade we’ve been making decisions like we’ve money to burn.

Dad’s barmyFaced with this slow puncture draining the vitality from our economy, the rational thing to do would be to try to reverse it.

The Windsor Framework for Northern Ireland was a small step. But as Rishi Sunak revealed in championing that region’s advantages in having a foot in Europe, we’d be better off going whole hog. Reversing our hard Brexit and re-entering some combination of the Single Market and the Customs Union could staunch the bleeding. The politics of EU membership may still be impossible, but we need the economics.

Alas we’re not there yet. Brexit benefits may be as thin on the ground as Brexiteers who haven’t yet left office in disgrace, but the UK isn’t a Mad Max wasteland – which is apparently the high bar set for judging the benighted project.

Instead, in what would be a doubling-down in Britain’s lurch into Banana Republic governance, there is talk of corralling British citizen’s pension assets into investing in British companies.

Apparently some people look at Britain’s diminished status since 2016 and scratch their heads.

What on Earth happened to turn global capital against us?

Has the weather been particularly bad? Was it the death of David Bowie?

Wait! What about Brex… traitorous UK pension funds!

From the Financial Times:

The proportion of all UK pension fund assets invested in equities was 26.4% in 2021, down from 55.7% in 2001, according to the OECD. By contrast, Canadian funds had 40.6% in equities and Australian schemes 47%.

“We have trillions of pounds sitting in pension funds that are not being used to invest in companies, drive growth or do a whole range of things that the economic viability of the country depends on,” says Immuncore’s Sir John Bell. “We need to find ways to release this capital.”

Please read the full article: Britain’s ‘capitalism without capital’: the pension funds that shun risk. It gives a good and balanced take on the malaise.

I pulled the quote above simply to illustrate that there are credible voices – inside government and out – who see your pension not as your buttress against an uncertain old age, but as a pot of loot to be raided in order to prop up an ailing British economy.

I’ve heard it suggested in the past few weeks that pension tax reliefs should be apportioned relative to the share of UK assets that a pension fund is invested in.

And that Local Government Pension Schemes should be compelled to invest in British equities, as well as in expensive long-term infrastructure problems.

This is all bonkers.

Bye BritainThe way to encourage investment into UK assets is to make Britain an attractive place to invest. As opposed to giving the world the impression we’re being run by a bunch of senior prefects at a public school for the banter.

As for British pension funds, we should solely want them to invest for our collective financial futures wherever they see the best risk-adjusted returns.

Not where some government diktat demands they put their money. That’s the economic policy of a military junta, not the birthplace of the industrial revolution.

Perhaps UK pension funds should own more equities. We saw with the LDI crisis during the Mini Budget (yet another showcase for global Britain) that index-linked gilts at all costs is no panacea.

But equally, not owning UK shares was absolutely the right move over the past two decades. British pension fund managers who shunned the UK stock market did their charges a favour. They dodged a market that went nowhere for 16 years, before the Brexit vote tanked the currency to boot.

Now, I happen to think British shares may do better going forward.

That’s not because Britain is about to boom thanks to our bureaucratic borders and crown stamps on pint glasses. More than 75% of FTSE 100 earnings are generated overseas.

Rather, UK shares still look unloved – that is, cheap – and successive mid-sized British companies are being taken over by overseas competitors, helped by a still-weak Sterling.

(No, I don’t recall seeing that in the 2016 literature either. Ho hum.)

At the same time, a more normalised regime for interest rates and inflation would be a better backdrop for the more defensive style companies that remain on the shrinking UK stock market, which could help returns too.

Our pensions are not their playthingsBarry and his mates down the golf club are welcome to invest their own ISA and SIPP money in UK companies if they want to.

No doubt they’ll be buying a round of G&Ts whenever a quality British company they own is acquired by an overseas predator by night, while fuming at breakfast over another story about Britain selling off the family silver in The Telegraph.

Blimps gonna blimp. But they can keep their hands off our life savings, thank you very much.

Have a great weekend.

From Monevator“How I got mixed up in this FIRE business” – Monevator

When investing is boring – Monevator

From the archive-ator: Never ever respond to a cold call – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK food prices rising at the fastest rate for 45 years – BBC

Britain’s middle classes feel the pinch in cost of living crisis [Search result] – FT

BoE said to be considering reform of bank deposit guarantee scheme – Reuters

Losing the plot: huge rent rises for council-owned allotments – Guardian

Half a million landlords to leave sector as Boomers retire – Telegraph via Yahoo Finance

Record numbers of Britons making mortgage overpayments – This Is Money

Latest figures on how much you need for a comfortable retirement – Guardian

Coming soon: QR-style barcodes – Axios

London Stock Exchange set to offer Bitcoin futures and options – Reuters

How China dominates the electric vehicle market – Semafor

Products and services11 tips to save on the cost of your subscriptions – Which

UK investors swell money market funds [Search result] – FT

Swap old clothes for vouchers from H&M, John Lewis, and M&S – Be Clever With Your Cash

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

HSBC, Natwest, and RBS all offering £200 bank account switching bonuses – This Is Money

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Here’s how much your appliances will cost to run from April – Which

Homes for people who want to downsize in style, in pictures – Guardian

Comment and opinionThe 60/40 portfolio is alive and well – Disciplined Funds

Testing flexible withdrawal strategies – Morningstar

Lump sum investing versus cost averaging – Vanguard

Planning my exit – Humble Dollar

Six tips for tackling investor under-confidence – Best Interest

Thinking fast and slopes – Dror Poleg

Accounting for home ownership in retirement [US CPI but relevant] – ERN

The mansion next door – Accidentally Retired

What if you’re not on the same financial page as your spouse? – White Coat Investor

The golden rule of investing [Gold vs low-vol stocks, research] – SSRN

How well do Monte Carlo models really forecast retirement success? [Nerdy] – Kitces

Naughty corner: Active anticsA provocative perspective on healthcare from a fund manager [Podcast] – FFtFP

So you want to launch a hedge fund? – Net Interest

Finance as entertainment – Jared Dillian

The real lessons of Warren Buffett – Real Returns

Doing nothing beat the S&P 500 over the past three decades – Morningstar

Secure Trust Bank looks shaky as a dividend stalwart – UK Dividend Stocks

Kindle book bargainsThe Nowhere Office: Reinventing Work and the Workplace by Julie Hobsbawm – £0.99 on Kindle

Cooking on a Bootstrap by Jack Monroe – £0.99 on Kindle

Money: A User’s Guide by Laura Whateley – £0.99 on Kindle

The Missing Cryptoqueen by Jamie Bartlett – £0.99 on Kindle

Environmental factorsTidal power’s fickle future – Hakai

Keep your garden green and get a tax cut, suggest scientists – Guardian

(Musical) robot overlord roundupAI-generated Drake and The Weeknd song goes viral – BBC

Is AI-generated music legal? – Semafor

AIsis, the band fronted by an AI Liam Gallagher – Guardian

Fourteen reasons why AI pop won’t eat itself [Search result] – FT

Bonus: winner refuses award after revealing AI creation – BBC

Off our beatJourney into sleep [Nice graphics] – Reuters

You can do it. No, really, you can – Klement on Investing

Why do mirrors flip left-and-right but not up-and-down? – Big Think

Dominic Raab forgot rule one: don’t be a massive arse – Marina Hyde

A few things learned over here that apply over there – Morgan Housel

Why do young people think jazz is romantic? – The Honest Broker

Henfluenced – Culture Study [via Abnormal Returns]

What God, consciousness, and physics have in common – Scientific American via Pocket

How to remove a fish hook from your finger [Not a metaphor] – The Art of Manliness

And finally…“Most of economics can be summarized in four words: “People respond to incentives.” The rest is commentary.”
– Steven E. Landsburg, The Armchair Economist

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: First, they came for our freedoms. Now what about our pensions? appeared first on Monevator.

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The trouble with bull markets is making money can seem too much like fun. Meanwhile plunges in a bear market at least get the pulse racing. But investing is boring when markets do nothing, month after month.

Welcome to the investing doldrums.

There’s a section in the Russell Crowe nautical adventure Master and Commander which finds Captain Crowe, ship, and crew literally going nowhere.

Listless on the ocean, day after day, the drama of a sailboat clipping across the seas has been forgotten. A storm would be a relief. Fatalism descends. Dying of thirst on a floating island in the middle of nowhere is not what anyone signed up for (or was press ganged into.)

If the ship doesn’t get going again, they will all go mad or cannibalistic.

Wait, was that a breathe of wind? No, just another sighing sailor.

Eventually one of the younger officers is branded a ‘Jonah’ by his superstitious shipmates. The unlucky fellow is harried into jumping overboard, clutching a cannonball.

Grim, but just like that the sails bloom and the ship gets going.

Correlation is not causation? Tell that to a parched seaman when the wind is at his back again.

There be dragonsOf course we’ve all read – or even written – about how good investing should be boring. Get your excitement from your PlayStation or a skiing holiday.

Right, right.

Except you’re reading a blog all about investing. I think it’s fair to say we’re all a little bit more… invested about investing here.

Also, as enlightened 21st Century folk conversant with behaviourial economics, incentives, and ‘nudge theory’, we know the most important thing is to avoid the inner urge to throw anything – or anyone – overboard, just to relieve the tedium.

But just because we know what we should do – stick to our best plan until the breeze picks up again – that doesn’t mean we will.

Some of you are still shrugging. So much, so obvious.

Good for you! Read on for reinforcement, or head out with the other swots for an early break.

However my emails, comments on Monevator, and our Google Analytics dashboard tells me people are getting a bit fed up.

Newer investors ask if it’s fatal they missed the gains from the low interest rate era. Older hands wonder if an unpleasant sequence of returns is derailing their early retirement schedule.

Savings accounts look juicy. And cash doesn’t put the willies up you by lurching into the red. Should we prefer that to all this investing malarkey?

Or what about Bitcoin? The crypto-cockroach is up 75% since New Year’s Eve.

That’s more like it! Maybe this index tracking thing has finally run out of road?

Bonds? Don’t talk to me about bonds. Sixty-farty portfolio more like.

Batten down the hatchesI understand the discontentment. Depending on what you invest in and how, your portfolio may have gone nowhere – or worse, down – for a year or more.

Not much in the grand scheme of things. But also not nothing in a 30-year investing window.

My own portfolio got within a couple of a percent of its (short-lived) all-time high as far back as March 2021. More than two years ago. Despite a bounce in the past six months, I can well imagine looking back at returns that tread water for four or five years from that giddy 2021 spring.

I don’t expect it, but it’s possible. Especially given the regime change to higher rates and inflation.

So don’t be dismayed by macho commentators saying they’re not bothered. Their stance is 100% correct – but there’s no need to be pig-headed about it.

Nobody gets into investing without wanting to make money. It’s better to admit that it sucks when investing is boring or worse. Feel the frustration. Then take counter-measures that keep you going, rather than chucking in the towel.

No doubt we all have a famous investor, money blogger, or economic pundit who we’d have walk the (metaphorical) plank to get our portfolios advancing.

But enough about Nouriel Roubini. What are some practical approaches you can take when you’re mired in a similar going-nowhere market?

Let’s consider a few things that might help, depending on whether you’re a passive investor or a naughty active sort. Followed by some general pointers for all of us.

Passive investing isn’t meant to be exciting……but it can be even more challenging when it’s dull as dishwater.

If you have a simple portfolio – a LifeStrategy fund, say, or a two-fund equity/bond split – then checking in when markets are drifting for years can make you feel like a hamster on a wheel.

You’re working hard. You’re stashing away your savings. You see very little to show for it.

You can’t force the market higher. But here are some things you could do.

Look at long-term charts. Remind yourself indices can remain underwater for years. A long trough is not unusual. Doing this won’t help your lousy returns, but you’ll take them less personally.

Count your ~~blessings~~ units. Your portfolio value might be frozen in amber, but is there a more positive metric you could track? Maybe how many units you’ve bought of your tracker funds or how many shares you’ve racked up of your favourite ETF? Or even just the total amount you’ve saved to-date. It is all laying the groundwork for gains when prices surge again.

Remember you’re invested in companies. Now and then I edit my co-blogger The Accumulator’s copy because his talking about ‘Value’ doing better than ‘Small Cap’ gets too much for me. I understand why we talk about baskets of shares this way. But as an old-school stockpicker I think of my investments as companies first, even when in a fund. Why is this relevant? Well, you may struggle to see why an index should rise again. But you might find it easier to imagine that entrepreneurs will keep striving, scientists innovating, and economies growing. These1 are the reasons why markets go up over time. It’s not just numbers.

Recall the worst is probably past for bonds. I will repeat myself on bonds. Yes they had a terrible 2022. If you owned them then you’d probably rather you didn’t. But that is water under the bridge. The fall in bonds last year set the stage for higher returns going forward – or at least made more deeply negative periods less likely. Bonds should help your overall portfolio return from here.

Don’t forget about income. Talking of bonds, they now sport higher yields. Dividend yields are up too. The mainstream indices may go nowhere, but income will trickle in. Reinvest it. The FTSE 100 index was all-but-flat over an interminable 20 years from 1999. But with dividends you still more than doubled your money. Not amazing, but far better than nothing.

Consider complicating your portfolio. A last – heretical – idea. Most people will do best with an all-in-one fund precisely because such funds hide how the sausage is made. The investor won’t know what is doing well – or badly. So they won’t take wealth-damaging actions in response. However it’s possible you’re somebody who would actually do better seeing a circuit board rather than a black box. An advantage of our Slow & Steady model portfolio is we can monitor the workings. It’s not lifeless inside, even when on the surface nothing is happening. Maybe you could break out some of your equity allocation to a value and/or momentum ETF? Or follow an even more explicitly diversified approach? Or set aside 10% as a speculative sub-portfolio? Doing so may reduce your returns. But if it keeps you interested in investing, it could be a price worth paying.

Active investors can always do somethingI stopped prevaricating with a foot in both camps and became a fully active investor early in the 2007-2009 financial crisis. I discovered ‘doing something’ best-suited my personality. It also gelled with my deep interest in economies, innovation, and the markets.

However the greatest strength of active investing is its biggest weakness. In theory you can trade your way around the worst and own the superior stocks in any market. But in practice most fail to do so. They make matters worse.

For instance last year has been dubbed an annus horriblis for UK fund managers. After moaning about ‘dumb’ money pushing prices higher in the long bull market, a majority of active funds failed to beat their index-tracking equivalents when the music stopped in 2022.

So most people will make things worse by stock picking or market timing. But we’re different, right? Or you’re having more fun investing actively. Fair enough, as long as your eyes are open.

Look below the surface. Indices don’t matter nearly as much when you invest actively. There’s always lots of commotion at the company and sector level, even when markets are flat. Last year was great for energy firms, for instance.

Monitor your watchlist. It’s surprising how much any company’s share price moves in a year, between its highs and lows. In confused and direction-less markets, you may find a favourite and typically expensive firm trading cheap for a bit. But you have to be looking all the time to spot these opportunities.

Rotate or recycle. Most of us have shares we know aren’t going to shoot out the lights, but we keep them for their steady qualities. Often they’re interchangeable for another. Procter & Gamble flying while Unilever languishes? There might be a good reason. Or it might be fickle fashion. Consider a swap. The same can hold true for whole sectors.

Look for anomalies. Things get normalized in bear markets that would seem odd when investors are confident. Massive discounts on riskier investment trusts, for example. Or housebuilders or gold miners trading contrarily to the goods they produce. Often there will be cyclical factors to take into account. But sometimes if you correctly judge which signal is superior you can find a bargain.

It’s always a bull market somewhere. I forget who said this, but it’s true. Obviously be mindful of flitting from fad to fad, and being the last buyer left holding the bag each time. But if you can alight on a durable bull market and you know your onions, it can be hugely helpful to have a big whack of your portfolio going up when everything else is doing nothing. Bleeding obvious I know, but you would be surprised how many active investors keep plugging away at the same crumbling coal face for years, rather than seeking a more promising seam to mine.

You probably want to keep thinking long-term. Most successful active investors seem to be long-term players, not frenetic traders. So while I think these trading strategies can be useful, I’d employ them within a framework of trying to tend towards my best portfolio of my best long-term ideas. Unless it’s your strategy and you’ve evidence you’re good at it, beware of ending up with a basket of crappy cheap companies that you have no faith if (/when) things go south. Remember, winners win. Most of the market’s return comes from a handful of great companies. You should be loathe not to own them.

How we can all keep the momentum goingHowever you invest, the big picture is as eternal as an avocado bathroom suite in Swansea.

Try to be happy. Expected are returns up. Yes you’d rather your portfolio’s prospects had risen for good reasons – higher company earnings or a booming economy – rather than because everything fell a lot last year. Nevertheless those falls blew away a lot of the valuation froth in shares and bonds. It’s reasonable to hope for better returns over the next ten years, compared to 2021.

Save more. You can’t make the market dance to your tune, but you can laugh in its face and throw money at it. Stagnant or even declining markets are a saver’s friend. They let you buy more assets for your money. If you’re under-40 you might even hope global markets drift sideways for 20 years.

Think long-term. The past 12-18 months doesn’t really matter in the grand scheme of things. Save and invest for another 20-30 years and you’ll struggle to see the wobble in your records. True, this is harder if your time horizon is shorter. All I can do is remind everyone that’s why your portfolio should be appropriate for your age (or perhaps your relationship with regular paid work).

Make money through cost reduction and tax mitigation. You can’t control the markets. But you can make sure you’re investing efficiently. Check out our broker comparison table for starters. If you own expensive funds, at least know why. Being optimally-efficient with your taxes, too, can move the dial. Defuse capital gains, for example, if you have unsheltered assets.

Check your portfolio less frequently. An easy way to feel better about a portfolio with a slow puncture is not to know what’s going on. Check in once a year and at worst you’ll get one shock a year. More often you’ll be pleasantly surprised. Most readers will want to look at their portfolios more often, but remember the more frequently you do, the greater the odds of being upset.

Check your portfolio more frequently. Do I contradict myself? Of course! Only recommended for investing nerds who feel out of control when losing money. Proceed with caution, but it’s possible seeing daily gyrations will help you grow a tougher shell, and also further stoke your resolve to put more fresh money to work. That’s what happened to me.

What’s the worst that can happen? It may help to run some numbers on how bad things can get. Look at the most rubbish markets of all-time and apply what happened to your situation. Could you live with it? You wouldn’t be happy – but it probably wouldn’t be the end of the world. Facing your fears can rob them of their power. Imagine if your portfolio was cut in half. How would you feel? The answer may prompt you to take action – but before you do, try the same exercise tomorrow. It may lose its sting, whilst also making run-of-the-mill gyrations of 5-10% feel piddling.

Hold fastGetting through a miserable period in the stock market is not rocket science. Most of the pointers above may seem obvious to you.

However good investing is simple but not easy.

Very few of us will look back and see brilliant decisions or insights as the making of our investing fortunes. Rather it will be sticking to it through the good times and bad – adding new money, gradually compounding it over the decades – that will deliver our financial freedom.

Choppy markets can make you seasick. Frothy markets can blow you off-course.

When investing is boring, the biggest risk is it can all seem rather pointless.

Do what you can to remind yourself why you’re investing, why you read Monevator, and where you’re hoping to end up.

I’m confident that sooner or later we’ll be going that way again.

Whether you’re a passive or active investor, let’s hear how you’ve been facing the mediocre market of the past 18 months. Even if I suspect for most loyal readers it’s been business as usual. (Quite right too!)

And inflation.

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Today we bring you a stop-the-press Monevator exclusive! Mrs Accumulator has wrestled the keyboard away from her other half to smuggle out her side of The Accumulator’s Financial Independence Retire Early story. Is she really living the FIRE dream, as TA has always implied? Or did she just play along with it to stop him going on about synthetic ETFs?

Hello, this is Mrs Accumulator. (I would prefer to be known as The Organ-Grinder but apparently I have to let this outdated anonym slide.)

In case you and/or your biggest asset class are interested, I present here a one-off counterpoint to The Accumulator’s loooooong-running blog saga.

I think you’ll find it interesting. After all – I am the ultimate passive investor.

The early daysI have fond if distant memories of once being in charge of both my own and TA’s money.

We lived as part of a complicated renting community back then. In fact, in those days, I collected rent from The Investor too. Great times. (The things I could tell you! Are those beads of sweat on TI’s brow?)

Due to what I shall term ‘burn out’ a few years later, the mortgage and bill-paying reins were handed over to TA. And that was the moment that a money-investing monster was born.

Over the next couple of years, I remember our walking holidays were constantly accompanied by the soundtrack of TA repeatedly explaining ISAs, diversification, and the inverse correlations of gold and Tamagotchis. Along with plastic (?), artificial (?), imaginary (?) ETAs.

Or were they ETFs?

Anyway, I was definitely listening.

TA fielded my questions about risk and sound-boarded me with options until we had a plan.

From then on, my role was simply making sure that TA knew that if all went the way of the Truss – or, in those days, Lehman Bros – I would never blame him. Much.

There were only a couple of questions I repeated over the years: “Can’t we invest in houses? I like houses” and “How many more years till FIRE?”

It seemed to me that TA gave the same answer every year, for however long was left.

I hit on the idea of sticking his projected date into a Google calendar to cross-reference as evidence – forcing him to be more realistic and enabling me to sound less like a petulant teenager.

Why was I on board? I like cars, houses, holidays, and buying presents. None of which are conducive to FIRE.

Luckily, a couple of formative experiences made me an easy mark for TA’s ‘get a bit rich eventually’ plan.

Catastrophising as a child about the horror of a lifetime working 9-5; cold Wars turning hot; ageing demographics. These all put pensions ridiculously high up the list of my ten-year-old priorities. Albeit a few rungs below wanting a pony.

I really did worry about those things growing up! Thank you Mr A. Senior. (I feel like we’re pushing the pseudonym sitch further than anyone wants to go?)

Then, oh so briefly working with my father in an Independent Financial Advisor’s office taught me a few rules: don’t bother with anything other than an index tracker, minimise investment costs and, no matter what – Covid, Putin, China – capitalism eats everything.

The markets always win – excluding a Godzilla-sized black swan or the Four Horsemen of the Environmental Apocalypse. It’s only investors who sometimes lose – when the scary black duck-thing lands – and then we’ve got other worries.

The ups and downsThese life lessons primed me for the path TA plotted for us, and my memory is that I immediately signed up.

But it wasn’t all plain sailing / amiable dawdling.

Downs Inevitably, on this journey the emotional bear market arrives first.

The annual, dreadful, first day back to work after the summer holiday. The only slightly less awful equivalent at the start of January.

The tightly holding onto each others’ hands when careers were particularly demanding, and our time together was all too brief.

There were periods when it felt like a very long road. Was that a speck of light at the end of the tunnel? Or just another migraine coming on?

Ups The joy of paying off the mortgage – or having the money in the bank to pay it off, anyway. Only slightly dented by the lack of reaction from close family members as we whooped the news down the telephone. (I’m still surprised, although I think I now understand why.)

Finding a house that made us relaxed and happy just by being there – despite the 1980s kitchen and bathroom, and the Stranger Things-style portal in the corner of our bedroom.

That house might have played a bigger part in smoothing our journey than either of us realised. Nature and the fun of city life are both an easy bike ride away. Despite the input of friends and family, it never felt like we were sacrificing anything with our shaky sash-windows.

The day to day *It’s easier when I remember all the things I am grateful* for. (Mainly freedom from DIY dentistry, killing the family pig, and giving birth to a football team’s worth of kids.)

Then there’s the wonder of living in Britain and next door to the miracle of a united Europe (which I hope we’ll once again view as a net benefit versus the mythical sovereignty we currently enjoy – ).

Also, the family and health. All those things.

It’s harder when I worry that we might be living too much for the future and not enough for the present.

In the early days, we possibly did do that. But no longer.

Crucially, we constantly checked in with each other about our choices. Often one of us would play devil’s advocate for the high life. Sometimes it resulted in us adjusting our aims.

Consequently, we have enjoyed fabulous holidays and fine-ish dining, own specialist biking kit, and we’ve never put off buying something we really wanted.

(Apparently I don’t really want an Aston Martin Vantage V600.)

Easier for me than others? My job doesn’t require much in terms of appearance, which helped. Although I am perhaps pushing the outer limits of their expectations!

Hate clothes, love messing about with TA.

No kids – although I would absolutely recommend FIRE for people with kids. I teach, and it’s an amazing thing to give kids the confidence to not judge themselves by the standards of others or social expectations. Even if they only manage to distance themselves a tiny bit.

The FIRE approach is compliant with our risk-averse mentality. A mindset that prevents us from setting up in business, true, but which does motivate us to take on the responsibility of researching, understanding, and choosing our own investments.

How successful is our version of FIRE?If retirement means no longer working for The Man – or woman in TA’s case – then we’ve nailed it.

If it means no paid work at all… well it hasn’t turned out quite like that.

Our FIRE is being in charge of our own destiny. Which is wondrous, and partly why we did the freeze for fun challenge this winter. It was another chance to question convention. The presumption that:

We should be warm as we are well-off
We should be warm as we are in a technologically advanced society
We should be warm as everyone else we know is
We need to be warm to feel happy

All BS, surprisingly.

For us, FIRE is work that is not alienating. It is retiring from the marketplace to work for fulfillment. Consequently this feels better than retirement (redundancy, hanging about, time-wasting, haunting the world?) It is comparative heaven.

We tend our garden in our own sweet time. Purpose with balance is contentment.

Happiness is fleeting. Doing nothing for no reason feels like death, or perhaps hell. You can’t even blame your unhappy restlessness on someone else. Unless you read The Spectator.

You may not need any work to achieve this purpose. But for us, right now, it helps.

In truth I’m not sure we’ve found the perfect balance yet, and I’m guessing that any such perfection is illusory. Nonetheless, we are cheerfully filling the hours before inevitable heat death by coming up with our bespoke answer to life, the universe, and everything.

And that answer swirls around the idea of belonging, not belongings.

We did it our wayI do not regret a single choice we have made – as far as I can remember anyway. We made them all with full knowledge of the risks.

The biggest fear I had was saving for a future that we couldn’t guarantee we would live to see. Even this niggle evaporated once we worked out how to spend our money and time in a way that didn’t feel like a sacrifice.

In fact – as I guess many people here already know – there is collateral salvage from pursuing FIRE. Namely, a firm grasp of your finances, of your values, your non-negotiables, and of yourself.

You don’t even need to spend a fortune sitting cross-legged in L.A., self-consciously humming while an ethereal chap disparages your aura.

It may say too much about TA and I that we prefer charts to chakras when it comes to plotting our independence. But the point, if there is one, is that a bit of enlightenment, a bit of distance from the daily struggle, and a greater connection to those at your side – these are the main reasons I’d recommend FIRE to anyone.

It isn’t all about the future. It’s quite a lot about realising what you treasure right now.

If FIRE is important to you, it’s probable that the rat race isn’t. And happily the road to FIRE immediately distances you from that highway, as you set off down your own path.

If all had gone wrong – if all goes wrong tomorrow – there is nothing to regret. We had to work hard anyway, and by choosing not to spend money to fill the happiness void, we discovered the values we truly held. As my earlier comments indicate, we aren’t exactly spiritual people, but we have learned to love the little things.

One thing I will say about TA, is his many, many, many faults (perhaps that’s one ‘many’ too many? – TA) are easier to overlook when weighed against his assiduous pursuit of FIRE-necessary insights.

While you don’t need his sub-atomical knowledge of investment vehicles (literally no-one needs that), the fact that TA did his due diligence has made life a lot less unnerving for me.

When the world lurches into crisis, I raise an eyebrow in TA’s direction, he gives me a nonchalant thumbs-up, and on we go.

(I would say ‘he smiles reassuringly’, but if you’d seen him smile… chance would be a fine thing).

Last wordsTo all on the FIRE journey, I wish you a fair wind. I hope you can treasure the days along the way, even the absolutely god-awful ones.

Just one last thing… If there is no mention of an incident involving sunglasses, a surprising drunken revelation, a glow-stick, and a trip to A&E, then you know that TI has left his heavy-handed editing fingerprints all over this piece of harmless whimsy.

And fear not if whimsy isn’t your thing, normal service will be resumed next week with the latest from The Accumulator.

In the meantime thank you for your patience. (Perhaps I’ll see you again in another 15 years?)

The O.G.

The post How I got mixed up in this FIRE business appeared first on Monevator.

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What caught my eye this week.

Pretty much straight into the links today, as I’ve been ill most of the week with a remorseless cold. I’ve kept up with my reading, but couldn’t manage much thinking.

Well, I did spend a few feverish moments wondering if getting Covid last year had somehow impaired my immune system.

Normally I shake colds off in a couple of days. I rarely get them in the first place. This one made itself at home, returning in waves from Monday to Friday.

Perhaps I’ve forgotten what a cold – let alone flu – is like? Lockdowns, masking, handwashing, indulging my reclusive tendencies with a global pandemic at my back… for whatever reason I can’t recall going toe-to-toe with mankind’s most implacable foe since at least 2019.

The Atlantic wrote recently that man flu-ism is rampant right now:

As far as experts can tell, the average severity of cold symptoms hasn’t changed.

“It’s about perception,” says Jasmine Marcelin, an infectious-disease physician at the University of Nebraska Medical Center.

After skipping colds for several years, “experiencing them now feels worse than usual.”

It was also nostalgic to rip open one of my last lateral flow tests, and to wait for those lines. The pregnant pause. The relief. Misguided, almost, given how the cold I actually did have dragged on for longer than The Big One did for me, though without Covid’s awful tiredness.

Anyway, rambling. Enjoy the links, please discuss them in the comments! I’d probably have focused on inflation. It looks licked in the US.

Have a great weekend.

From MonevatorAre US Treasuries better than gilts for UK investors? – Monevator

Buying an investment trust on a discount versus a premium – Monevator

From the archive-ator: Great expectations: how much should you fear inflation? – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Some workers may have to wait until they are 74 to get state pension – This Is Money

Frozen food beats fresh as shoppers seek savings – BBC

Strikes weigh on a UK economy which stagnated in February – Reuters

House prices drop amid falling demand as rents keep increasing – Yahoo Finance

Interest rates likely to return to pre-pandemic levels after inflation is tamed – IMF

What is the Living Pension standard, and could it boost your retirement pot? – Which

Are Americans too pessimistic about their financial futures? – Morningstar

Products and servicesMore borrowers choosing two-year fixes in gamble mortgage rates will fall – This Is Money

Blackrock/iShares is getting into the ‘Buffer’ ETF game – Bloomberg via Yahoo Finance

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Plan now to afford typical care home costs [Search result] – FT

17 ways to save money on your bills and living costs in 2023 – Which

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Restored homes with interiors that sing, in pictures – Guardian

Property mini-specialThe highs and lows of starting a new life in a static caravan – Guardian

Curbs on second-home rentals risk hurting local economies [Search result] – FT

Folly – Indeedably

Seven tips on selling your home quickly in a slow market – Which

This is where people with staggering wealth end up – Guardian

Comment and opinionShould we ban billionaires? – Prospect

Risky business – Humble Dollar

The ultimate level of wealth – A Wealth of Common Sense

James Choi: improving the way we make investment choices [Podcast] – Morningstar

Invest like Oprah Winfrey? – Contessa Capital

Play your own game [Podcast] – Morgan Housel

Why portfolio diversification helped in 2022 [US but relevant] – Morningstar

The alpha games: technology funds – Finominal

Harvesting tax losses – Fire V London

Never retire…what the ‘world’s oldest practicing doctor’ does for a long life – CNBC

Naughty corner: Active anticsRIT Capital Partners: a rare opportunity to buy a unique trust – Quoted Data

Ten lessons from three small-cap AGMs – Maynard Paton

100-baggers with Chris Mayer [Podcast] –We Study Billionairesvia Apple

Finding companies with consistent dividends and profits – UK Dividend Stocks

US inflation is yesterday’s news – Calafia Beach Pundit

An annus horribilis for UK stockpickers [Search result] – FT

The end of the cycle is nigh [PDF] – Legal and General

Kindle book bargainsCooking on a Bootstrap by Jack Monroe – £0.99 on Kindle

Money: A User’s Guide by Laura Whateley – £0.99 on Kindle

The Almighty Dollar by Dharshini David – £2.19 on Kindle

The Nowhere Office: Reinventing Work and the Workplace by Julie Hobsbawm – £0.99 on Kindle

Environmental factorsLess cars, more money: visiting the city of the future – Mr Money Mustache

The illusion of saving the planet with a trillion trees [Search result] – FT

Have global combustion engine sales already peaked? – Visual Capitalist

“Bees are sentient”: inside the brains of nature’s hardest workers – Guardian

Full-year results from UK energy storage investment trust GRID – DIY Investor

Billionaire founder of Paul Mitchell invests in man-made coral reefs – CNBC

Robot overlord roundupIf we don’t shut down AI development we will all die – Time

First hands-free self-driving system approved for British motorways – Guardian

The Bloomberg terminal just got a ChatGPT-style upgrade – Institutional Investor

How to use A.I. to do practical stuff – One Useful Thing

Existential threats: Terminator scenario – Continuations

An example of LLM prompting for programming [Nerdy] – Martin Fowler

A BabyAGI mod is close to creating own executables [Nerdy, big if true] – via Twitter

Off our beatWhat makes you happy – Morgan Housel

The gambler who beat roulette [Video] – Bloomberg via YouTube

Slowing down – Conor Mac

Dave Eggers: sketches from Ukraine – The Believer [h/t Abnormal Returns]

The Super Mario Bros. movie will be impossible to beat – Wired

Fame – Professor Scott Galloway

Stock therapy – Humble Dollar

“I am 70 and so full of regret about my husband and career” – Guardian

And finally…“Far from being the smartest possible biological species, we are probably better thought of as the stupidest possible biological species capable of starting a technological civilization – a niche we filled because we got there first, not because we are in any sense optimally adapted to it.”
– Nick Bostrom, Superintelligence

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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Superintelligence: Paths, Dangers, Strategies

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This mini-series has previously explained investment trust discounts and premiums and why they arise. Read those articles first if you need to.

Bear markets are when you make your money. You just don’t know it at the time. Beaten-up markets enable you to buy future cashflows cheap, boosting your expected returns. That’s as true for investment trusts as for any other assets.

Indeed: pick-up unloved investment trusts on a discount and you can extra-juice your future returns, should that valuation gap narrow over time.

But alas! I haven’t just whispered the secret to getting rich quick into your ear.

Because it’s no easier to pick winners in a bear market than in a bull one. You’re still statistically likely to lag a tracker fund. (Although I’d argue it’s little easier to avoid outright losers once the froth has come off.)

Besides, even if you buy the indices you can’t know how long a recovery will take.

You can’t even be absolutely certain a recovery will come at all. Just ask anyone with a tin full of share certificates from Tzarist Russia…

However with those caveats out of the way, it’s a fact that investment trust discounts and premiums do wax and wane.

People overpay in the good times. While in miserable periods someone will sell at almost any price.

Check out this graph from Numis showing how discounts widening and narrowing is an age-old story:

I don’t believe it’s fanciful to try to profit from these cycles.

2022 and all thatAverage discounts blew out towards historically extended levels in the ‘Sell Everything’ market of 2022.

Some trust sectors have rallied since, at least off the Mini Budget lows. You won’t find infrastructure or blue chip equity income trusts on a double-digit discounts anymore.

But what about technology, private equity, commercial real estate, or growth trusts priced at anything from 10% to 50%-off the value of their underlying assets?

You know – all the stuff we couldn’t get enough in the good old days of… 18 months ago?

All that is still priced to go.

So if you’re an adventurous (/misguided) active investor and you’re ready to take a hit if you get it wrong, some bargains are surely out there.

Don’t discount itThe most important thing we need to think about when buying any investment trust – whether it’s trading at a discount or a premium to its underlying value – is obviously the potential impact on our wealth.

Recall that investment trusts are listed companies that own other assets. When you buy shares in an investment trust, you effectively become the owner of a portion of those assets.1

Your ownership of the trust’s assets is proportionate to your ownership of the trust.

For all but the oligarchs among us, this is most easily worked out by taking the total number of shares you own, and multiplying by the net asset value (NAV) per share of the trust:

If you own 1,000 shares of a trust with a NAV per share of £2, then your economic exposure to its assets is £2,000.

But as we’ve previously seen, a trust’s share price may be higher than the NAV per share. (It’s trading at a premium to net assets.)

Or it may be lower. (The trust trades at a discount).

And this complicates things!

Two ways to win (or lose)Premiums and discounts come about for all sorts of reasons. We covered that earlier in this series.

The key point today is we have two moving parts when it comes to the returns we see from buying shares in a trust:

The movement of the trust’s share price. This determines how much we’ll get for our shares if we sell today.
The movement of the trust’s NAV. This reflects the underlying returns of the trust’s investments. NAV changes tell us how well the trust is performing, ignoring the gyrations in its share price.

As I said earlier, as a shareholder you have an economic interest in a proportion of the trust’s net assets. Thus it’s the movement of the trust’s NAV over time – ideally upwards – that’s most important over the long-term.

However over the short-term, share prices are kerrraaazy! They can do anything.

This means that if you want to sell on any given day, you’ll have to take the price you’re offered for the trust’s shares. Regardless of whether the shares trade at a discount (boo!) or a premium (yay!) to NAV. (Aka ‘What they are really worth’.)

Sadly you can’t demand the trust is liquidated just so you get the correct value for your assets. Well, not unless you own enough shares to influence the board of directors.

Sometimes trusts do wind themselves up. They’ll sell their assets and gradually return the NAV to shareholders via capital returns or dividends.2

But that’s rare, and it’s outside your control.

No, in practical terms your shares are worth what someone else will pay you for them. Whatever the underlying NAV might be.

This means that any movement in the discount or premium while you hold the shares can greatly affect the returns you see.

NAV growth and the share priceProvided the discount or premium remains unchanged during your ownership of the shares, the share price will simply capture the increase or decrease in the underlying assets.

People get confused about this. So here’s a quick example:

Let’s say you buy Monevator Investment shares at a 25% discount to the £1.60 NAV.

That is, you pay £1.20 a share.

The simply brilliant manager [ahem] makes great stock picks. The NAV doubles from £1.60 to £3.20.

Despite this superb performance, the discount remains unchanged at 25%.

Your shares now trade at £2.40 (75% of £3.20) against the NAV of £3.20.

You’ve made the same 100% return in the share price as the NAV has doubled, despite the persistent – but constant – discount.

How a narrowing discount increases your returnSo far so straightforward.

But what’s more likely to happen is that the performance of a manager who has doubled the trust’s net asset value will be noticed by other investors. And these envious hordes will want a piece of the action.

More people wanting to buy the shares would typically lead to the discount being reduced (narrowing) as demand hots up:

Let’s say the discount narrowed from 25% to just 5%.

At a 5% discount to the £3.20 NAV, the shares would be trading at £3.04.

In this case, the doubling of the NAV – plus the closing of the discount – has boosted the return you see on your initial purchase price of £1.20 a share.

In fact, you’ve made a 153% return, compared to just the 100% growth in the NAV.

Conversely, premiums can clobber your returnsA discount narrowing from 25% to just 5% is an unusually good outcome, unless you’re lucky enough to purchase shares in a trust when the market is going through one of its fits.

But the general point is clear. It’s great to buy an investment trust at 25% less than the value of its assets and then to see that markdown narrow due to good performance. You get a double whammy of a return!

If these things happened predictably we could all meet on a tropical island by Christmas.

In practice, discounts can persist for years – or ‘forever’ in practical terms. But they do often close, and it’s great when it happens.

On the other hand, when you buy a trust at a premium to its underlying assets then the converse of all the above can unfold.

If you buy an investment trust on a premium to NAV and that premium closes – either because the share price doesn’t keep up with NAV growth, or because the NAV doesn’t grow or shrinks, and the share price falls even faster – then the premium narrowing will reduce your return, versus the performance of the trust’s underlying portfolio.

For this reason, I almost never buy trusts on a meaningful premium.

When premiums fadeSome people – especially those who manage investment trusts – will tell you that it doesn’t matter if you buy at a premium. What is important is the performance of the underlying portfolio.

And it’s true that if you buy on say a 10% premium and in future sell at the same mark-up, then your returns will not be affected. Just as with static discounts, like we saw above.

However in my experience, premiums do not generally persist. Even trusts that more often than not trade at a premium – infrastructure trusts, for example – go through spells on a discount.

Why not buy them then, and get rid of the risk of paying over the odds?

Managers will point to graphs showing how delaying purchasing like this foregoes returns. But it’s a false choice. There’s almost always something else you can do with your money while you wait to buy near par.

RIT’s faded gloryIn the original version of this article in 2010, I wrote:

One of my favourite investment trusts, RIT Capital Partners, frequently trades at a premium to its NAV, thanks to its great track record and investors taking optimistic views on the value of its illiquid holdings.

I don’t sell my RIT holding just because of the premium. I’d just have to buy back in later. But I have only ever bought the shares when they were priced at or below net asset value.

This is a cautious approach, and it will mean you will sometimes miss out on an excellent performance from a trust that’s become popular with investors.

Better safe than sorry is my view, but you’ll have to make your own mind up.

While it only goes back ten years, this graph from the AIC shows how RIT’s fading premium has taken the edge off shareholder returns:

Source: AIC

Starting in early 2015 RIT’s shares began to trade at a persistent premium to NAV. You can see this in the bottom chart. (Click to expand). The premium was over 10% by 2018.

No doubt investors at that time shrugged off paying a near-12% surcharge for exposure to RIT’s underlying assets. After all the record looked good – and with RIT your gains tend to be come with less downside than you get in the market, which is always nice too.

Happy days!

Sadly though, as I write the shares now trade at a thumping 22% discount to NAV.

This huge shift from premium to discount has scythed away about a third of the return that shareholders would have enjoyed if the premium had instead remained static.

Investors get off the Lindsell TrainAn even more startling example comes with the Lindsell Train Investment Trust.

For many years investors paid an expanding premium for this trust.

Initially this seemed to be down to enthusiasm for manager Nick Train’s market-beating stock picks. But in time a more sophisticated analysis had it that the trust’s large shareholding in Train’s (unlisted) fund management company was undervalued. The premium, it was said, reflected the market correctly divining the true value of this large and fast-growing private holding.

To his credit, Nick Train was himself cautious. For example in 2016 Train warned:

“We would advise investors to think carefully before buying shares at such a steep premium to NAV.”

A fund manager telling people not to buy his fund? Needless to say, not the usual run of things.

It’s worth knowing though that Train had been warning about the trust being on a precarious footing for many years before that. In fact he said much the same when the trust was on a 21% premium to assets in 2012. The share price more than tripled over the next five years!

So perhaps we can almost understand how some shareholders persuaded themselves it was worth paying a roughly 90% premium – nearly double the NAV – to buy the shares in 2019.

Unfortunately, the music finally stopped and the years since have been rubbish:

Source: AIC

Notice here that – while hardly racing away – the NAV (orange line) has continued to grow since the date of the peak premium in 2019.

However the share price (blue, shaded) has sunk like a stone as the premium (bottom chart) has completed evaporated.

If you were unlikely (or foolish) enough to buy at the peak premium then your shareholding has been pretty much cut in half. Again that’s despite the NAV being modestly up since then.

When something can go wrong, it usually willNow, in the case of both RIT Capital Partners and Lindsell Train there’s other stuff going on besides the gilding coming off an excessively buffed-up share price.

RIT had a rotten 2022 for a trust that some – incorrectly – expected to never lose money. Meanwhile Lindsell Train has seen market-lagging returns and fund outflows as its style has fallen out of favour.

In the face of these headwinds, there’s no eagerness to pay a premium for the assets. Hence the demise of those premiums.3

I would argue however that some similar rough patch will nearly always come along to take the sheen off shares that are priced to perfection.

If I like the long-term investment case, I’d far rather buy in that rough patch, and with a margin of safety. As opposed to in the best of times, where the potential downside is magnified by paying well above NAV for the shares.

Indeed I currently own both these investment trusts. And I bought them on a discount.

I wouldn’t avoid a trust on a small premium of 2-3%, if everything else checked out. And I’d probably hold if the price subsequently got carried away – at least within reason.

Generally, though, anything beyond that is a no-go. I like to stack the deck in my favour!

Cut-price trusts boost your income, tooFinally it’s worth knowing there’s an advantage for income seekers buying investment trusts priced below NAV.

You will get a superior dividend income from a trust on a discount. That’s because the trust will usually pay out the same cash stream from its net assets, regardless of the discount.

And since you’ve bought more exposure to those underlying assets for the same money, you’ll get more income than if the trust traded at NAV:

A 10% discount to NAV will boost your income from that trust by 10%, compared to if you bought when the share price at NAV.

There’s not many free lunches in investing, but buying a good equity income investment trust on a big discount may be one of them.

For this very reason, income-focused investment trusts usually trade close to their net asset value.

Not all that glisters is gold – or even cheapBeware: a really big discount or one that is out of whack with other trusts in its sector can be a warning sign. Investors may rightly fear something is amiss with the trust (or know that it is) and so require a big markdown to assets before buying in to help protect their downside.

Look closely at such a trust’s gearing (debt), the sort of assets it holds, and management’s plans and track record. Consider the macro-economic backdrop, too.

A classic example right now are commercial property investment trusts. These are on a big discounts for a host of reasons.

Offices are half-empty, with people still working from home. Financing is dearer. Yields on alternative investments (particularly bonds) are higher.

These trusts have already written down the value of their assets. But there could be further to go, so NAVs could yet head lower. And all this could get worse with a recession.

Or… it could get better? Maybe interest rates will be cut, bond yields will fall, and workers keen to keep their jobs will show their faces in the office more, boosting occupancy.

Nobody (should have) said this stuff was easy.

By all means be contrarian if you’re an active investor with reason to believe you know better about one of these factors.

That’s my game, I won’t judge.

But if you don’t – don’t!

Buying trusts on a discount: naughty, but niceIn conclusion, I think rifling around for excessively unloved investment trusts is one of the more accessible ways to play the active investing game. Should you be inclined.

But before I get pilloried in the comments, I certainly am not saying it’s a sure thing. Nor that you will do better than buying a tracker, or anything like that.

This is still stockpicking. Most people do it poorly, especially on a risk-adjusted basis.

For related reasons, I’ve not bothered citing academic research into whether buying investment trusts on a discount is a way to capture market-beating returns.

I’ve read a few bits and bobs over the years. Most do detect ‘price signals’ – that is, they find evidence of future returns captured in today’s prices.

But I don’t really think such studies are especially relevant to private investors.

You won’t be buying a basket of every investment trust on a discount, weighted by the degree of apparent under-valuation, for instance. You probably can’t hold indefinitely. And you certainly won’t also be shorting trusts on a premium, which is the sort of thing academics love to do in their models but is both costly and risky in real-life.

You’re also unlikely to have the muscle to agitate for corporate change – a strategy often employed by professional bargain-hunters in closed-end funds.4

No, you’ll be looking for good trusts with decent prospects, priced more cheaply than you judge they should be.

Nothing more complicated. Nothing less simple. Fun, if you’re that way inclined.

Happy hunting!

Remember you need to subtract any debt or other obligations carried by the trust, to determine the value of its net assets.
After subtracting any costs for doing so.
Lindsell Train’s board has also tweaked the valuation of that unlisted fund management business.
Investment trusts are a variety of closed-end fund.

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Orthodox investing advice has always been that UK investors should hold either gilts or high-quality global government bonds hedged to UK pounds (GBP) for the main part of their defensive asset allocation.

I’ve long subscribed to that advice myself.

Highly-rated government bonds provide the defensive ballast for your investing strategy. Sticking with your local currency – in our case GBP – avoids adding additional riskiness into what’s meant to be the steadier portion of our portfolio.

But (heresy alert!) recent evidence suggests that unhedged US Treasuries could be a better choice.

Why? Because the dollar has risen against the pound in the majority of stock market slumps since the turn of the century. When it did so, it bestowed a welcome FX bonus for UK-based investors who owned US government bonds – juicing up their defensive returns at just the right time.

The upshot is holding US bonds can protect your portfolio from equity losses better than home-grown gilts – when it works.

But what if that trend is a reversible historical anomaly, and not a bankable portfolio hack?

To approach that question we need to ask some others.

For starters, did US Treasuries dominate gilts for more than just the past couple of decades?

A second salient question: how does this strategy impact long-term returns? Because if US bonds actually deliver lower returns than gilts over time then they become much less attractive, even if they do better for a bit in a crunch.

Maybe those currency gains quickly unwind once market jitters subside, exposing UK passive investors to FX blowback and potentially extra-nasty losses if they’re caught sitting in US Treasuries?

It’s quite the conundrum. But if I’m better off holding US Treasuries instead of gilts though then I’d really like to know about it. So let’s dive in.

UK vs USA: enter at your own riskBefore getting to the good bit, we need to repeat that holding unhedged US Treasuries ahead of UK gilts means adding currency risk to your fixed income asset allocation.

Currency risk can work for you or against you:

A UK investor – with assets valued in US dollars (USD) – benefits when the pound weakens against the dollar. A rising dollar means USD-priced assets are now more valuable in GBP terms.
Equally, USD assets sink in value in GBP terms when sterling strengthens. The dollar price of such US assets is now worth less in pounds.

These gains or losses from currency risk are grafted on top of the asset’s underlying return.

If you invest in unhedged US Treasuries, you’re hoping for two things to happen:

Your government bonds spike as global equities tumble.
You additionally profit from the surge in demand for dollar-priced assets.

Hence this ploy adds an extra risk to your collection. Namely, that the dollar doesn’t live up to its reputation as a safe-haven during a market tailspin.

If the USD falls against the pound in an “adopt the brace position!” scenario then the currency knock-back could swamp any bond bounce you hoped to gain.

All of which tells us that playing FX roulette with your defensive allocation is like releasing a predator into the environment to wipe out a pest species.

It’s inherently risky and it may not work as advertised.

UK vs USA: battle of the government bondsTo discover how frequently US Treasuries beat gilts during sustained stock market falls, I calculated the annual total returns of unhedged US Treasuries in GBP from 1971 to 2022.

We’re looking at GBP returns throughout because we’re interested in this substitution from the perspective of a UK investor.

And those dates were selected because they span the entire floating exchange rate era for currencies, up until this year.

Next I compared the GBP returns of Treasury Bonds against gilts in every year when UK equities registered a negative annual return and/or the UK stock market fell 10% or more, for a period of at least one month, regardless of whether that loss is revealed by the annual returns data.

Against that backdrop, US Treasuries beat gilts in 15 years out of a sample of 21:

Nominal total return data from JST Macrohistory1, FTSE Russell, and Aswath Damodaran. Annual exchange rate from Measuring Worth2. February 2023.

Gosh, that’s quite the thumping. Not as bad as our record in the America’s Cup, but still a comprehensive win for US Treasuries.

Is that it in then? Is it time to ditch our gilts? Do we never need to worry about a mad Prime Minister ever again?

Not so fast…

US Treasuries vs gilts: overall annualised returnsNext I looked at the match-up between gilts and US Treasuries over the entire period, in terms of their annualised returns.

And oh my, the plucky Brits have won something!

George Washington, John Bogle, Beyonce, are you watching? Your bonds took a helluva beating! Okay, sorry about that – I may have got carried away and slightly exaggerated.

The bond scores are:

8.3% gilts
8.0% US Treasury bonds

Those are nominal, average annualised returns across the entire 52-year period, for an investor operating in UK pounds.

And there’s essentially nothing in it. Regardless of whether you bought and held gilts or Treasuries, your overall returns were much the same after 52 years.

US government bonds actually bested gilts, by 28 years to 24. But much of the gain made in US Treasuries during down periods was later undone by the strengthening pound when market confidence was restored.

US Treasury Bonds vs gilts: across the decadesNext question: are there distinct eras when owning US Treasuries worked best for UK investors?

The table below shows how many years per decade that US government bond returns exceeded gilts when UK equities fell (same criteria as before):

| Decade | US Treasuries | UK gilts | | 1970s | 4 | 1 | | 1980s | 1 | 1 | | 1990s | 1 | 3 | | 2000s | 4 | 0 | | 2010s | 3 | 1 | | 2020s | 2 | 0 |

By this reckoning, the 1990s was the only decade when US Treasuries didn’t counterbalance sliding stock prices at least as well as gilts.

However even this data hides decent periods for our boys versus US Treasuries.

Most notably, gilts made a comeback versus US Treasuries in the late 1970s, held their own in the 1980s, and then actually outperformed in the 1990s during those down years.

So preferring US bonds didn’t benefit UK investors for about a quarter of a century.

How bad are US Treasuries when they don’t perform?When equities caved but gilts outperformed Treasuries, the average nominal annual return for each government bond for UK holders was:

US Treasuries: -2.3%
Gilts: 12.3%

Which is a painful showing for the US asset – one that would probably leave you ruing the decision to go off-piste if it happened to your portfolio.

As mentioned at the start, the problem with adding a currency play to the bond side of your portfolio is that FX volatility can swamp the asset’s typically more modest underlying returns.

Hence my biggest fear with this strategy is that an adverse currency move could cause US bonds to inflict large negative returns upon investors who are already buckling under the strain of watching their equities nosedive.

The worst GBP annual return for Treasury bonds was -13.2% during 1987 – the same year as the Black Monday Crash. In contrast gilts were up 17.9% that year.

That said, when gilts fell -16% in 1974 and -24% in 2022, US Treasuries were up 7% and down only -9%, respectively.

America the BeautifulHow do things look when US Treasuries beat gilts during stock market losing streaks?

Well, under these conditions, average nominal annual returns for the two government bond types were:

US Treasuries: 12.3%
Gilts: 2.3%

Meanwhile, across all 21 of the down years we looked at earlier, the average annual returns gap narrows to:

US Treasuries: 8.1%
Gilts: 5.2%

It’s still advantage US Treasuries, but the picture is more mixed.

Which leads me to wonder: which bond is the better option during a proper nightmare?

Which bond works best during the worst bear marketsThe stiffest tests of investor nerve this past half century were the 1972-74 stock market crash, the Dotcom Bust, and the Global Financial Crisis.

US Treasuries beat gilts 3-0 during these utter meltdowns.

Here are the average returns:

US Treasuries: 13.2%
Gilts: 1.5%

That’s a big performance gap. US bonds potentially bucked up your portfolio just when you needed it most.

However, there’s one final and important check we need to make.

What difference does replacing UK government bonds with US Treasuries make to the overall returns for a globally diversified portfolio?

US Treasuries vs gilts: diversified portfolio returnsI compared the long-term results of two diversified portfolios. Both feature 60% MSCI World equities, with the remaining 40% devoted to either gilts or US Treasury Bonds.

And it’s a photo-finish!

Here are the nominal, annualised returns for the two portfolios (1971-2022):

World / US Treasuries: 9.88% annualised
World / Gilts: 9.94% annualised

(Equity returns are in GBP from the MSCI World index. Portfolios rebalanced annually.)

However, it wasn’t so close over the entire time frame. The portfolio with gilts was actually an annual percentage point ahead by the end of the 1990s.

It was still almost half a percentage point ahead before the Brexit Referendum.

US Treasuries vs gilts: bet now!We’ve seen then that US Treasuries can indeed cushion your portfolio better than gilts when equity confidence crumbles. Not all of the time, but the majority of the time, at least historically. And especially in the worst crunches.

However just to keep things interesting, gilts edged the win when it comes to overall portfolio returns.

To me this strongly suggests the strategy is only worth considering if you’re a particular type of investor – one who is hands-on with your portfolio, enjoys managing extra complexity, and understands the extra currency risk may not pay off (and might even backfire) at the worst possible time.

So if you want to keep things simple, then you can happily leave this ploy alone.

Despite 50 years of relative UK economic decline, you’d still have been better off owning gilts all told.

Cool Britannia revisitedDon’t fall for gloomy geopolitical narratives that the UK is destined for the international knacker’s yard.

Plausible-sounding storylines of doom are the stock-in-trade of financial punditry. But they’re no basis for a long-term investing strategy.

To give you but one counterpoint: nobody would have predicted gilts would buck the trend against US Treasuries after Britain lurched from crisis to crisis during the 1970s as ‘the sick man of Europe’.

Sure, we’re in a mess right now. But our current national conversation could as easily signal a turning point as herald further decline.

Finally, if you are tempted by the idea of adding unhedged US Treasuries then consider dipping a toe in the water, rather than entirely ditching gilts (or GBP hedged global bonds).

You could split your nominal bond allocation fifty-fifty, for example. Or you could instead buy a slug of gold, given it’s a non-correlated defensive asset that also boosts UK investors when the dollar rises.

Take it steady,

The Accumulator

Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
Lawrence H. Officer, “Dollar-Pound Exchange Rate From 1791,” MeasuringWorth, 2023.

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What caught my eye this week.

One thing that helped me through the worst of the pandemic was a newly-found love of South Korean ‘K Dramas’.

Like many others, I discovered these bingeable soap operas – with their wholesome story lines and fairy tale romances – to be wonderful escapism.

What my 19-year old self – neck-deep in Dostoevsky and Joy Division – would make of my middle-aged addiction, I’m embarrassed to think about.

Then again perhaps it’s just two sides of the same coin.

In those days I thought there were answers to the human condition, waiting for me to find them.

Much older and maybe very slightly wiser – or perhaps just more cowardly – I now suspect there are mostly only comforts.

Here, there, and everywhereEnough metaphysics, and on to some on-topic reflections on the latest K Drama to soothe my days – the veritable chicken soup for the soul that is Hometown Cha Cha Cha.

It’s still available on Netflix and you should watch it. So I’ll try to avoid spoilers.

In brief it’s the story of high-flying dentist Yoon Hye-jin and her burgeoning relationship with the show’s other lead – a huge fish in a small pond named Hong Du-sik, or ‘Chief Hong’ to all his neighbours.

Besides making all real-life women pale for me compared to the fantasy of Hye-jin (and there’s even a t-shirt suggesting many viewers feel the same about Chief Hong) Hometown Cha Cha Cha showcases an alternative way of life. One that’s relevant to the way we do business around here.

You see, from the moment of her arrival in the small town where Chief Hong plies his many trades, Hye-jin is astonished to find him at work everywhere.

Here is Chief Hong directing fisherman at the docks. Now he’s over there at the coffee shop pulling lattes. The doorbell rings – Chief Hong has deliveries. His other occupations include estate agent, carpenter, and tech repair guy.

Naturally, hilarity ensues. And there’s a deeper reason for all this plate juggling, too.

But as I said, no spoilers.

Moe than his job’s worthJust to generalise, Chief Hong is doing all these things because he wants to support – and be supported by – the local community.

Hong charges for everything he does. But he only ever charges an hourly minimum wage. Hye-jin argues he could pull big bucks in the capital, Seoul. But he prefers pulling espressos for his friends by the seaside.

On his days off he surfs.

Again dancing around revealing too much, we can see Chief Hong as sort of Barista FIRE1. He appears to have inherited his grandfather’s home (and to be fair what a home). Beyond that, the minimum wage – and endless payments in kind – keep him happy.

Hye-jin can’t believe he’s not working for a prestigious chaebol making megabucks. Chief Hong is frustrated that she can’t see why he doesn’t.

Less pain, more gainI like the new FIRE definitions – Coast FIRE, Barista FIRE, and so on – that arrived in the more recent years of what we now apparently must call a movement.

These new definitions neuter that old enemy, the ‘retirement police’.

So you might say “yes I’m financial independent and I’ve retired from the rat race, but I’m Barista FIRE. I’m working at the pub because I like the social contact and the extra cream it puts on my post-work cake”.

Or perhaps you do some maths and see that as long as you let your ISAs and SIPP compound for 20 years, you’re already sorted. So you shift to a Coast FIRE way of life, ambling towards the end of your career at your leisure.

Many of the biggest voices on the Internet on this topic transition to one of those two lifestyles after finishing with formal work. Even our own Accumulator, I’d (gingerly) argue.

TA would say he’s ‘Lean FIRE’. He has a pot of cash that he calculates can get his household through the rest of his days, albeit without many fancy holidays.

But in practice he’s still doing paid work he likes. Because, well, he likes it, but also – I strongly suspect – because it takes the edge of that Lean aspect. So perhaps he’s Barista FIRE, but a fatter FIRE than his Lean FIRE sums suggest.

Still, a rose by any other name and all that malarkey, right?

You do it your wayLong-time readers will know I’m a fan of doing some work forever. And I do mean paid work.

The testimonies of the legions of early retirement advocates who either go back to work or do some sort of side hustle reinforce my case for me.

Volunteer by all means. But I believe in our society as we find it today, getting paid for doing something is about more than money.

I’ve always assumed work-with-FIRE should usually involve maximizing your Pareto-power by doing your best-paid work in the least amount of time.

But – call me slow – Chief Hong has opened my eyes to another way.

I wonder too if the government would have more luck tempting the retired back to work if they encouraged them to watch Hometown Cha Cha Cha, versus fiddling with the tax system.

Maybe getting these over-50 dropouts to do just a couple of days a week part-time doesn’t suit their diabolical economic plans?

I don’t know. But as we’ve discussed before, just a little extra income is worth an awful lot, especially in retirement. Making £10,000 a year doing a couple of days of engaging work a week pretty much doubles the state pension. It is equivalent to perhaps £250,000 extra in your retirement pot.

I understand taxes and allowances complicate the maths, but again I think that misses the point.

Yes, I know wild horses wouldn’t drag some of you back to anything resembling work. Fair enough, whatever is best for you is grand with me.

But at least schedule Hometown Cha Cha Cha into one of your endless days of leisure. You might just get a glimpse of what you’re missing…

Have a great Easter weekend!

p.s. Sending my links early ahead of the long weekend as The Accumulator and Mrs TA are visiting Monevator HQ for an overnight stay. Of course, generally we don’t even travel on the same planes, in order to avoid a tragedy bringing down this blog forever. If you never hear from us again, you know that freak gas explosion you saw in the news had our names on it…

From MonevatorThe Slow and Steady passive portfolio update: Q1 2023 – Monevator

From the archive-ator: My law of crazy big numbers – Monevator

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Global economy set for weakest growth since 1990, says IMF boss – Guardian

King Charles banknotes printed – but not ready yet – BBC

UK firms try to lure Gen Z workers with ‘early finish Fridays’ – Guardian

Twitter is no longer policing Russian or Chinese state-backed media – Semafor

Klaus Teuber, revered creator of Settlers of Catan, dead at 70 – Catan.com

Have we reached peak inequality? – Prospect

Products and servicesFintechs face reckoning over customer service [Search result] – FT

How to pay in a cheque online with your phone – Be Clever With Your Cash

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

What is a joint mortgage and how does it work? – This Is Money

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

What it’s really like to win a dream home – Guardian

Which supermarket is currently the cheapest? – Which

Homes with room to extend, in pictures – Guardian

Comment and opinionWhat Gillian Tett learned from three banking crises [Search result] – FT

Bracing for job loss – Humble Dollar

Will you have ‘retirement regret’? – RAD Reads

Over-confidence in investing – Best Interest

What if you owned no US stocks? – Meb Faber

There’s so much to like about a bear market [US taxes but relevant] – Humble Dollar

Generational wealth and the angst of the not-rich-enough class – Financial Samurai

There’s exactly one good reason to buy a house – The Atlantic via MSN

The active management delusion – CFA Institute

Everything you can’t have [Podcast] – Morgan Housel

Fruition – Indeedably

One of the biggest mistakes in investing – A Wealth of Common Sense

Why this blogger sold her rental properties before retiring early – Business Insider

Aging in retirement mini-specialOn quitting early, decumulation, and living to 100 – Advisor Perspectives

The real secret to retirement happiness – Think Advisor

Today’s old folks are set to smash through longevity records… – The Register

…though shorter life expectancy are giving UK pensions a windfall [Search result] – FT

Naughty corner: Active anticsThe ABC of noise traders – Klement on Investing

ITV and The Investment Potential of Commercial Television [Podcast] – via Apple

Are cheap European stocks more likely to profit from disruptive tech than the Nasdaq? – Verdad

Kindle book bargainsCooking on a Bootstrap by Jack Monroe – £0.99 on Kindle

Money: A User’s Guide by Laura Whateley – £0.99 on Kindle

The Almighty Dollar by Dharshini David – £2.19 on Kindle

The Nowhere Office: Reinventing Work and the Workplace by Julie Hobsbawm – £0.99 on Kindle

Environmental factors‘Forever chemicals’ linked to infertility in women, study shows – Guardian

Gone to the dogs – Hakai

Glaciers may melt even faster than expected – Scientific American

Why is LED light so bad? – NY Mag

Robot overlord roundupCan we backtest an asset allocation model in ChatGPT? – Quantpedia

Finally, a climate-friendly trashcan – Slate

An interview with Sam Altman, the CEO of OpenAI [Video] – via YouTube

Why can’t we see the impact of automation in the economics statistics? – Uncharted Territories

The ground is quaking – The Reformed Broker

Off our beatAn interview about longevity with Peter Attia, author of Outlive – GQ

You will be discriminated against – Contessa Capital

How Fox and Murdoch are destroying US democracy – Prospect

Be dignified, as a rule – Raptitude

The daughter who fled North Korea to find her mother – BBC

Computer-generated diversity: fashion turns to digital models – Guardian

Your phone is ruining your vacation – Vox

And finally…“All that we have to decide is what to do with the time that is given us.”
– Gandalf, The Fellowship of the Rings

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Financially Independent Retired Early.

The post Weekend reading: Making a K Drama out of the FIRE movement appeared first on Monevator.

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The beginning of the year has not been awful. Which is all I ask, really.

You’ll recall that last quarter capped off the worst year ever for the Slow and Steady passive portfolio: a -13% loss. Pretty painful, if really nowt but a light slap on the list of all-time market drawdowns.

The good news today is every asset class bar commercial property has regained ground since then. That’s despite bank runs triggering flashbacks to the Financial Crisis, Britain flirting with recession harder than a couple of Love Island playas, and all of us being afraid of our heating bills.

True, recovering a few per cent under these circumstances feels about as triumphant as winning back 20 yards of No Man’s Land after months of trench warfare. It’s hardly the stuff of overnight victories, but we’ll take what we can get.

Here are the latest results from the Slow and Steady portfolio brought to you by HalfGlassEmpty-O-Vision:

The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000. An extra £1,200 is invested every quarter into a diversified set of index funds, tilted towards equities. You can read the origin story and find all the previous passive portfolio posts tucked away in the Monevator vaults.

The wider economic tumult has put me in a disheartened mood. I think it’s because, for me, my own portfolio first and foremost represented a hedge against being crushed by the grinding wheels of capitalism.

Regardless of demand for my particular skills, through focused saving and investing I was able to construct a fast-moving skiff of securities that skimmed over the turmoil and finally beached me in the sunnier climes of FIRE1 island.

But I now worry the opportunity may be lost for the younger generation battling rising taxes, rising inflation, a rising cost of living, and fears of a rising China.

How can you invest if you can’t spare the change?

And why would you believe in it anyway if the market drifts sideways for years?

The generation gameFor all we talk about it being a long-term game, I’m painfully aware that passive investing was an easy sell when returns were advancing at a heady rate, post-Financial Crisis.

But how many would jump onboard or keep the faith during a lost decade? Even if that churn created the conditions for higher expected returns in the future?

Who would buy into that?

It’s not a personal thing. I’m happy and remain optimistic about my own future.

But I was moved by Mrs Accumulator telling me that her young pupils feel terrified of, and despondent about, the climate crisis.

I don’t blame them. Too many of their elders seem to be calculating it’s okay to drive SUVs because they’re not going to be around to deal with the consequences.

So colour me concerned that there aren’t enough reasons to be hopeful about the future right now. It feels like the tube is squeezed from both ends – from a UK and from a global perspective.

My portfolio has helped insulate me to some extent. I just don’t want those who come after me to conclude that even the financial independence escape route has been closed.

Slow & Steady: the sequelChanging the subject, I’d like to ask your opinion about some ideas The Investor and I have been kicking around.

We’ve been thinking about introducing two new Monevator portfolios to the site. They’d be long-running series, in a similar vein to the Slow & Steady portfolio.

One would be aimed at absolute beginners and the other would plot a course for Planet Decumulation.

It’s crazy but true that the Slow & Steady portfolio is in its 13th year now. This means there are only seven years left on the clock before we hit the model portfolio’s self-imposed 20-year lifespan!

So the question we’ve been asking ourselves is: what would a passive portfolio look like if we were starting from scratch today?

Our model portfolio is meant as an educational exercise, rather than as a default recommendation. And my reading of the feedback is that everybody gets the global equities side of the equation.

All the angst lies on the defensive side:

“Why bother with bonds?”

“Why are my index-linked gilts getting crushed?”

“What about ‘alternatives’?”

“I’ll stay in cash thanks.”

I think a new starter portfolio should work harder to explain its defensive picks. I also believe the Slow & Steady probably isn’t diversified enough to deal with an uncertain world.

I’ve talked before about the all-weather portfolio concept. Harry Browne’s Permanent Portfolio and Ray Dalio’s All-Weather strategy are famed examples.

These frameworks focus first on the principles of diversification, while being built upon solid investing foundations that remain simple and effective.

Model behaviourThe value of a model portfolio lies in its ability to confirm or to challenge our preconceptions.

I’d rather the Slow & Steady’s successor tilts more towards the latter, by exploring what happens when we add more volatile but less correlated assets to the mix.

Something like:

Global equities
Gold
Broad commodities
A bond barbell (long bonds and an ultra-short or cash component)

That’s a portfolio which will almost always have a hero and a zero on its books. The contrasting fortunes of those asset classes should provide plenty of food for thought.

To keep it simple, I’m thinking of leaving out some of the elements the Slow and Steady portfolio already deals with. For example, UK home bias, global REITS, and emerging markets.

Index-linked bonds would also stay on the shelf. I think young investors can do without them.

Should the equity allocation be invested in ESG funds? Because my hunch is that more young investors are putting their faith in that label even though I’m wary of the potential for greenwashing.

And should there be a 5% fun money element? Perhaps a naughty punt on tech, a macroeconomic theme, private equity, or some other alternative bet?

Let me know what you think.

Destination decumulation The decumulator’s portfolio would be more about the moving parts than the asset price soap opera.

All the action happens when you withdraw cash. Perhaps there’d be two check-ins a year to simulate that. Maybe I’d run two different withdrawal methodologies in parallel to see how each plays out.

Then I’ll try to tease apart the complex interactions of portfolio returns, inflation-adjusted income, tax consequences, dynamic withdrawals, SWRs, and life expectancy.

Rock. And roll.

Along the way, I’d like to look at how to handle unexpected cash demands, equity release, annuities, sustainable withdrawal rate guardrails, and the psychological hurdles of living off a diminishing pot of wealth.

It all sounds pretty ripping, I’m sure you’ll agree!

Anyway, we’ve been musing about it for ages so it’s about time we did something.

Please let me know your thoughts, ideas, and requests in the comments below.

New transactionsEvery quarter we pipette £1,200 into the global market petri dish. Our financial seed culture is split between seven funds according to our predetermined asset allocation. The trades play out like this:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

New purchase: £60

Buy 0.247 units @ £242.69

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%

Fund identifier: GB00B59G4Q73

New purchase: £444

Buy 0.842 units @ £527.11

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

New purchase: £60

Buy 0.159 units @ £378.28

Target allocation: 5%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.21%

Fund identifier: GB00B84DY642

New purchase: £96

Buy 53.402 units @ £1.80

Target allocation: 8%

Global property

iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.17%

Fund identifier: GB00B5BFJG71

New purchase: £60

Buy 28.207 units @ £2.13

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £324

Buy 135.381 units @ £135.38

Target allocation: 27%

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £156

Buy 146.893 units @ £1.06

Dividends reinvested: £203.38 (Buy another 196.502 units)

Target allocation: 13%

New investment contribution = £1,200

Trading cost = £0

Average portfolio OCF = 0.16%

If this all seems too complicated check out our best multi-asset fund picks. These include all-in-one diversified portfolios, such as the Vanguard LifeStrategy funds.

Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? Our piece on portfolio tracking shows you how.

Finally, learn more about why we think most people are better off choosing passive vs active investing.

Take it steady,

The Accumulator

Financial Independence Retire Early

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What caught my eye this week.

Last week’s inheritance tax and pension alchemy from Monevator contributor Finumus was rounded off with an excellent thread of comments from readers.

Check out the nearly 90 responses if you haven’t. There’s plenty of extra pension and inheritance tax knowledge to be gleaned from the Monevator masses. (Yes, we’re all surprised at the turns our lives have taken that means learning more about taxes and pensions is an exciting prospect. And yet here we are…)

The comment thread also includes a by-turns intriguing and befuddling discussion about what the phrase ‘middle class’ really means these days.

I don’t intend to resurrect that debate. What was frustrating about it to me though was that some people’s conception of middle-class – and for the sake of peace, I’ll concede ‘middle-class’ was a cheeky if not provocative classifier to use in the title – led to off-base missives about how Monevator was becoming the parish circular for the Downton Abbey set.

(Regarding the same article, I just now deleted a short content-less comment bemoaning that Finumus’ useful advice was cluttered up with “left-wing claptrap”. You see the challenge?)

Anyway nobody, not even Finumus (at least not in this article) was denying that – with a household income of £360,000 a year and millions of pounds of assets – the coupled that he featured weren’t minted, even by the standards of London’s gilded postcodes.

My argument will always be that I want people to know how and why people with money do what they do. We can learn something from them. (Including that they often do dumb things, like pamper their egos by investing in expensive market-lagging active funds.)

Alternatively, you could try the opposite approach of hanging around with the Socialist Worker crowd in a south London pub on a Friday night.

You’ll certainly learn something. But I’m confident it won’t be how to make, keep, and invest your money.

Knowing your placeThe point is that I fully agree the couple were very well-off, of course. And while from his vantage point in a helicopter headed to the Home Counties for the weekend Finumus may move in more rarefied air, even he bemoans that most people earn so little, rather than being ignorant of it.

In fact I often find myself explaining to friends whose careers are kicking into their peak earning years that their incomes would sound magical (if not faintly criminal) to much of the populace.

Yet even I’m still mildly surprised when I’m confronted with statistics like the dissection of the latest household income figures in This Is Money this week:

Official figures show that 8.8 million people in Britain had an income above £1,000 a week in the year to March 2022 – which would equate to £52,000 a year and put them in the higher rate tax bracket.

However, the average median real-terms household income before housing costs was £565 a week in the period, equating to around £29,500 a year.

That nearly nine million people have been dragged into paying higher-rate income tax is shocking. In 1990 just 1.7 million paid the 40% tax rate. Even by the time Tony Blair was elected in 1997 it had only risen to a little over two million.

This is of course all grist to the ‘squeezed middle’ line of political thinking.

But – much more dispiriting – just look at the thin gruel down below:

Britain’s real problemAs I’ve said before in our political debates, Britain is a relatively poor country among its peers – on a per capita basis – that unfortunately thinks it’s rich enough to indulge in self-harming fantasies.

It wouldn’t be so bad if we had more affordable housing, like Germany, Spain, or (ex-Paris) France.

But our expensive property puts the boot in.

Anyway go check out all the graphs in the This Is Money article, there’s plenty to gawp at. (I couldn’t locate the original graphs from the Department of Work and Pensions website. If you have a link please pop it in the comments below).

But I must confess that it left me in a gloomy frame of mind.

One visual metaphor for wealth generation and distribution in the UK in recent years is the helicopters evacuating a few lucky thousands in the Fall of Saigon in 1975, with a handful more clinging to the landing gear and the rest falling back into a doomed mob left behind.

Maybe I should buy the Socialist Worker bloke a pint, after all?

The new competitionOkay, I’m kidding, for rhetorical effect. Been down that road 30 years ago, literally got the T-shirt.

But capitalism must do better, especially with yet another workplace revolution – instigated by AI – seemingly at our door.

On that note, I’ve included a new AI links section below. Things are moving so fast, and unlike with crypto real-world use cases already abound. Every week there’s something new to flag. Watch this space, and those links.

And have a great weekend!

From MonevatorSIPPs vs ISAs: which is the best tax shelter for your investments? – Monevator

FIRE-side chat: Fat FIRE, with family in mind – Monevator

From the archive-ator: How to run your portfolio like a hedge fund – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Delay on bringing forward rise in state pension age to 68 confirmed – Guardian

ONS: mortgage approvals up for first time since Mini Budget – This Is Money

Manchester’s £1 a night tourist tax comes into force – Guardian

UK is global equity markets ‘backwater’, Nick Train warns [Search result] – FT

Financial planning in an uncertain world – The Uncertainty of It All

Products and servicesShawbrook Bank’s Best Buy 4.04% fixed rate bond has unusual nine-month term – This Is Money

Apple finally launches [US] Buy Now, Pay Later service: Apple Pay Later – Apple

Pre-order Amazon’s first own-brand TVs priced at a 30% discount – Amazon

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Buying a car online: what to watch out for – Which

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Where next for fee-free share dealing? Freetrade founder Adam Dodds – This Is Money

Homes for sale in or near High Streets, in pictures – Guardian

Comment and opinionMarkets make you feel bad all the time – A Wealth of Common Sense

Re-imagining index funds [Search result] – FT

10 years on, what did the Help To Buy scheme really achieve? – Guardian

Tax cliff edges: how a 1p pay raise could cost someone £20,000 – This Is Money

Memory and probability – Verdad

Why do we retire? – The Long Run

How to build generational wealth – Of Dollars and Data

A higher tax burden is upon us, and it’s mainly by stealth – David Smith

Is owning your home still cheaper in the UK than renting? – Which

When average isn’t enough – Abnormal Returns [on The Age of Average]

Highlights from a chat between Charlie Munger and Todd Combs – Neckar

Naughty corner: Active anticsThe commonalities of super-investors – Investment Talk

Markel: playing the long game [Podcast] – Business Breakdowns

Traders are betting on a US commercial property credit crunch – Axios

David Einhorn on value investing [Podcast] – Invest Like The Best

Debunking the myth of market efficiency – CFA Institute

Kindle book bargainsBanking On It: How I Disrupted an Industry by Anne Boden – £0.99 on Kindle

Bank of Dave by Dave Fishwick – £0.99 on Kindle

Never Go Broke by Lee Boyce and Jesse McClure – £0.99 on Kindle

Green Living Made Easy: Hacks to Save Time and Money by Nancy Birtwhistle – £0.99 on Kindle

Environmental factorsBuy. Return. Repeat. What happens when we send back clothes? – Guardian

Government’s air passenger tax cut spurs double CO2 output vs trains – Which

300-year-old letters reveal hurricanes’ long-term rise – Hakai

What ESG news matters most the market? [Research] – CFA Institute

Robot overlord roundupNow that ChatGPT is plugged in, things could get weird – Wired

AI chatbots making it harder to spot phishing emails – Guardian

“My kids played D&D with ChatGPT4 as the DM” – via Medium

300 million jobs could be affected by latest AI wave, says Goldman Sachs – CNN

A.I. is sucking the Internet in. Here’s a tool to extract yourself out – Slate

ChatGPT: keep talking and nobody explodes – ETF Trends

Off our beatAre coincidences real? – Aeon

Destitute by design: trapped in the UK’s immigration system – Prospect

Why China’s population is shrinking [Video] – Vox

Mental liquidity – Morgan Housel

Life is worse for older people, post-Covid – The Atlantic via MSN

What’s the point? – Tom Morgan

Taking on the crack-up capitalists… – Prospect

…talking of which, Twitter is dying – TechCrunch

And finally…“There’s nothing duller than hearing people talk about indescribable, deeply personal revelatory experiences, things like the LSD experience, the ayahuasca retreat, the delights of music that bores you to death, and the ineffable joys of kids.”
– Ermine, Simple Living in Somerset

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We’re back with another interview with a Monevator reader who has attained financial independence and/or early retirement (FIRE). This month John explains how he achieved a very comfortable retirement by working hard, maxing out pensions, and buying property – all while raising a growing family. Plenty to chew on, especially for those aspiring to Fat FIRE…

A place by the FIREHello John! How old are you and are you married?

I’m 53 and my spouse is 59. We have been together 30 years but only married in the last ten. (We didn’t want to rush!) Marriage does simplify things such as wills, defined benefit (DB) spouse pensions, ISAs, and so on.

We FIRE-ed about seven years ago and we still feel financially secure. But world events and double-digit inflation do concern me.

All this positive talk of inflation eating away at mortgages only works if you get inflationary pay rises. FIRE types may have ‘real’ investments such as property. But they probably don’t get many inflationary increases.

Do you have any dependants?

We have three kids and eight grandkids. The kids are 35-40, the grandchildren 3-23. All three of our children went to university and two work in the NHS. Their lives seem a little harder than ours in terms of getting on the housing ladder and settling into adult life. We still provide some financial help. Mostly interest-free loans and below-market rents.

Childcare can be expensive and we’ve helped out a lot during the last seven years. We even got NI credits for four years!

The little ones are now all in school so it’s more drop-off and pick-ups a couple of days a week. I’ve really valued time with the little ones this time round. The first time I was more selfish and work focused.

The older grandchildren seem like a different species. They just don’t grow up as quickly as I remember. Two of the older ones decided against university. One is an apprentice trades-person and the other works in the hospital, waiting for a suitable apprentice opportunity.

Whereabouts do you live and what’s it like there?

We are currently in East Anglia but have lived in the North and South following job opportunities.

The weather is fantastic compared to where I grew up. Rail links are good for the capital.

When do you consider you achieved Financial Independence (FI) and why?

By age 45 I thought I had enough for a fairly ‘Fat FIRE’ – around £5,000 per month – without running down investments in nominal terms, and hopefully not in real terms1.

FI to me means work is an option, not a requirement, and “how much is enough” to achieve that is a tough question for a young FIRE-ee. I needed to be confident that my living standard wouldn’t take too hard a hit and that we’d be robust to changes in interest rates and inflation.

The big question for me was about the gap between the work pensions and exiting date. I had ten years until I could access the defined contribution (DC) pension pot and 15 for the DB pension.

What ultimately decided it for you?

I resigned when I’d truly had enough of working 60 hours per week and being away from home for 150 days a year. The less you need the money, the easier it is to walk away.

Also, as your FIRE fund grows, each extra year of work moves the dial less. At some point you realise your assets earn enough to live off. At that point you start to think about things differently.

What about Retired Early?

I left aged 45 and haven’t returned to any full-time work yet. There has been some interim consulting and contract work and quite a bit of unpaid work with a tech start-up that eventually fizzled out. About 100 days in total paid work – things dried up post-Covid.

I’m still open to day-rate work and short contracts but the telephone calls are much less frequent than when I was working.

If I went back now, my earnings would be lower than when I left. A three to four-month well-paid winter contract every year would be nice. It would make the summers off even sweeter!

Assets: Fat FIREWhat is your net worth?

Current net worth is around £2.8m.

This roughly made up of:

Four properties at £1.2m total (valued at 90% of the 2022 peak)
Defined Benefit pension £900,000
Defined contribution pension £450,000
Cash £250,000
ISA £500,000
General investment account £75,000
All minus two mortgages totaling £500,000 (@Jan23)

The DC pots have been set to retirement age 70 and I’m in the default funds. The ISA and General Investment Account are in the FTSE 100 and Pref shares (45/55% split).

I’m a sucker for yield. I should have bought a world tracker, I know!

The interest-only mortgages have been my friend for 12 years (costing the Bank of England’s base rate +.75% on average across two properties). But now rates have risen, the £1,800 per month interest is starting to hurt. I’ve had such a good run on ultra-low rates it’s hard to complain.

My main (and only) residence makes up about 20-25% of our net worth. It’s a four-bed detached house at 2,000 sq ft set on a quarter of an acre.

We will consider downsizing again soon. I just need to work out how to take the mortgage with me.

Is your home an asset or an investment?

I consider my home to be an asset. It’s an asset that pays your rent.

I often wonder what percentage of net worth is sensible to spend on your home? We have downsized once already and will probably do so again in the next five years. I’m keen to take advantage of the inheritance tax rules, so I will downsize in terms of size, but probably not value.

My three remaining buy-to-lets are clearly investments and a hassle I don’t need. I would like to sell at some point. But evicting family is unlikely, and a spare flat could be handy if we move abroad.

I sold one property last year with a rental yield of 3% and bought preference shares at 6% yield, so I nearly doubled the income. But I subsequently lost the capital gains potential and about 15-20% in their value!

Earning: High-earner, SAYE, and property investmentWhat did you do in your regular income-earning days?

I spent my career working in the finance departments of insurance companies in senior technical and director-level roles.

In order to achieve pay rises, I frequently applied for external roles. Sometimes I left and sometimes I stayed with a pay rise.

In all I had about seven different roles over 24 years, and worked at five different companies.

For the first half of my career my average earnings were ~£40,000, including a car and bonus, but excluding the DB pension. The second half averaged around £170,000 (including car, DC pension, and bonus). Total career earnings excluding the DB pension was around £2.5m, before tax & NI.

Other income sources included Save As You Earn (SAYE) share schemes and similar discounted share buying schemes. I tried to invest the maximum. Free money is the best money! I ended up with around £250,000 of employer company shares in total. All sold now, with minimal CGT.

Buy-to-lets happened accidentally at the first, and then on purpose. We relocated with work and we didn’t sell the old house for a few years.

All told we’ve bought nine properties. Four main residences and five rentals. Across the properties there has been around £900,000 capital growth and £250,000 income. Costs are harder to total up!

Did thinking about FIRE influence your progression?

Planning to retire early didn’t impact my career. With hindsight I wish I’d moved jobs sooner and more often to get broader experience.

I should also have been more choosy about my first graduate employer. A good graduate training program can offer a great foundation and career springboard.

Saving: a saver born and bredWhat is your annual spending? Do you stick to a budget or otherwise structure your spending?

We don’t actively stick to a budget, but I’m a value-focused Northerner who isn’t keen on waste, and who demands value for money. It’s probably to my own detriment. I’d rather go hungry in an airport than pay £15 for a burger! But your money DNA or blueprint stays with you.

I’m very aware of what income is coming in and try not to spend too far over that level. The large volatile number is travel and holidays. And also gifts to kids.

Our income will increase significantly when I can access my pension pot at 55 and final salary pension at 60. Until then we stick to spending the current income, but we probably could spend more.

What percentage of your gross income did you save over the years?

I don’t have good record keeping for savings and cash flows.

The first half of my career didn’t involve savings, apart from owning two houses, a DB pension, and some employer shares. I recall my net worth was around £250,000 after 13 years, excluding the DB pension. Roughly £200,000 was from the houses, which benefited from the fall in interest rates around 2001.

In the second half of my career I moved to DC pensions. I usually put in about 10% on top of the company’s 10-15%. Towards the end I also put in bonus payments.

Based on my DC contribution and the properties I bought for cash, I estimate my savings rate in the last ten year to be around 35% of work earnings. That includes the company pension element.

As earnings increased and then later as children moved out, our savings headroom increased. We never massively changed our lifestyle – yes to a nicer car, house, holiday, clothes (my wife) but not in a silly way. We’ve only ever bought one brand new car and my daughter has it now 12 years later. The cost of that car works out at about £4 a day so far…

Essentially, most of the money came when we were over-35. By then we were set in our financial ways. It isn’t always a good thing. I’m going to Tesco later to take advantage of an £8-off coupon!

That’s always a good thing in my book! But what is the secret to saving more money?

Earn more, earn more, earn more!

Maximise free money – pension contributions. Don’t buy new cars, learn to cook, avoid keeping up with the Jones’s, and aggressively manage your direct debits and bills.

Savings happen when you earn more than your lifestyle is costing you.

If you want money and freedom, you must focus on your market worth in the job market. Think long and hard – about what industry, qualifications, and training time are required – and then work hard to become expert and knowledgeable.

Add value, be flexible, and move companies often.

Do you have any hints about spending less?

Everyone is different and enjoys different things. I suppose actively think about the cost of something versus how much joy it brings. We don’t think about opportunity cost often enough.

Looking at the grandkids, they seem to have a problem with delayed gratification and labels. They have £100 a month or more mobile phone contracts, £14,000 car loans – this when they’re 20 and earning £300 a week or similar.

I have a friend who is a city lawyer charging £600 per hour. Listening to his lifestyle is completely alien to me (but hugely interesting).

Having too many friends a lot wealthier than you must cause some anxiety and extra spending. So pick your social circle thoughtfully.

Investing: not over-thinking or too taxingI tend not to check share prices too often and intuitively like the invest-and-forget approach.

Rebalancing hasn’t happened yet. So, I’d say I’m passive in that I very rarely buy or sell.

Most of my investments were made before I found the FIRE websites and before I read the books. A big mistake was not buying world trackers to begin with.

Best investments – or rather lucky ones that worked out well:

Discounted company share schemes. Put in about £75,000 investment, sold for around £250,000 over a 20-year period.
Residential property – we must be close to £1m up over 25 years.
Joining the DB pension scheme on my first job, even though I thought I was leaving within two years.

It’s hindsight speaking, but while I was financially comfortable enough to have gambled a small percentage of my money on crytpo or tech shares in the recent boom, I didn’t do it. I lost £1,000 on Motion Poster shares in around 2000 and didn’t try my luck again!

I have no idea what my overall return has been. I mostly focused on the earnings and tax-efficient savings. Once I realized the size of the DB pension, the pressure was off a little.

Can you tell us more about your thinking about tax-efficient savings?

Tax incentives have had a big influence on my strategy. Pension tax relief at 40-50% was too good to ignore. My timing was fortunate in that the annual allowance taper didn’t exist – and I took Fixed Protection 2014 to preserve the £1.5m limit.

My plan is to drain the DC pot from age 55-60 tax efficiently – no 40% tax – and I will probably get close to hitting the £1.5m in aggregate.

DC pension contributions were around £250,000 for 2006-2014, including the company element. Avoiding 40% tax in retirement is also probably what led me to max out ISA for the last 12 years (for me and my wife).

I do wonder sometimes if I over focus on tax efficiency at the expense of growth.

Wealth: buying freedomDid you have a target for when you’d consider you’d ‘made it’?

Between my late 30s and my early 40s my ‘number’ was around £800,000 plus pensions. But once I got close to this the number I revised it to £1.2m plus pensions. Mostly because 15 years is a long time to wait for the pension.

In real terms I’m broadly level with the 2016 position. I’ve given up potentially a lot of earnings, but I gained a lot of freedom and time.

There is still a niggling question around my children’s finances. Should I return to work to make their lives a little easier?

Things I wished I’d known sooner, or thought about more:

Your spending habits change as you get older or retire. New shiny stuff isn’t that important – apart from a nice iPad obviously!
Enjoy the journey more. Why rush? Some things are better enjoyed 25-40 than at 45-65.
If you didn’t find time for it when you worked then you probably won’t when you retire. Fitness, learning Spanish, and so on.
My working 60 hours a week for that last ten to 15-year stint was probably unnecessary.

Do you have any passions, hobbies, or vices that eat up your income?

We used to smoke, which was incredibly expensive. But we stopped after getting a cancer diagnosis. That was probably the catalyst for aiming to retire by 50. It also makes me think about selling the DB pension.

Our main areas of discretionary spending are family, travelling, holidays, and motoring. Motor homes aren’t cheap! I decided against flying lessons and I struggle mentally with the David Lloyd £120 per month membership. So I found one costing £32 with a monthly rolling contract instead.

We don’t have expensive tastes. That’s probably a good thing. An £8 bottle of red is good enough for us.

In the longer-term we are giving serious thought to moving to Spain or Portugal. The older I get the more I like spending time in shorts and in the sun!

Porto, PortugalYour money mindsetWhen did you first start thinking seriously about money and investing?

I grew up fairly poor on a council estate in the North. Since money was always short, I’ve always being focused on getting more of it. Probably over-focused.

Being relatively poor shapes you and your thinking, and it’s hard to change. I gambled quite a lot in my 20s but stopped when I started earning good money.

My 20s were focused on kids, career, and trying to get housing security. We spent five Christmas Days in five different houses. Tough with three kids.

Late 20s saw earnings increase. I took advantage of Save As You Earn share plan schemes (SAYE) to the tune of £250 per calendar month. This was probably my best decision as within a couple of years they were worth £60,000, though only briefly. I settled for about £30,000 in the end.

My 30s were about career, bigger houses, nicer cars, and a move from final salary pension to a money purchase DC pension.

From 40-45: my career, the four BTLs, and I started an ISA and maxed it every year since.

Around 45 I left work, downsized property, and tried to invest the proceeds sensibly.

Did any particular individuals inspire you to become financially free?

Mostly it was just that strong desire not to be poor – and to never be poor again.

The best FIRE resources are websites – Monevator, Indeedably, Simple Living in Somerset, and Retirement Investing Today. When I first found these websites it was like I’d found my tribe.

A lot of the old websites have died and their creators have (hopefully!) moved on to better things.

Other interesting reads include:

Early Retirement Extreme – hardcore saving for retirement, with much to think about.
The 4-Hour Work Week – read this around 2009 and loved the creativity and different style of thinking. Not sure about the podcast though.
I’m also a fan of Nassim Taleb, Tim Hale, Mark Spitznagel’s Safe Haven, and The Psychology of Money by Morgan Housel.

What is your attitude towards charity and inheritance?

Seeing my father-in-law deteriorate quickly aged around 80 led my to see that the phrase “go-go years, slow-go years and no-go years” is probably correct.

I plan to help the kids into their own houses. One has already bought a buy-to-let off me, with a 25% discount. As an aside, filling their LISA accounts is great tip for free money from the government.

We also currently help with childcare, holidays, after school activities, and so on. I see this continuing.

An inheritance unknown is the grandchildren. We have about eight, but the number grows! They are aged between 3-23. My gut says to focus on their parents as they are not comfortable enough and let them sort out the grandkids.

Most of my giving or charity is within the family. This may change when I’m older and the kids are sorted. I admire those who tithe but I’d worry about what if I need it later myself? Growing up poor stays with you.

What will your finances ideally look like towards the end of your life?

My assumption is I have 25-30 years left.

I’m aiming to spend or give away down to around £1m in the ISAs and then maintain at that level. We will also probably have £1m in property – which is above the inheritance tax (IHT) main residence allowance – so there will be IHT to pay. I haven’t really given IHT enough thought, I tend to over-focus on income tax.

When we have a greater understanding of our spending patterns as we age, I can see gifting accelerating, because my DB and State pension together should be more than enough.

Mental abilities fade so I want to simplify and de-risk in later life. I’ve thought long and hard about selling the DB pension, as it dies with us. But keeping it also simplifies things. I can’t spend it, I can’t lose it, and it’s guaranteed (mostly).

My ambition is to give my kids the option to retire a little early. Two work in the NHS and should have decent pensions. I’d like them to be mortgage-free by 60 and have the option to give up work 5-10 years before the state pension. I probably don’t have enough to make that happen but I should be able to help.

The money game took a lot of my energy and focus from a young age. It’s funny how once you have ‘enough’ it’s just not important anymore.

Perhaps I’m lucky not to know many very rich people. I can see how that would make you more competitive.

But if £2m is your ‘enough’, and you have £3m, then wasting your life (and time) chasing £10m seems a bit nuts to me.

Lots of life lessons in there readers. Of course John’s balance sheet is at the higher end of the FIRE spectrum and will be out of range for many. But equally lots of our readers might well get there in the long-term. Besides, enough is enough, whatever your enough is, as John concludes. Questions and reflections welcome. As usual please remember John is not a regular Internet commenter and he is just sharing his story to inspire others, not to provoke nastiness. Of course you can disagree on practical matters constructively, but please keep that in mind. One particular person’s situation isn’t a comment on yours. Thanks!

That is, inflation-adjusted.

The post FIRE-side chat: Fat FIRE, with kids and grandchildren in mind appeared first on Monevator.

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Should you invest in a pension or an ISA? Is there a decisive answer to the eternal SIPPs vs ISAs question?

Well… almost. We can make three immediate statements that provide clear direction – although the decision tree gets pretty thorny after that:

If you hope to live off your investments before your minimum pension age1 then a stocks and shares ISA is the clear winner.
Employer pension contributions are an unbeatable leg up. Take them, take them, take them. It’s free money, unless you plan on dying a rock ‘n’ roll death before age 55. (Pro tip: almost nobody does.)

If you’re self-employed, or have hoovered up your employer’s match, then much depends if you’re contributing to your SIPP (or other pension type) at the higher-rate of income tax or the basic rate:

Paying higher-rate tax? Then prioritise your pension accounts over ISAs.
Paying basic-rate tax? Then the choice between a SIPP and a Lifetime ISA (LISA) is finely poised. We’ll delve deeper into this below.
If you’re a young basic-rate taxpayer who won’t retire until State Pension age, then an ISA may beat a SIPP in certain scenarios. Again, we’ll explain below.

The Kong-sized caveat to all this is that future changes to the tax system may move the SIPP vs ISA goalposts.

You can have it allTax-strategy diversification can help you deal with the uncertainty. This simply involves diversifying your tax shelters, irrespective of their current pecking order.

Spreading your savings across your tax shelters makes the most sense for young people for whom retirement is decades away. But the technique is worth everyone considering, because SIPPs and ISAs hedge against different tax risks. We’ll come back to that.

With those broad ISA vs SIPP principles established, I’ll take you through the reasons why in the least painful way I can. Though keep your aspirin on standby.

To set the scene, let’s first recap what ISAs and SIPPs have in common, and what sets them apart.

Terminology intermission: I mostly talk about SIPPs in this article but the conclusions apply equally well to other defined contribution (DC) pensions, such as Nest-style auto-enrollment Master Trust Pensions. I’ll use the term ISAs to refer to all ISA types, except for the LISA. I’ll mention the LISA when its special features alter the SIPP vs ISA comparison.

SIPPs vs ISAs: these things are the sameSIPP or ISA? There’s nothing between them on the following counts:

| Tax shelter / feature | SIPP | Stocks and shares ISA | | No tax on dividends | Yes | Yes | | No tax on interest | Yes | Yes | | No tax on capital gains | Yes | Yes | | Invest in funds, ETFs, bonds, shares | Yes | Yes | | Ceiling on lifetime tax-free income | No | No | | Versions for children | Yes | Yes |

SIPPs vs ISAs: these things are differentISA or SIPP? Well, on the other hand…

| Tax shelter / feature | SIPP | Stocks and shares ISA | | Free of income tax on withdrawals | No | Yes | | Income tax relief on contributions | Yes | No | | Tax relief on National Insurance | Yes, with salary sacrifice | No | | 25% tax-free cash on withdrawal | Yes, up to £268,275 | N/A | | Access anytime | No | Yes | | Annual limit on contributions | £60,000 | £20,000 | | Employer contributions | Yes | No | | Inheritance tax exempt | Yes | If passed to spouse,otherwise no |

As you can see, a SIPP gathers more ‘Yes’ votes than an ISA, and those advantages stack up.

Remember that ISAs are superior to SIPPs when access to your money before the normal minimum pension age is your priority.

However, the various tax breaks on offer make SIPPs the best option for the bulk of most people’s retirement savings.

LISAs are a different kettle of tax wrapper, though. The dream combination of tax relief and tax-free withdrawals make LISAs an attractive option for basic-rate taxpayers vs pensions – under some circumstances.

The devil is in the detail and we’ll dance with him shortly. Before that, let’s talk tax-strategy diversification.

Tax-strategy diversification in retirement planningTax-strategy diversification for UK investors means spreading your retirement savings between your LISA, ISA, and SIPP accounts. It’s partly a defence against adverse changes to the tax system in the future.

The concept is analysed in a US research paper called Tax Uncertainty and Retirement Savings Diversification by Brown et al.

The paper examines the impact of tax code changes upon the traditional IRA and the Roth IRA. These two American tax shelters are analogues of our SIPP and ISA, respectively.

The authors make several key observations. So I’ve translated their US tax-shelter language directly into their UK equivalents, as follows…

SIPPs are negatively affected by income tax hikes in the future, and are positively affected by income tax falls.

For example, if you get tax relief at 20% but are taxed on retirement withdrawals at 22% then that’s a blow against pensions.

The reverse is true for ISAs. They’re taxed upfront so enable you to lock in your income tax rate now. This is an advantage for ISAs vs SIPPs if tax rates rise in your retirement.

For example, you win if you took a 20% tax hit on the salary that funds your ISA contributions today, but withdraw tax-free in the future – when the basic rate of tax has risen above 20%.

SIPPs are a hedge against poor pension performance. In other words, if your investments are hit by a terrible sequence of returns then more of your withdrawals will be taxed at a lower tax bracket. This offsets some of the damage wreaked by bad luck, especially if you banked higher-rate tax reliefs when you were working.

The long gameThe whole paper is well worth a read. But the following quotes provide particular insight on how future tax changes could boost or hobble SIPPs and ISAs for different demographics.

Future tax rates are more uncertain over longer retirement horizons. Our analysis of historical tax changes also suggests that the rates associated with higher incomes are more variable.

The paper’s authors found that income tax rates were much more volatile for high earners going back to 1913.

So it’s worth remembering amid the current gloom that the tax burden isn’t a one-way street. Income tax-rates fell dramatically in both the US and the UK in the 1980s. Higher earners also enjoyed more recent cuts in America.

As a result, the highest tax-risk exposures will occur among younger investors with sufficient traditional account [SIPP] savings to produce taxable income in retirement that exhausts the lower-income brackets. Young, high-income investors who are likely to meet these criteria can manage their exposure to tax-schedule uncertainty by investing a portion of their wealth in Roth [for us, ISA] accounts.

High-income investors increase their allocations to Roth [ISA] accounts when faced with uncertainty about future tax rates. At these income levels, reducing consumption risk in retirement by locking in tax rates today is more valuable than realizing a potentially lower tax bracket in the future.

Young, higher-earners are the most susceptible to steep future tax rises, according to this analysis. Thus tax-strategy diversification implies they should hedge against that possible fate by ploughing a significant portion of today’s income into ISAs. That’s because the danger with SIPPs is that future withdrawals may be made at tax rates that are higher than the reliefs on offer today.

I’d caution, though, that the biggest SIPP vs ISA gains come from taking higher rates of tax relief on pensions that are subsequently taxed at a retiree’s much lower income tax rate. UK income taxes would have to soar in the future to negate this advantage.

On the other hand, here’s a reason to invest in pensions that most of us would rather not think about:

Investors with sufficiently high current income must pay the top tax rate in the current period, however, such that the traditional [SIPP] account is preferable for higher-income investors who may end up in a lower tax bracket if the stock market performs poorly.

The case for a bit of bothUltimately, the paper comes to a conclusion that I suspect many investors reach using their gut:

The optimal asset location policy for most households involves diversifying between traditional [SIPP] and Roth [ISA] vehicles.

Spreading your bets makes sense (as ever), especially when retirement is still a dim and distant prospect.

But that said, do bear in mind this is a US-focused study. Their income tax bands are more nuanced than ours.

In contrast, our SIPPs benefit from a massive cliff-edge if you enjoy higher-rate tax relief when you pay in but your retirement income falls mostly in the 0-20% band.

This feature of the UK tax system tilts the playing field heavily in favour of pensions vs ISAs, as we’ll see.

ISA vs SIPP: when it doesn’t matterYou’re taxed upfront on money that goes into your ISA, but your withdrawals are tax-free.

SIPPs work the other way around. You pay less tax on contributions, but are subject to tax on money taken out. Thus UK pension vehicles can be thought of as tax-deferred accounts.

ISAs vs SIPPs is a dead heat when the tax deducted from your ISA contributions matches the tax you pay on pension withdrawals.

The amount of cash you can take out of each account is exactly the same in this situation, as shown in the following example:

| Account | Gross income | Net after tax | After tax relief | Withdrawal | | ISA | £100 | £80 | £80 | £80 | | SIPP | £100 | £80 | £100 | £80 |

The example tracks the value of £100 through the tax shelter journey, from contribution to withdrawal.

Think of it as comparing each £100 that you could choose to put in either your ISA or SIPP.

Gross income is earned before tax.
Net after tax is the amount left in your account after HMRC takes its bite.
After tax relief is the value of your savings after any rebates.
Withdrawal is what’s left of your original £100 once taken in retirement (based on current tax rates and ignoring investment returns because they’re ISA vs SIPP neutral).

A previous post of ours walks you through the underlying SIPP vs ISA maths.

But just to be clear, pensions always win when an employer contribution match is on the table. Pound-for-pound that doubles your money. Not taking the match is sort of like taking a pay cut.

Same differenceEmployer contributions notwithstanding, the example above shows that the tax-saving powers of an ISA or a SIPP are evenly matched when:

You’re taxed at 20% on the ISA cash you put in, and
You’re taxed at 20% on the SIPP cash you withdraw

The amount of income you can take from each vehicle is the same, if the tax rates are equal. The order of tax and tax relief makes no difference to your investment returns, as The Investor has previously shown.

If both accounts gain, for example, 5% a year, then your SIPP’s balance will be larger than your ISA’s because there’s a bigger sum of money to grow after tax relief.

But the SIPP’s advantage is cancelled out by tax on withdrawal. Hence the Withdrawal value is identical for both accounts in this scenario.

If that’s the case for you then we need to head into an ISAs vs SIPPs tie-breaker situation.

ISAs vs SIPPs: tie-breaker situation

Personally, if I was many years from retirement, I’d favour the accessibility of ISAs as a handy backstop. Just in case life took an unpleasant turn.

Some of you on loftier incomes may prioritise inheritance tax (IHT) planning. Monevator contributor Finumus came up with a particularly extreme – but seemingly legal – IHT avoidance wheeze using SIPPs.

However, the wisdom of tax-strategy diversification still suggests splitting your savings between both vehicles.

SIPPs vs ISAs: back in the real worldBecause most people will be taxed at a lower rate of tax as retirees than they are as worker bees2, in practice pensions usually beat ISAs for retirement purposes.

Albeit LISAs are the wild card that can disrupt the SIPP vs ISA hierarchy.

Much depends on:

How much 0% taxed cash3 your SIPP ultimately provides as a percentage of your retirement income.
Whether your SIPP income is taxed at a lower bracket in retirement relative to the tax relief you snaffled while working.

To unpick the complexity, I’ll try to find the best-fit tax shelters for most people by running through some common retirement income scenarios.

And I’ll account for variations in individual circumstances by looking at key breakpoints that alter the ISA vs SIPP rankings.

Breakpoint 1: the tax shelter types availableI tested the tax efficiency of four accounts that are useful in retirement:

Salary sacrifice SIPP. This wrapper enables basic-rate employees to legitimately avoid 32% tax (20% + 12% NICs) while higher-rate employees avoid 42% tax (40% + 2% NICs)

SIPP. A standard pension account provides tax relief at the 20% and 40% rates but you still pay national insurance contributions (NICs)

Stocks and shares ISAs can deliver the investment growth needed for retirement.

As can LISAs which also accept investments.

Breakpoint 2: retirement income levels and stealth taxesI’ve examined three retirement income levels that align with the research published in the Retirement Living Standards report.

These three tiers equate to a Minimum, Moderate, and Comfortable living standard in retirement.

However, I’ve adjusted the incomes to account for our current era of stealth taxes.

The UK’s tax thresholds are frozen until April 2028. That is a tax hike by any other name.

The Office for Budget Responsibility estimates this manoeuvre amounts to increasing the basic rate of income tax from 20% to 24%.

Rising rates of tax disadvantage pensions vs ISAs as noted earlier. So I’ve inflated the three retirement income levels by my CPI guesstimate up to 2028.4 This increased income requirement models SIPP withdrawals losing more to tax, as inflation erodes the lower brackets.

I assume that the tax thresholds rise with inflation after April 2028, as they should.

Breakpoint 3: how you use your personal allowanceThe less your SIPP income is taxed in retirement, the better SIPPs do versus ISAs.

If you retire at age 55 and don’t receive a State Pension until age 67 then your SIPP’s tax performance improves – especially at lower retirement incomes – because a significant chunk falls into your personal allowance.

But the SIPP advantage contracts if your personal allowance is mopped up by the State Pension, defined benefit pensions, or by any other income.

Indeed, with the personal allowance frozen and the Triple Lock intact, the full State Pension could grow large enough to entirely fill the 0% income tax band by April 2028, or soon thereafter.

I’ve used that assumption in the examples below to guide anyone who thinks they’ll retire at State Pension age, or with a substantial source of alternative income.

Even if you retire early, the State Pension will arrive around ten years after your normal minimum pension age, after April 2028.

I account for this by modelling a 40-year retirement journey. This sees SIPP income cease to benefit from the personal allowance after the first decade.

Breakpoint 4: the fate of 25% tax-free cashUK pensions are boosted by another blessed benefit. That’s the 25% tax-free cash that can be taken as a lump sum (PCLS) or in ongoing chunks (UFPLS).

Before the Lifetime Allowance was abolished, the tax-free sum used to automatically reduce a basic-rate payers overall income tax burden from 20% to 15%.

But that can no longer be taken for granted – because the 25% tax-free cash allowance is now capped at £268,275.

It sounds a lot as of today, but the Chancellor has said the limit is frozen.

Frozen until April 2028 – after which it rises with inflation?
Frozen forever? In which case inflation will eventually swallow it like light quaffed by a black hole.

It’s not clear, so I’ve tested both scenarios.

The first scenario is relevant to near-term retirees who can assume their tax-free cash allowance will retain most of its current value when they retire. Especially if they’re at the Minimal to Moderate income levels and inflation is tamed again (which helps if the cap doesn’t rise in future years).

The second scenario may make sense if you’re three or four decades from retirement, and the cap remains frozen in time while inflation crushes it.

Final preamble point: I’ve used UK income tax rates – though the results will still be relevant to most Scottish income taxpayers, with minor variations.

Right, at last, let’s get on with the key ISA vs SIPP examples.

SIPPs vs ISAs: £15,480 Minimum annual retirement incomeSIPP contributions are made at the basic income tax rate in this scenario. And the 25% tax-free cash cap is not reached during a 40-year retirement.

| Ranking | PA5 intact | Retire on State Pension | 40-yr retirement | | 1. | Salary sacrifice | LISA / Salary sacrifice | Salary sacrifice | | 2. | LISA / SIPP | – | LISA | | 3. | – | SIPP | SIPP | | 4. | ISA | ISA | ISA |

PA intact = SIPP income benefits from the 0% personal allowance (PA)
Retire on State Pension = SIPP income does not benefit from the personal allowance
40-yr retirement = The ranking for a 40-year retirement journey that relies on SIPP income for the first decade, while the State Pension absorbs the PA thereafter. 25% tax-free cash may run out at some stage. (Though not at the Minimum income level)

The headline is that a salary sacrifice pension wins across a 40-year retirement journey beginning about age 57. That is, the normal minimum pension age.

But the LISA matches a salary sacrifice SIPP if you retire later with a full State Pension at age 67 (and/or a decent defined benefit pension etc).

A normal SIPP (‘relief at source’ or ‘net pay’) lags behind a LISA overall. Standard ISAs come last.

Despite this outcome, remember that any pension is immediately catapulted above a LISA so long as your employer matches your contributions.

After you’ve trousered your employer’s contributions, you’re best off stuffing your LISA up to its £4,000 annual hilt on tax-strategy diversification grounds.

LISA contributions locked in at today’s tax rates will benefit versus pensions if taxes go up in the future.

Intriguingly, a normal SIPP only just scrapes in ahead of an ISA if you retire at State Pension age.

In this scenario, you pocket £72.50 from a SIPP, and £68 from an ISA, for every £100 you originally contributed to each account. That’s only a 6.6% difference.

Such a slim margin suggests that diversifying between the two accounts is a sound idea. Albeit I’d still heavily favour my SIPP, given that small gains make all the difference at lower incomes.

If the 25% tax-free cash is eliminated

The advantage swings in favour of LISAs if the 25% tax-free cash ceases to be a factor in reducing SIPP taxation.

For those retiring at the State Pension age, an ISA strategy even draws level with a SIPP in terms of withdrawal value: £68 a piece for every £100 contributed.

If I really believed that the 25% tax-free cash will whither to nothing then I’d overwhelmingly favour my ISAs vs SIPPs in this scenario.

However, I think it’s more realistic to assume that the 25% tax break will retain some residual value, even if you’re 30-40 years away from retiring.

SIPP contributions made at higher-rate taxpayer level

Higher-rate taxpayer contributions lead to a decisive win for pensions in the SIPPs vs ISAs match-up.

LISAs and ISAs form the bottom half of the table in this scenario and stay there. Salary sacrifice and normal SIPPs continue to beat the L/ISA gang even if the 25% tax-free cash disappears entirely – and whether you retire at the Minimum, Moderate, or Comfortable income level.

LISAs do best SIPPs if you expect to earn around £75,000 per year in SIPP income. That’s because the tax-free cash cap is hit so quickly.

But for those of us operating below such Olympian heights, the higher-rate tax reliefs are the sweet spot for pension contributions – because 40%-tax workers are likely to become 20%-tax retirees.

SIPPs vs ISAs: £23,300 Moderate annual retirement incomeSIPP contributions are made at the basic income tax rate in this scenario. The 25% tax-free cash cap is not reached during a 40-year retirement.

Salary sacrifice outcomes continue to dominate normal SIPPs. That’s because they effectively gain relief on 32% tax, instead of 20%.

Meanwhile SIPPs only just beat ISAs across a 40-year retirement, and for those retiring at State Pension age. Narrow margins strengthen the case for tax-strategy diversification.

If the 25% tax-free cash is eliminated

The ISA / SIPP draw occurs because the SIPP’s 20% tax relief on contributions is the same as the ISA’s 20% tax exemption on withdrawals.

The SIPP vs ISA rankings for higher-rate taxpayer contributions are the same as the Minimum income level, regardless of what happens to the 25% tax-free cash.

SIPPs vs ISAs: £45,109 Comfortable annual retirement incomeSIPP contributions are made at the basic income tax rate in this scenario. The 25% tax-free cash cap is reached after 24 years of retirement.

As before, SIPPs only just beat ISAs across a 40-year retirement, and if you stop work at the State Pension age.

LISAs top the table across a 40-year retirement because the tax-free cash spigot splutters dry after 24 years.

However, it’s possible to avoid this fate by pulling out your 25% tax-free cash as a lump sum (PCLS) before the ceiling is reached.

Ideally, you’d get it all under ISA cover as quickly as possible. Once in an ISA your money can continue to grow tax-free without limit. (That is, as if the tax-free cash cap had not been introduced.)

How doable is that?

Sheltering your tax-free lump sumLet’s say you retire in late March and deliberately leave that year’s ISA allowance free until then. That’s £20,000 under your tax shield straightaway.

The tax year clock ticks on to April 6. Now you’ve got another £20,000 worth of ISA to fill with newly-minted 25% tax-free cash.

Perhaps you also have some emergency cash standing by, an offset mortgage facility, or other cash savings?

With a bit of planning, you can use these resources to expand your flexible ISA’s elastic band in the years before your retirement date.

Check out the ‘Flexible ISA hack to build your tax-free ISA allowance’ section in our ISA allowance post. (Hat tip to Finumus who came up with the idea.)

Double your ISA allowance numbers if you have a trustworthy significant other.

You’ll be able to stash a bit more tax-free in General Investment Accounts, too. However, the much-shrunk dividend tax and Capital Gains Tax allowances mean that only a smidge of your subsequent returns will escape HMRC’s tractor beam.

All the same, you’re better off being taxed at dividend and capital gains rates than income tax rates. Hence you should withdraw any 25% tax-free cash as soon you can, once you look like you’ll hit the cap. It’s better out than in.

If the 25% tax-free cash is eliminated

Notice that a SIPP actually performs worse than an ISA in the main two scenarios. That’s because a ‘Comfortable’ income earner ends up being partially taxed at the higher-rate. This might happen to a basic-rate worker who saved into their SIPP from a young age, experienced outstanding investment performance, or suffered elevated tax rates in retirement.

The SIPP vs ISA rankings for higher-rate taxpayer contributions are the same as the Minimum income level.

The ranking is: Salary sacrifice SIPP, non-salary sacrifice SIPP, LISA, then finally ISA.

LISAs vs SIPPs: tie-breaker situationThere are quite a few scenarios that end in a draw between LISAs and pensions. Let’s head into the tie-breaker:

I don’t think the few years’ gap in account accessibility is an issue. You can always drawdown harder on pensions until age 60.

Interestingly, the government seems to have cooled its jets on advancing the normal minimum retirement age in lockstep with the State Pension age.

Accessibility aside, the LISA’s low allowance, restrictions on contributions beyond age 50, plus the principle of tax-strategy diversification all suggest maxing out the LISA if you can.

That goes double if your financial position means that salary sacrifice actually makes you worse off. Hit that link for the gory details.

Pensioned offThere have probably been retirements that lasted less time than it took to write this post. Alas recent developments have not made the SIPP vs ISA question any easier to answer, I’m sorry to say.

But I hope this guide helps you think through the options. Assuming you haven’t lost the will to live in the meantime.

Do I need to plug taking employer pension contributions one more time? Probably not!

Take it steady,

The Accumulator

P.S. Here’s more on how much should you should put in a pension and how much you need to retire.

The Normal Minimum Pension Age will be 57 for most people from 5 April 2028.
As the rules stand.
That includes the Personal Allowance and any 25% tax-free cash.
7.5% this year as per the OBR’s inflation forecast and 3% per year up to 2028.
Personal Allowance

The post SIPPs vs ISAs: which is the best tax shelter for your investments? appeared first on Monevator.

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What caught my eye this week.

Watching a handful of my friends get pretty rich over the past few years, it’s been striking how little they’ve changed.

Of course the props are swapped. Better cars breakdown. Household appliances are replaced with services, or even by part- or full-time staff. Baggage is stranded in more exotic locales. Arguments with their partners go upscale.

Sometimes one of them does something odd, like painting all the interior walls of their home griege and replacing literally 95% of the furniture to match the same rain cloud tone.

But mostly they are the same old Tom, Dick, or Harriet they were before.1

I recently had a coffee in Berkeley Square with one who was fitting me in between the hedge funds. He was lamenting in turn his success or otherwise with dating apps, and trouble with his teenage son.

The same pep talk I offered could have been delivered to an old childhood mate in his caravan in the provinces back home.

Spare any change?Of course this is a convenient narrative for those who want to argue that we’re all in it together.

We’re not. Those of us with a lot of money have it better.

But it’s true, too, that there is a limit to how much better.

Not because of the canard that, after a certain point, happiness brought about by money plateaus. This bit of social science no longer appears to be true, according to recent research. (See the Guardian article I linked to above).

Rather, it’s because much of what really matters to us simply cannot be bought.

As a beautiful post by Lawrence Yeo on More To That put it this week:

You can be the healthiest person on the planet, but if you love no one, what’s all that vitality for?

You can be free to do whatever you want, but if there’s no one to spend that time with, what’s the point?

Is it even possible to feel a sense of purpose in your days if you believe that you’re loved by no one?

Yeo is doing original digging on a very well-worked seam in his article – albeit not so much in the Beatles-y extract above, which nevertheless ring true – and I’d urge you to give him a read.

Maybe follow up with Ben Carlson, who this week wrote:

Happiness is a complicated topic because when you ask people what they want out of life the answers typically involve career achievements, financial goalposts, or status.

A good job or a high salary or a certain level of fame are easy to quantify and define. Relationships are not.

Money has a value you can attach to it. It’s impossible to quantify the value of strong relationships in your life.

Or with Indeedably, and his sombre reflections from a palliative care unit:

Over the weeks spent visiting the ward, I got to know some of the patients. Lending a sympathetic ear or supportive hand to those in need of a diversion, while the person I was there to see slept.

None reminisced about the jobs they had performed. The nappies changed, houses built, essays marked, budgets prepared, businesses founded, or lines of code written. Beyond their former professions being a token of identity, they barely rated a mention at all.

None reflected on the things they had bought or experiences they had purchased. Cars. Holidays. Houses. Concerts given or attended. Sporting events witnessed or participated in. All irrelevant.

It must be something in the water?

(Middle) class warriorsI do sometimes wonder if I’ll look back on all the effort I’ve put into saving, stock picking, and even running this investing blog over the years as a bit of a tawdry exercise.

I long ago gave up believing Monevator will make many poor people less poor. If we’re doing our job properly, then we help make ‘are or soon will be well-off’ people a little bit more well-off.

Which isn’t nothing, but it’s hardly God’s work.

I’m not looking for sympathy or anything like that. I’m proud of this site!

I just wonder now and then if I should have been writing poems, or helping out at a care home.

The feeling passes, and I’m grateful for the autonomy my decisions have given me. But I’m also left wondering at the counterfactual shadows. Flitting around, just out of sight.

Have a great weekend.

From MonevatorWhat order to put things into an ISA or SIPP – Monevator

Pensions, the LTA, and IHT – Monevator

From the archive-ator: Crisis investing as swine flu panic spreads – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK inflation breaks declining trend with surprise jump to 10.4% – CNBC

Households spending 12% more on essentials than a year ago – Guardian

Mortgage rates drop to six-month low – Which

Ministers reportedly scrap plan for earlier rise in UK state pension age – Guardian

Fewer than 10% of over-50 retirees tempted back to work by Budget – This Is Money

TFL ‘to spend £4m naming each London Overground line’ – My London

Amigo to be wound down after failure to secure financial backing – Sharecast

Wealthy executives make millions trading stock of competitors – ProPublica

A sensible strategy for the UK needs radical changes on pensions [Search result] – FT

Counter-argument: Stop blaming everything on pension funds! [Search result] – FT

(Sorry they are both FT search links. I consider my FT subscription a must these days.)

Products and servicesHow two similar index trackers can generate different returns – T.E.B.I.

Millennials and Gen Z are driving up the price of retro items at auction – This Is Money

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

English wine: the brilliant bottles to try – Which

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Tesco to reduce value of points with Clubcard reward partners – Which

Studio flats for sale, in pictures – Guardian

Comment and opinionWilliam Bernstein: riskless at age 104 [US assets but relevant] – Advisor Perspectives

How seven couples aged 20 to 80 manage their joint finances – This Is Money

Youth: the envy at work that dare not speak its name [Search result] – FT

Threadneedle’s dubious claims about active fund outperformance – Trustnet

Are pensions really so good for inheritance tax planning? [Search result] – FT

Status games: absurd or necessary? – RAD Reads

Don’t let the tax tail wag the investment dog…okay, maybe once – S.L.I.S.

Altogether now – Morgan Housel

Unhealthy claims [The NHS isn’t perfect, but at least it avoids all this!] – Humble Dollar

More evidence time in the market beats timing the market [Research] – Ben Felix via Twitter

Reminders about risk from the banking crisis mini-specialUnderstanding the banking panic [Short video] – Cullen Roche via YouTube

Everything you didn’t think of – Young Money

Reality meets expectation – Fortunes & Frictions

Five ways investors can succeed by knowing their limits – Morningstar

Banking crisis highlights shifting nature of real estate assets – Dror Poleg

Crypto o’ cryptoNo, Bitcoin isn’t pumping because it’s a safe haven from the banks – Molly White

Coinbase, SEC on collision course for ‘existential’ clash over crypto industry – Reuters

SEC charges various celebrities with crypto violations – CNBC

Naughty corner: Active anticsDefending discounts: the investment trusts buying back the most shares – Trustnet

With regime change, institutions are rethinking their portfolios – Institutional Investor

Short-term gain, long-term pain – Capital Allocator

Wandisco revisited – Maynard Paton

Strategic thinking matters – Klement on Investing

What is Bill Ackman up to? – Institutional Investor

More thoughts on the banking crisis – Calafia Beach Pundit

Kindle book bargainsBanking On It: How I Disrupted an Industry by Anne Boden – £0.99 on Kindle

Bank of Dave by Dave Fishwick – £0.99 on Kindle

Never Go Broke by Lee Boyce and Jesse McClure – £0.99 on Kindle

Green Living Made Easy: Hacks to Save Time and Money by Nancy Birtwhistle – £0.99 on Kindle

Environmental factorsBathing water status rarely granted in England, analysis finds – Guardian

Scientists release ‘survival guide’ to avert climate disaster – BBC

Cruise ship invasion – Hakai

We need to talk about carbon credits – Klement on Investing

DIY giant B&Q offers solar panel installation for the first time – This Is Money

Bras fit for burying: Australia to set standard for composting textiles – Guardian

Off our beatThe age of AI has begun – Bill Gates

Unschooling [On taking your children out of school] – Aeon

What are the world’s safest holiday destinations? – Which

Dining across the divide: “I thought I was going to meet an awful Tory” – Guardian

The real reason South Koreans aren’t having babies – The Atlantic via MSN

Please get me out of dead-dog TikTok – The Atlantic via MSN

I saw the face of God in a semiconductor factory – Wired

Off our beat Succession season 4 mini-specialThe final season of Succession is going to be a bloodbath… – Vox

…with Tom Wambsgans on the up and up… – The Ringer

…though there’s still a lot of wood to chop to the top – The Ringer

And finally…“There are no atheists in foxholes or ideologues in a financial crisis.”
– Ben Bernanke, quoted in Too Big to Fail

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

At least after a hard-to-endure 12 months for those who got rich very quickly, before they get over themselves…

The post Weekend reading: Prices versus values appeared first on Monevator.

Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System---and Themselves

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Note: This article on pensions and inheritance tax aims to provoke ideas and discussion. It is very obviously not personal tax advice, which neither the author nor this website are qualified to give. Speak to professionals about your circumstances, if required. Also we’re not getting into politics here. (Indeed Monevator owner The Investor would scrap all this malarkey and whack inheritance tax up to 90%, above a modest allowance for recipients!) As always we’re mostly about making you aware of the tools, not telling you exactly how you must use them.

The Lifetime Allowance for Pensions (LTA) is to be abolished. Subsequently there’s been much gnashing of teeth about how big pension pots are a sop to ‘wealthy families’ who can use them to avoid inheritance tax.

Will your pension now save you a plane trip to Panama?

How much can you legitimately pass on to your heirs via your pension pot while mitigating inheritance tax (IHT)?

We run some numbers.

Setting the scene: pensions and inheritance taxA quick (partial) recap of how pension rules work (as of now):

You get (income) tax relief at your marginal rate when contributing to your pension.
There’s a limit to what you can put in per year (the ‘Annual Allowance’).
This limit is currently £40,000 (gross), rising to £60,000 in April 2023.
You can employ ‘carry back’ to use unused allowances from the prior three tax years.
You can withdraw a ‘tax-free’ lump sum of 25% of your pot. (Now capped at £268,275).
You pay regular income tax on your withdrawals / income from the pension in retirement.
You can’t touch the pension until you’re 55. (Rising to 57 in 2028.)
Your pension falls outside your estate. There’s no IHT to pay.
You have to tell the trustees (the pension administrator, essentially) who you want the beneficiaries to be in the event of your death.
If you die before age 75 your beneficiaries get the pot tax-free. (Alternatively they can leave it in the pot tax-free and pass it onto their descendants).
If you die after age 75, your beneficiaries have to pay income tax on withdrawals / income. However, there’s no ‘minimum income drawdown’ requirement. They can just leave they money in the pot if they don’t need it. (And can pass it on to their descendants tax-free, ad-infinitum).
The LTA wasa limit on the value of your pot of about £1m. You could have a bigger pension pot, but above £1m you had to pay 55% to withdraw the money – as opposed to 20%, 40%, or whatever your income tax rate was.
The LTA was NOT a cap on total contributions, despite mainstream press reporting it as such.
This 55% charge over the LTA limit also applied in all sorts of other situations. For example you dying, getting to 75, and so forth.
Labour has already said it will re-introduce the LTA for everyone who isn’t a doctor, a judge, or presumably, an MP.

Here’s a ridiculously brief summary of Inheritance Tax (IHT):

When you die, the value of your estate over the allowance of £325,000 is subject to IHT at 40%.
If you give assets away and then live for seven years, there’s no IHT to pay on the gift.
There’s no IHT between married couples.
Reminder: pensions fall outside IHT.
There are lots of other boring and complex rules I won’t go into. Read up and get professional advice as needed.

Sarah and StephenLet’s meet a hypothetical middle-class couple, Sarah and Stephen, both in their late 40s.

The couple live in a £2.5 million north London townhouse of which Sarah is immensely proud. They have two kids, Amelia and Jack, and a Labrador, Max.

Jack is 17 and still at public school (that is, a private school). Jack is smart, but he doesn’t work very hard, except at rugby, beer, and girls. Amelia is 19 and is nearly halfway through her first year ‘studying’ psychology at a mid-ranking university on the South Coast.

Stephen reckons they spent more than half a million quid on Amelia’s education, once you throw in the field trips to Norway (geography), and Italy (classics). But Amelia still didn’t do well in her A-levels. Worse, she suffered some fairly acute mental health problems during sixth form. She’s hopefully over that now, but nonetheless they do worry about her.

Stephen has had a few health problems himself and Sarah is into cycling – we’ll see how this is relevant in a minute.

Financially, they are doing okay. They both – conveniently for our maths – earn exactly £160,000 per year. Sarah is in marketing and Stephen works in the back office of a large global bank.

Their net (after-tax) household income is about £200,000. They still have a £800,000 mortgage outstanding on the house. Inconveniently, their super-low fixed-rate deal rolled off shortly after the ‘kamikaze’ Mini Budget and they’re now paying 5% on the loan.

Stephen and Sarah are great savers. They each have about £500,000 in their ISAs. Stephen has £900,000 in his SIPP, and Sarah has £700,000 in hers. (Sarah took a few years off work when they had Amelia and Jack).

Because of the LTA, they stopped contributing to their pensions a couple of years ago.

They have a few other assets, but most are fairly illiquid: a couple of private equity investments that Stephen made, some VCTs from when they still thought those were a good idea, and some ESOP shares in Stephen’s employer.

Now the LTA is abolished, they’d quite like to do what everyone else does and pay the slab of their income above £100,000 into their pension. That’s because the £60,000 above £100,000 is taxed at an effective marginal tax rate of about 50% (thanks to the withdrawal of the personal allowance).

Cash managementOur couple is clearly well-to-do, with masses of assets and great incomes even for London. They have options. However they have a bit of a cash-flow problem.

Let’s look at their budget. (I’m assuming Jack has turned 18 and with Amelia has a £20,000 annual ISA allowance).

Sarah and Stephen both feel strongly that they should fill up both their and the children’s annual ISA allowances. This may seem like an indulgence, but ISAs are use-it-or-lose it allowances and they have the cash to do so.

The couple worries that neither Amelia nor Jack will have the financial fortune they had. The political mood music for the treatment of income and assets outside of tax wrappers does not sound good, either.

(Unfortunately, the couple doesn’t read Monevator. They don’t know about this one weird ISA trick to preserve your allowance even if you don’t have the money.)

Stephen and Sarah acknowledge they could do better on the general expenses front. They swapped the bi-weekly hand delivery of fresh organic bread from the local artisan bakers for Waitrose. And a frank conversation was had about how much money was spent – and on what, exactly – when Stephen went for a weekend snowboarding with ‘the boys’ in Val-des-Aire. That’s one of three annual foreign holidays now substituted with a week at a friend’s holiday-let in Norfolk.

Still, it’s not plain sailing. Maintenance on the house seems to be a bottomless money pit, there are payments on the car that they only use at weekends, Max (the Labrador) is getting on a bit, and the vet’s bills are ridiculous.

Were interest rates lower, they might be tempted to borrow more on the house. But they’re not.

Indeed as things stand they are running a £40,000 deficit every year, when you take into account their ISA contribution ambitions. They can’t currently afford to make any pension contributions.

Enter Mike and MaryNow let’s meet Sarah’s parents, Mike and Mary.

In their late 70s, Mike and Mary are classic wealthy boomers. They live in a mortgage-free multi-million pound pile in the Home Counties and have oodles of assets and cash. Their estate would be worth close to £7m if they died tomorrow.

In very good health, the couple can reasonably expect to live for more than seven years. (Mike’s dad only just died, aged 102).

But the family is still aware that there’s a looming inheritance tax problem, and now is the time to be planning.

However Mike and Mary don’t really consider the IHT their problem. They can’t really be bothered with any complicated arrangements.

Mike and Mary also feel, given the general state of the NHS and the possibility that they will need expensive care, that the £7m is money worth holding onto.

For that matter they can’t imagine, given Stephen works for a big bank in the City, why their daughter Sarah would need any help?

Sarah is a bit annoyed about this. In her opinion, the Brexit that mum and dad seemed to think, inexplicably, was such a grand idea, is causing half her problems. Brexit has them paying higher taxes. It also impacted Stephen’s promotion prospects at work. The bank has moved functions to Dublin.

(Naturally, they never discuss any of this at family get-togethers…)

Obvious inheritance optionsWhy don’t Mike and Mary just give some money to Sarah now, in the reasonable expectation that she’d pay for their care or medical bills if it came to it later? Even if it’s just for the younger couple to put in their ISAs?

If Mike and Mary live for seven years, that’s £40 of IHT saved for every £100 given.

Alas Mike and Mary worry about Sarah dying before them, leaving them in a sticky situation. And the grandchildren certainly can’t be relied upon to do the right thing. (Sarah’s mum has provided a running commentary on how they’re not being brought up properly their entire lives.)

They aren’t even entirely sure about Stephen.

Sadly, there’s a very good reason behind these worries. Sarah’s only sibling, James, died in a motorcycle accident in his late 20s. Untimely tragedy is not an abstract risk for this family.

A way out of the inheritance tax trapSarah’s family then are in a classic wealthy middle-class income tax / inheritance tax trap.

But all the chatter about the injustice of the LTA removal when it comes to inheritance tax has motivated Sarah to do a bit of digging.

And now she has a plan.

Finumus is looking forward to what people think of Sarah’s situation in the comments.Sarah’s plan for Mike and MarySarah thinks there’s an opportunity to reduce the IHT burden on her parents estate, boost the family’s wealth, and at the same time, actually increase her post-tax income.

A triple-whammy!

For now, Sarah’s not going to worry about Labour’s threat to bring the LTA back. (Besides, some kind of protection would probably need to be put in place to make any such move politically palatable.)

Let’s first consider what happens if Sarah doesn’t bother doing anything – and everyone just ignores the eventual IHT problem.

£100 in Mike and Mary’s estate would be taxed at 40%, becoming £60 in Sarah & Stephen’s hands. When they die it would get taxed at 40% again as part of their estate, and ultimately becomes £36 in Amelia and Jack’s hands.

Ahoy there, pension shenanigansEnter Sarah’s alternative plan. She reckons it will enable her to restart contributing to her pension, reduce future inheritance tax, and, according to her sums, not leave the family out of pocket at all.

She sets up a new SIPP, separate from her existing pension.
Her mum and dad give her £48,000. (Unconditionally, without reservation, accompanied with a letter saying as such).
She makes a £48,000 (net) contribution into the SIPP.
She names her parents Mike and Mary as the beneficiaries of the SIPP.
In the expression of wishes, she allocates the benefits to Mike (50%), Mary (50%), Stephen (0%), Amelia (0%) and Jack (0%) in the event of her death.
She then instructs the pension trustees to allow Mike and Mary the option of forgoing the benefits in favour of other beneficiaries, if they wish. This covers the situation where they decide they don’t need the money when it comes to it.

Sarah has solved her parents’ biggest concern – that she dies before them. If Sarah gets left-hooked by a HGV cycling to work, they get their money back, tax-free. (Indeed with a 25% uplift, because it got grossed up in the pension).

Sarah knows she should be able to do this for three tax years (including this one) before the next election potentially changes the rules again.

The Annual Allowance goes up to £60,000 next tax year, and she has ‘carry-back’ available from previous years to use before the 5 April 2023.

Sarah runs the numbers. She’s got £60,000, grossed up, in her SIPP, and it has cost the family £30,000 directly. But they will also save the IHT on Mike and Mary’s estate.

So net of both income tax and inheritance tax this move cost them only £10,800!

Not bad. But there’s another benefit. The SIPP is outside Sarah’s estate as well.

The gift that keeps on givingUltimately, Sarah and Stephen’s estate will have an IHT problem, too.

In 30 years they are going to look very much like Mary and Mike (different politics, perhaps) and face the same challenges.

What if she included that latter IHT tax benefit of shrinking her estate via the pension move?

That’s another £11,520 saving.

Through this lens, getting £60,000 into the pension has come at a net cost of minus £720.

Sarah has created a £60,000 pot for the family, for basically nothing. That pot grows tax-free. Whereas Mike and Mary were paying income tax on the interest they earned on that cash they gave her, so another win.

Sarah ponders for a moment why she’s the one coming up with this stuff, given Stephen works in ‘banking’.

Actually, perhaps she can persuade mum and dad to do the same with Stephen, if she gives them Limited Power of Attorney to manage the investments in the separate SIPP she sets up for him?

This would double the annual pension pot gain for the couple to £120,000. With three tax years before Labour gets in, that’s £360,000 in the bag.

Best of all, every year, £36,000 of that is going to drop straight into their bank account after they’ve filed their tax returns. This is going to really help with the stretched household finances!

And for an extra kicker – if they can make these contributions as salary sacrifice they can reduce National Insurance (NI) as well.

They will save 2% employee NI, and their employers will save 13.8% employer NI.

Sarah works for a small, founder-run firm. It is perfectly happy to have her divert as much of her salary as she wants into her SIPP, and kick back half the saved employer NI in there as well.

That’s an extra £1,200 in her NI and £4,100 from her boss. Another £5,000, almost.

It’s the final countdownSarah’s aware she’ll need to be careful she doesn’t go over the Annual Allowance. (She can use her carry back to do this).

Her table is now completed as follows:

Alas Stephen’s employer is a lot less co-operative on the NI front. He can only use salary sacrifice to a maximum of 15% of his salary, only into the company sponsored scheme, and there’s no employer NI kickback. But he’ll still do the max – and then transfer the cash from the employer scheme into the specially segregated SIPP, which he’ll do once a year by submitting a partial transfer form. The rest he’ll do with a direct net contribution into the SIPP.

Sarah is feeling so pleased about this wheeze, she’s thinking of treating herself to a new handbag.

How will they get the money out of the pension?As their daughter Amelia would say, spending the pension pot is a ‘future me’ problem.

The couple have no idea what marginal tax rate they or their beneficiaries will suffer on extracting funds from the SIPP. It very much depends on the circumstances under which they are doing it, and the rules at the time. Even their tax residency.

Their marginal tax rate could be anything from 0% to nearly 85% (the latter with the old LTA charge, inheritance tax, and income tax all compounded).

To Sarah, the manoeuvre still seems worth the risk, particularly as it’s not actually impacting her income at all.

Quite the reverse, it’s actually boosting it.

Back to the real worldIn case you’re wondering, I’m neither Sarah nor Stephen. Yes there are some echos. But our situation is quite different to theirs.

We’re a lot more frugal for a start, and we don’t have a dog. (All that hair and barking!)

That the tax system is structured such that it incentivises this sort of thing seems to me nuts. All the same, I wish them the best of luck.

Quite a few people are asking me what I’m doing about my pension contributions – because I’m way over the (old) LTA.

You will not be surprised at all, if you’ve read any of my other stuff, that I’m setting my risk dial to 11.

I will max out pension contributions over the next three tax years and hope for a bull market. I’ll then hopefully take protection (if there is any) should the LTA be reintroduced.

My income is (un)fortunately below the annual allowance taper, and I have carry back I can use.

Mrs Finumus’s pension, on the other hand, is way below the old LTA. We were maxing out her contributions anyway.

The complexities of the LTA are such that I’d guess it’s not a slam dunk that Labour will just revert to the old regime (ex-doctors) once in power. Nor do I think it’s likely they bring pensions into peoples’ estates. Pensions are trusts, and this would require the overhaul of quite a bit of trust law. It’s more likely they remove the pre-75 tax-free status, which has the optics of achieving the same thing, but is a lot less effort.

Nonetheless I’ll be voting for them. I’m in a Conservative/Labour marginal constituency, so there’s literally no other choice for me.

I’m near the fag end of my career anyway. Is it too late to become a doctor?

If you enjoyed this, follow Finumus on Twitter or read his other articles for Monevator.

The post Pensions, the LTA, and IHT: how a middle-class couple can bag £360,000 for free appeared first on Monevator.

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Can’t fit all your investments into your ISAs and SIPPs? Then you’ll reduce your tax bill by following the first rule of tax-efficient investing:

Squeeze the most heavily taxed investments into your tax shelters first.

Happily, the pecking order for maximum tax efficiency is clear cut for most people.

Tax-efficient investing priority listShelter your assets in this order:

Non-reporting offshore funds
Bond funds
REITs
Individual bonds
Income-producing equities
Foreign equities (arguable)

To see why this sequence is tax efficient, let’s just tee up the relevant tax rates:

| 2022/23 | Income tax | Dividend tax | Capital Gains Tax | | Tax-free allowance | £12,570 | £2,000 | £12,300 | | Basic rate taxpayer | 20% | 7.5% | 10% | | Higher rate taxpayer | 40% | 32.5% | 20% | | Additional rate taxpayer | 45% | 38.1% | 20% |

(Note: From 6 April 2023 the dividend tax allowance is halved to £1,000 and the CGT allowance is cut to £6,000. Also note, these capital gains tax rates are for investments like shares. Capital gains on residential property other than your own home are taxed at 18% and 28% instead of 10% and 20%.)

At a glance we can see that income tax is the nastiest while capital gains tax (CGT) is generally the most benign. Your CGT burden can also be reduced by offsetting gains against losses.

So the plan is to shelter investments that are liable to income tax first, dividend tax second, and CGT third.

A few tax efficiency caveats to considerBefore we get into the guts of it, I’ve got to dish up some caveat pie:

Interest is taxed at your usual income tax rate. Basic-rate payers have a £1,000 personal savings allowance, reduced to £500 for higher-rate payers and nil pounds beyond that.
A few very low earners qualify for an additional band of tax relief on savings. Up to £5,000 of interest can be sheltered under the ‘Starting Rate for Savings’.
If your interest, dividend income, or capital gains pushes you into a higher tax band then you will pay a higher rate of tax on the protruding part.
In that situation, it matters what order you’re taxed in, so you can make the most of your tax-free allowances. The UK order of taxation is: non-savings income, savings income, dividend income, and finally capital gains.
If you’d like a quick refresher on the tax-deflecting powers of ISAs and SIPPs, just click on those links.
And if you’re not sure which is best for saving then try our take on the ISA vs SIPP debate. Most people should probably diversify across both tax-efficient investing shelters. But there are a some important wrinkles to think about.

Let’s now look in more detail at – all things being equal – the best order of sheltering assets for tax-efficient investing, starting at the top.

Non-reporting offshore fundsOffshore funds that do not have reporting fund status are taxed on capital gains at income tax rates. And as you can see from the table above, that’s a hefty tax smackdown.

Worse still, your capital gains allowance and offsetting losses are knocked out of your hands by HMRC like the school bully taking your lollipop.

If your offshore fund or exchange-traded product (ETP) doesn’t trumpet its reporting status on its factsheet then it probably falls foul.

It’s worth double-checking HMRC’s list of reporting funds. Many offshore funds / ETPs available to UK investors don’t qualify. Also, it’s possible for a reporting fund to lose its special status.

Any fund that isn’t domiciled in the UK counts as an offshore fund. (Sometimes it’s worth saying the obvious!)

Bond fundsBond funds and ETFs are next into the tax bunker because interest payments are taxed at income tax rates rather than as dividends.

Any vehicle that has over 60% of its assets in fixed income or cash at any point in its accounting year falls into this category.

However because bond distributions count as savings income, interest payments are also protected by your Personal Savings Allowance, so long as it lasts.

Bond fund capital gains fall under capital gains tax, naturally.

Bear in mind that recently-acquired bonds and bond funds will probably be paying out more interest now that yields have risen.

Starting Rate for Savings – bonus protectionSome people – most likely retirees – can find themselves with low earnings income but reasonable savings income.

Such savings income can be sheltered by the Starting Rate for Savings.

Savings income that sits in a £5,000 band beyond your Personal Allowance may qualify for a 0% rate of income tax thanks to the Starting Rate for Savings rules.

That’s most likely to happen if your non-savings income plus savings income lands somewhere between £12,570 and £17,570.

(The upper limit can be increased if you’re eligible for additional tax-free allowances.)

Beware that every pound you earn (in non-savings income) over £12,570 shaves £1 from your £5,000 Starting Rate for Savings allowance.

So if you earn over £17,570 in non-savings income then you won’t get any Starting Rate for Savings privileges.

Whereas, £14,000 in non-savings income leaves you with another £3,570 in savings income that can be protected using your Starting Rate for Savings.

Any savings income that can’t huddle behind the Starting Rate for Savings barricade can still duck under the Personal Savings Allowance.

All this begs the question: what counts as earnings income?

The main categories are:

Income from work, whether employed or self-employed
Pension withdrawals including the State Pension
Retirement annuities
Rents
Taxable benefits

It’s obviously less urgent to get all your bonds into your ISAs and SIPPs if you can earn interest tax-free via the Starting Rate for Savings and Personal Savings Allowance routes.

As mentioned though, bonds can make capital gains. Long to intermediate maturity bond funds are most likely to land you with a significant CGT bill.

Short bonds and money market funds typically achieve at most miserly capital gains.

Real Estate Investment Trusts (REITs)REITs pay some of their distributions as Property Income Distributions (PIDs).

PIDs are taxed at income tax rates not as dividends.

Get them under cover for optimal tax-efficient investing.

Individual bondsIndividual bonds are liable for income tax on interest – just like bond funds.

The only reason that bonds are slightly further down the list is because individual gilts and qualifying corporate bonds are not liable for capital gains tax.

We’ve previously delved into the differences between how bonds and bond funds are taxed.

Income-producing equitiesThe dividend tax situation has got a lot worse for UK investors in recent years, so high-yielding shares and funds should duck under your tax testudo next.

By all means prioritise protection for your growth shares if you think CGT is the bigger problem.

But bear in mind you can still defuse capital gains every year – although this mitigation measure is being steadily eroded by the shrinking capital gains allowance – and you can usually defer a sale.

Foreign equitiesIt isn’t necessarily a priority to get overseas funds and equities sheltered, but there’s a tax-saving wrinkle here that only works with SIPPs.

The issue is withholding tax, which is levied by foreign tax services on dividends and interest you repatriate from abroad.

Sometimes withholding tax will be refunded as long as you fill in the right forms. For example a 30% tax chomp on distributions from US equities becomes a mere 15% if your broker has the appropriate paperwork.

Foreign investments in SIPPs can often have all withholding tax refunded but only if your broker is on the ball (and the appropriate agreements are in place). You’d need to check. ISAs don’t share this feature.

If you hold foreign equities outside of a tax shelter then you can use whatever withholding tax you have paid to reduce your UK dividend bill.

So in the case of US equities, a basic-rate taxpayer could use the 15% they’ve paid in the US to reduce their 7.5% HMRC liability to zero.

In other words, only higher-rate / additional-rate taxpayers should consider sheltering US equities in ISAs from a dividend perspective. (There’s still capital gains tax to think about in the long-term, remember.)

Everyone can benefit from the SIPP trick though.

Bow-wowing outIt only remains to say that this is generalised guidance and tax is a byzantine affair. Please check your personal circumstances.

Tax efficiency is important but whatever happens don’t let the tax tail wag your investment dog.

Take it steady,

The Accumulator

Note: This article on tax-efficient investing has been given a tidy up after a few years out in the pastures. Comments below might refer to previous tax rates and allowances. So do check the date they were posted!

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What caught my eye this week.

A big week for news. A Spring Budget that shifted the retirement savings goalposts like a giant tossing cabers, alongside a banking crisis still threatening to drag down US – and possibly European – banks, like giants gasping for air.

On pensions, do read the cracking comments to our article on Wednesday. We’re lucky to have informed readers who mostly take the time to flesh out their thinking when they post. You’ll learn as much from that thread as from any media article. Especially when many financial journalists seem confused as to how the Lifetime Allowance really works.

There’s no doubt this ceaseless pension meddling is a pain though – from how the Lifetime Allowance has been reduced over the years to Hunt going back on a pledge made just last autumn to freeze it until 2026 (making this week’s reversal potentially bitter and costly to anyone who had acted accordingly) to Labour’s response that they’ll – you guessed it – reverse the reversal.

I believe the Lifetime Allowance is bad regulation. But changing the pension rules every few years is even worse. Pensions require people to plan for several decades away. Yet we can’t be confident the rules will even outlast an election.

Those who can should probably take advantage of this latest pivot. But do your research carefully – and don’t dawdle!

Here today, gone tomorrowAs for the banking crisis, that story is changing daily. I just deleted a huge bunch of relevant links I collected over the week. Most of them – while admirable takes – have been overtaken by events.

The most interesting of these discussed how the failure of Silicon Valley bank is a sign of a wider shift in the venture capital ecosystem. But that’s pretty esoteric stuff from a mainstream perspective when a European bank like Credit Suisse is listing.

Now money can be moved in seconds online, bank runs seem to be just a Twitter panic away.

Perhaps my main takeaway therefore is US regulators seem to be deciding they can’t risk any deposit losses – because that risk even existing can drive deposit flight – and so they will in time legislate towards either full insurance of deposits or at least limits in the several millions.

Existing insurance schemes work by protecting enough small deposits to satisfy most of a bank’s customers that their money is safe. This gives the larger deposits a sort of free ride.

The theory is that protecting the little guys means a bank run won’t happen. But Silicon Valley Bank’s failure showed that model has limits.

Banks are still not boring enoughIf we do see all cash deposits protected that would surely change the business of banking, both in the US and abroad (if only due to regulatory arbitrage).

Banks would become quasi-national utilities if the Government explicitly stood behind their balance sheets. And they’d be regulated as such.

On the other hand smaller banks (of which the US still has thousands, some of whom fail ever year) might get a leg-up. Larger banks wouldn’t benefit from Too Big To Fail status if, thanks to universal insurance and regulatory scrutiny, no bank could fail.

For what it’s worth I still think the drama is containable – not least because it has to be. The authorities can do what it takes, albeit we might be cleaning up the consequences for years to come.

As the Motley Fool said this week in a tongue-in-cheek letter to lawmakers:

[Imagine] how well your sensitive, musical instrument-playing children would fare in post-capitalist Mad Max wasteland.

Then add a zero to every number in your rescue package.

Have a great weekend!

From MonevatorOur updated guide to finding the best online broker – Monevator

Lifetime Allowance for Pensions abolished and annual allowance raised – Monevator

From the archive-ator: Gagadom and the Grim Reaper: suppose they come early? – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Spring Budget: key points at-a-glance – BBC

Spring Budget: changes to pensions, childcare, and energy support – Which

Spring Budget: how will your income change? [Calculator] – Guardian

Labour pledges to reverse abolishing of Lifetime Allowance – Pension Age

Jeremy Hunt’s R&D shake-up divides UK small businesses [Search result] – FT

UK house prices to fall 10% from peak, says OBR – Yahoo Finance

Barclays could save £200m by pausing payments to staff pension scheme – Guardian

Oil price falls to lowest level since Russia invaded Ukraine – Axios

Scottish Mortgage removes non-executive director after boardroom clash [Search result] – FT

Argentinian inflation soars over the 100% mark – BBC

Seems like the Covid ‘She-cession’ was a ‘He-cession’ after all… – Axios

…but there’s still plenty to debate in the latest UK gender pay gap figures – ONS

Why the UK economy has grown so slowly [Search result] – FT

Frozen thresholds impact mini-specialThe impact of frozen or reduced tax thresholds on personal incomes – OBR

Frozen tax thresholds to cost higher-rate households £1,000 a year, says IFS – This Is Money

Products and servicesHow the government energy cap U-turn will affect your bills – Which

Open an account with InvestEngine via our link and get £25 when you invest at least £100 – and an additional £100 if you invest at least £10,000 into an ISA before 2 May (T&Cs apply. Capital at risk) – InvestEngine

£4.5bn is lying in lost accounts. Could some of it belong to you? – Which

Eight energy-saving fixes from a hands-on energy-saving expert – This Is Money

Halifax is offering a time-limited £175 bank switching bonus – This Is Money

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Homes for sale in former pubs, in pictures – Guardian

Comment and opinionWhy the higher paid should work longer than the rest [Search result] – FT

Gradually, then suddenly – Fortunes & Frictions

Investor behaviour during market shocks – Behavioural Investment

No, it wasn’t pension funds that killed the UK stock market – Real Returns

The rules of the money game [Podcast] – Morgan Housel via Apple Podcasts

Stabilizing – Retirement Investing Today

Staying invested – Spilled Coffee

Market expectations for US interest rate hikes are yo-yoing – The Irrelevant Investor

Don’t waste your emotional capital investing out of spite – Abnormal Returns

Will ChatGPT improve financial literacy? – Morningstar

Market timing mini-specialDon’t chase the past – Bilello

Why you always sell stocks at the bottom – Darius Foroux

Naughty corner: Active anticsA tracker and a slug of cash replicates the average multi-factor hedge fund – Finominal

Statistically speaking, you are the patsy – Neckar Substack

Crisis alpha versus panic alpha – Random Roger

Can the value spread expand forever? – Alpha Architect

Kindle book bargainsBanking On It: How I Disrupted an Industry by Anne Boden – £0.99 on Kindle

Bank of Dave by Dave Fishwick – £0.99 on Kindle

Never Go Broke by Lee Boyce and Jesse McClure – £0.99 on Kindle

Green Living Made Easy: Hacks to Save Time and Money by Nancy Birtwhistle – £0.99 on Kindle

Environmental factorsGermany gives green light to €49 a month public transport ticket – Guardian

How the fossil fuel industry plays dirty in the “fight for its life” – Semafor

Baking on the seaweed rush – Hakai

Joe Biden just broke a big climate promise in Alaska – Vox

Off our beatMichael Heseltine: “The adults are back in charge” [Search result] – FT

Is Facebook’s Metaverse turning into a ghost town? – The Honest Broker

Six useful prompts to make better use of ChatGPT – via Twitter

Our reality may be the sum of all possible realities – Nautilus

Meta productivity – Dror Poleg

How Ted Lasso became a multi-million dollar business – Huddle Up

An interview with futurist Kevin Kelly – Noahpinion

And finally…“No doubt all commodities have politics. But money and credit and the structure of finance piled on them are constituted by political power, social convention, and law in a way that sneakers, smartphones, and barrels of oil are not.”
– Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World

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Genuinely exciting developments today in the typically somnolent world of pensions. Chancellor Jeremy Hunt has announced he’s scrapping the Lifetime Allowance for Pensions.

Hunt is also significantly increasing the pension annual allowances.

As per Hunt’s 2023 Spring Budget:

The government will remove the Lifetime Allowance charge from 6 April 2023, before fully abolishing the Lifetime Allowance in a future Finance Bill.
The maximum Pension Commencement Lump Sum for those without protections will be retained at its current level of £268,275 and will be frozen thereafter.
The government is also set to increase the Annual Allowance from £40,000 to £60,000 from 6 April 2023. Individuals will continue to be able to carry forward unused Annual Allowances from the three previous tax years.
Finally the Money Purchase Annual Allowance will rise from £4,000 to £10,000 and the minimum Tapered Annual Allowance from £4,000 to £10,000 from 6 April 2023. The adjusted income threshold for the Tapered Annual Allowance will also be increased from £240,000 to £260,000 from 6 April 2023.

Together these are massive changes. Unusually sensible ones, too.

Good riddance to the Lifetime Allowance for PensionsFor anyone who is too young, who doesn’t earn enough – or who has more exciting hobbies to preoccupy them like macramé or reading obituaries – and so hasn’t been paying attention, the Lifetime Allowance for Pensions has long been one of the most complicated, counterintuitive bits of legislation in the whole tax maze.

See this summary of how the Lifetime Allowance works from The Details Man on Monevator. But set an alarm on your iPhone first –just in case you nod off while reading it and forget to come back.

Scrapping the Lifetime Allowance for Pensions on the grounds of tax simplification is good enough.

But the government’s avowed aim is to encourage older and typically higher-earning professionals to remain in the workforce for longer.

The thin end of this particular wedge has been the high-profile case of doctors. They have apparently been leaving the NHS in droves because, they felt, continuing to work no longer paid.

It was always more complicated than that. But suffice to say creating a fix just for medics would have sent an already cumbersome system into meltdown. Great for accountants but crap for the rest of us.

Plus it would hardly have been ‘fair’. Whatever that is taken to mean these days.

So – almost unbelievably after seven years of terrible decisions from the top – the Government has instead ripped the whole sorry thing up.

The Lifetime Allowance for Pensions was clumsy. It penalized investment success. It introduced all kinds of bureaucracy. And it was fully understood by no one.

We are well rid of it.

Less taxing for the moderately wealthyI was as surprised as anyone to see the Lifetime Allowance for Pensions put to the sword.

But it’s particularly notable given the annual contribution allowance is being hiked by 50% to £60,000, too.

At a stroke, higher-earners can now defer a lot more tax – and for longer – than before.

However you can see these changes as potentially progressive if you squint a bit.

That’s because, as I noted above, the tax-free lump sum (nobody ever calls it the Pension Commencement Lump Sum) has been frozen.

It won’t even increase with inflation.

Presuming these changes remain in place indefinitely (spoiler: they won’t) then over time the 25% tax-free lump sum will become less valuable in real terms.

So higher-earners will be able to put more into their pension. But they will subsequently be taxed on more of it it down the line.

It gets rid of the complexity and edge case silliness of the Lifetime Allowance for Pensions. But freezing the tax-free lump sum means it isn’t all gravy financially.

The freeze of the lump sum allowance at a concrete £268,275 makes the increases in the other allowances more valuable for ordinary pension savers – who are more likely to have a 25% lump sum below that level – than for the very wealthy.

More flexible for today’s high-rollersStill, this doesn’t make the other changes redundant for very high-earners.

If you’ve got a high but lumpy income, say – perhaps because you’re a freelance or an entrepreneur – or you expect to earn much more later in your career, then the extra headroom should be very helpful.

Tax relief on money going in makes pensions the best way to boost your retirement savings in a hurry. So being able to contribute more in a particular year (perhaps from savings) is a boon.

And while we must always remember that pension income is subject to taxation (unlike income that you take out of an ISA) there are ways to mitigate this.

So these changes do seem to be pro-enterprise. That is, the sort of thing we used to expect from the Conservative party before it was captured by its economically self-defeating lunatic fringe.

I said I was happy to see Hunt and Sunak take the reins after last year’s Mini Meltdown. This sensible suite of pension changes backs up that faith.

What do you think of the changes?Of course the devil will be in the detail.

It will be interesting to see how the big hike in the Money Purchase Allowance might be put to use by FIRE1 types. Please share your thoughts below.

Also, I was already concerned at the growing stature of pensions as an inheritance tax (IHT) dodging vehicle before these changes were made. That light is now flashing red.

Presumably Labour will do something about it after the next election, and Hunt knows this. So perhaps it makes sense politically to let the opposition carry the can.

(I understand most of your lights flash green on IHT when mine flashes red. I’d rather let people get very rich on their efforts and tax the children who did nothing to earn it. Most of you seem to prefer to tax those who actually earn the money – given we have to tax somebody. Ho hum!)

Should we feel sorry for someone who bit the bullet and made decisions based on the existing system yesterday – or even this morning?

These changes always seem unfair to me on that front. It’s yet another argument for tax simplification – and then stasis, so we can all plan with confidence.

Finally, do you think it will achieve its aim of keeping people in work for longer? Perhaps that depends on how many people get the FIRE bug.

All told, these are the biggest changes to the pension system since the introduction of the pension freedoms a decade ago.

What do you make of them? Let us know in the comments below!

Financial Independence Retire Early

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What caught my eye this week.

This might be a Mini Budget moment for the US. Its regulators moved yesterday to shut down Silicon Valley Bank and to take control of its deposits. It’s the biggest US bank failure since 2008.

Silicon Valley Bank’s shares had already been pummeled this week as the Californian lender tried to secure extra funding to shore up its balance sheet. But in the face of a bank run, its regulator cited “inadequate liquidity and insolvency” and pulled the plug, taking control of its $175.4bn in deposits.

Financial shares sold off on fears of contagion – even here in London – but this doesn’t look like a ‘Lehman moment’. However that doesn’t mean the failure is not significant.

Silicon Valley Bank was the dominant lender to the US venture capital industry, was the 16th biggest bank in the US, and it was valued at over $44bn at the end of 2021.

It’s failure is probably not systemically disastrous, except in exactly why Silicon Valley Bank got into trouble and what it reveals (again) about the state of the financial system.

Because its failure isn’t really due to troubles in the venture capital ecosystem that it serves – despite the well-documented collapse in tech and start-up valuations over the past 18 months.

No, it has been undone by our old and now clearly not so risk-free friend – fixed income.

On the runAt the height of the post-pandemic growth mania, everyone was throwing money at the venture capital sector.

The biggest VC companies ballooned. Some began to pivot their strategies to become permanent owners of the companies they funded. Meanwhile at the other end of the spectrum, VC newsletter writers and podcasters launched one-man firms and raised real money.

One way or another, much of this froth ended up on deposit at Silicon Valley Bank. As the FT explains, the bank then decided to park $91bn of these deposits into low-risk but – crucially – long-dated assets, such as mortgage-backed securities and US government bonds.

Well we know what happened next. But in case you’re still oblivious to the regime change, central banks around the world hiked interest far faster and further than anyone predicted. This crashed everything from blue sky tech firms to Amazon and Apple to the 40 in your 60/40 portfolio.

It also saw Silicon Valley Bank’s portfolio of safe assets that stood behind its customer deposits fall $15bn underwater.

Which wouldn’t in itself have been a problem – the assets have a positive yield-to-maturity, and will pay out their face value in the long run – unless sufficient depositors got scared and began to demand their money back in droves.

Which is what happened this week.

As economist Noah Smith explains in a comprehensive piece, the US FDIC scheme – the equivalent of our FSCS guarantee – was beefed up after the financial crisis to try to stop this happening:

Because everyone knows the federal government will cover their deposits, they aren’t worried about losing their money in a run, so they’re never in a rush to pull it out. And because they never rush to pull it out, runs can’t even get started.

For a normal bank, about 50% of deposits are FDIC insured.

But there’s a but:

But 93% of SVB’s deposits were not FDIC insured. So SVB was vulnerable to a classic, textbook bank run.

Why did SVB have so many uninsured deposits?

Because most of its deposits were from startups. Startups don’t typically have a lot of revenue — they pay their employees and pay other bills out of the cash they raise by selling equity to VCs. And in the meantime, while they’re waiting to use that cash, they have to stick it somewhere.

And many of them stuck it in accounts at Silicon Valley Bank.

Smith gives an excellent summary of how the run got started. It was down to the usual alchemy of initial lemming-like behaviour transforming into rational action once everyone else is at.

Just as we saw 16 years ago with Northern Rock.

We are gonna make it…The consensus of opinion this weekend is that Silicon Valley is an outlier that over-served a concentrated customer base. And so that the rest of the financial system isn’t very exposed.

I imagine US regulators are pulling all-nighters to try to ensure that narrative holds over the weekend. Ideally they’d probably want to get the bank’s business shifted into bigger and safer hands by Monday.

However the episode is another example of the rapid ascent from near-zero interest rates leading to a mild calamity. We previously saw it with the Mini Budget-provoked pension crisis here in the UK, and I’d argue with the collapse and bankruptcy of much of the cryptocurrency infrastructure.

The more of these blow-ups we go through without a system-wide meltdown, the more confidence we’ll have that the financial system was sufficiently shored-up following the dramas of 2007-2009.

I mean, just imagine what would have happened to bank balance sheets following the collapse in fixed income asset values last year if they had still been levered-up like in 2007.

On the other hand, the more of blow-ups we see, the more we might fear that one of them is going to get us eventually. (My best bet would be something connected to the global housing market.)

So let’s hope inflation calms and rates can stop rising soon.

Have a great weekend!

From MonevatorStocks and shares ISAs: Everything you need to know – Monevator

The Annual ISA allowance: How it all works – Monevator

Is cash a money maker for you or for your broker? – Monevator

From the archive-ator: How should you invest for your age? – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

‘Cut stamp duty to boost UK stocks’, brokers urge [Search result] – FT

Spring Budget 2023 rumours: what could be announced? – Which

Why the chancellor wants this budget to be boring – BBC

FCA urges banks to consider cutting mortgage payments for those struggling – Guardian

Gary Linekar: a stand-off with no clear exit strategy – BBC

The UK’s housebuilding crisis [PDF] – Centre for Cities

Products and servicesZopa and Tandem launch new best buy savings rates – This Is Money

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

A new solar offering from Ripple Energy – DIY Investor UK

When do lockdown-era airline credit notes and vouchers expire? – Which

Fears pensions are being overlooked in DIY divorces – Which

Could you afford your home at today’s mortgage rates? – This Is Money

Homes with film connections, in pictures – Guardian

Comment and opinionPutting guardrails around your retirement spending – Humble Dollar

Active versus index funds: latest results – Mathematical Investor

Dying with millions – Best Interest

Is it easier for investors to forecast the short or long-term? – Behavioural Investment

Morgan Housel has started a podcast [Podcast] – via Spotify

Bonus – Indeedably

How to make a fortune out of secondhand furniture – This Is Money

Backtests are unemotional. Humans are not – A Wealth of Common Sense

Priceless possessions that cost next to nothing – Humble Dollar

Things important and unimportant – JL Collins

Commodity investing and its role in a portfolio [Nerdy, PDF] – Vanguard

Naughty corner: Active anticsWhy Tim Ferris wouldn’t do as well starting angel investing today – Tim Ferris

Private company valuations defy fall in listed stocks, adviser says [Search result] – FT

Enough: the forgotten lesson of Ben Graham’s life – Neckar Substack

Jeremy Grantham’s market meat grinder [Podcast] – Bloomberg

Why you shouldn’t launch a hedge fund – Russell Clark

Kindle book bargainsAntifragile: Things that Gain from Disorder by Nassim Taleb – £1.99 on Kindle

Bank of Dave by Dave Fishwick – £0.99 on Kindle

Never Go Broke by Lee Boyce and Jesse McClure – £0.99 on Kindle

Green Living Made Easy: Hacks to Save Time and Money by Nancy Birtwhistle – £0.99 on Kindle

Environmental factorsDo fund managers really believe in ESG? – Klement on Investing

Hunt’s Budget to announce £20bn funding to cut carbon emissions – Guardian

How to stop cigarette butt litter – Hakai

AI, minds, matter mini-specialYou are not a parrot – Intelligencer

What plants are saying about us – Nautilus

In AI, is bigger always better? – Nature

Off our beatStaying alive – Humble Dollar

Psychological paths of least resistance – Morgan Housel

Gold old times, innovation edition – Klement on Investing

Peak TV is over. Welcome to Trough TV – Slate

Productivity and bullshit – Dror Poleg

A ‘claxonomy’ of Mexico City’s traffic [Multimedia] – Allegra Lab

Infinite games – Young Money

Lang Lang gigs on the St Pancras concourse – Guardian

And finally…“When you have more words to describe the world, you increase your ability to think complex thoughts.”
– Yeonmi Park, In Order to Live: A North Korean Girl’s Journey to Freedom

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Antifragile: Things That Gain from Disorder (Incerto)

In Order to Live: A North Korean Girl's Journey to Freedom

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The past year saw interest rates ascend from the murky depths of near-zero. What began as a gentle wobble expanded like some giant emission from the sub-aquatic crust below calm seas to – ahem – belch violently at the surface, causing shockwaves in all directions.

Hmm, my co-blogger The Accumulator makes these metaphors look so easy. Anyway you get my point.

Early last year I warned this regime change could derail early retirement plans by whacking equities and bonds. Mortgage rates would rise, too. Although on a brighter note cash savings would pay more. Albeit not, as things have turned out, by anything like enough to match inflation.

In the UK we eventually even got a government-induced Mini Financial Crisis, when a spike in bond yields threatened to blow-up the pension system and imperil the banks again.

And to my surprise, this shift is still not over. 18 months ago I’d expected inflation to have eased a lot by now. The longer high inflation lasts, the more likely it gets embedded via higher wages.

Policymakers are similarly bemused, if not panicked. They first talked of “transient” inflation. Then they unleashed a rapid succession of hikes. Then they arguably lowered their guard – only to see inflation fears now pick up again.

Bonds and equities have fallen recently as more and longer-lasting US rate rises are back in sight:

Rate expectationsWhat we are seeing here is the messy sausage-making behind the ugly word ‘normalization’.

We’ve gone back to a world where money is no longer almost free.

As much discussed, the inverted yield curve that has resulted from the rate hikes that got us here seems to predict a recession is coming. (Though the academic behind this signal has doubts).

Most pundits expect a mild slowdown. But I suppose a very deep recession could hammer the outlook for inflation and hence rates. Maybe we can’t entirely dismiss a return to near-zero interest rates – especially if the vast amount of borrowing out there limits how long high rates can endure.

However it looks much likelier to me that we’ve seen the last of policy rates of 0-2% from central banks for a while. That we’re back in a 3-6% market interest rate world.

That has consequences for financial products and services, and for government borrowing and business strategies, too.

Higher borrowing costs will surely inflict a correction on frothy residential property markets. Higher costs will also change how businesses raise money and where and why they invest. Zombie outfits propped up by low rates could finally go bust. There will be other winners and losers.

Banks for instance should do better in a higher rate environment, all things considered. They’ve become masters at finding other ways to make money rather than simply sweating their ‘net interest margin’, which was crushed in the near-zero era. But the alchemy of lending at higher rates and paying savers less is more forgiving at today’s levels. So traditional banking should do markedly better from here. (Barring a true housing crash…)

Elsewhere, any company sitting on a lot of cash will finally have the wind at its back – whereas such prudence was a drag on returns for over a decade.

But these won’t just be conservative companies with strong balance sheets.

We can also expect firms that take a lot of customer cash upfront – and then sit on it for a while – to report higher income from interest earned, too.

Many companies are in this position. It all depends on exactly when they pay their suppliers for whatever they sell their customers. A big delay creates a cash ‘float’ that can generate an income.

Cash in an investment accountHowever the most interesting winners from the return to higher rates from a Monevator perspective are the investment platforms and brokers.

Stephen Yiu – who manages the sometime market-beating Blue Whale Growth Fund – reminded me of this in a recent interview with the Investor’s Chronicle.

Yiu mentions his fund invested in US broker Charles Schwab explicitly on expectations of higher interest rates. That’s because Schwab earns interest on cash left idle in its customer accounts.

When risk-free rates were very low, this ability was redundant.

But with short-term US rates nearing 5% and Schwab boasting $7.5 trillion in assets under management, it’s almost a superpower.

Not all Schwab’s trillions under management will be in the right kind of assets or accounts. I just pulled up that $7.5 trillion total figure from investor relations. Plenty of assets will be, though.

Consider next that Yiu says 10% of customers’ money on Schwab’s platform is typically held in cash. Depending on what exactly you multiply by what, you can quickly forecast a huge income stream here.

All without any of the risks attendant with banking.

I remember seeing a similar dynamic when studying the results of Hargreaves Lansdown many years ago. Interest on customer cash back then contributed nicely to its profits. But this dwindled to nothingness in the years after the financial crisis.

Hargreaves scrambled for a fix for a while. It even worked up a peer-to-peer savings product, though this was ultimately scrapped. But today’s higher interest rates are a panacea.

Hargreaves’ revenue in its latest half jumped 20% thanks to higher interest income and customers holding more cash, presumably spooked by last year’s turmoil. That’s a nice hedge to the bond and equity downturn for the investment platform.

Indeed from its perspective, the best thing a customer can do is hold cash.

From its recent results:

Overall revenue margin [was] between 50 and 55 basis points, primarily reflecting the higher revenue margin on cash resulting from higher interest rates. The margin for each asset class being:

– Funds 38-39 basis points (no change)

– HL Funds 55-60 basis points (no change)

– Shares 30-35 basis points (no change)

– Cash 160-170 basis points

Notice that cash is by far the most profitable asset class for the broker.

How do you rate them?Higher rates are good news for Hargreaves Lansdown and its shareholders, then. But what about for you and me?

Well I was dismayed to hear Schwab’s US customers leave 10% of their money un-invested.

Yet a quick glance at where customers keep their money on Hargreaves Lansdown suggests we’re even worse – with just over 11% of investment account assets held in cash.

To be fair, Hargreaves Lansdown does pay interest on this cash. From 1% to 2.4% right now, depending on what kind of account you have the cash in, and how much you have there in total.

As a quick comparison, rates seem a little higher at Interactive Investors. Whereas it appears that AJ Bell pays a little less. This is just my quick impression, you’ll have to break out the calculator and look at your own balances for an accurate comparison. And of course consider the total cost of investing.

We’ve thought about adding interest rates to our broker comparison table, incidentally, but the wide variety of permutations – and the frequent rate shifts – means it’s not really feasible.

Hence you’ll have to do your own research I’m afraid.

Money for nothingWhatever your broker pays you on cash in an investment account, the point is those rates are likely much far lower than you – and your broker – can earn with the best cash or cash-like options.

Which is exactly why uninvested cash is a profit center for the brokers.

Investment platforms need to make money of course. Even zero commission brokers must get paid to stay in business.

Personally I’d prefer to see higher interest rates at the expense of higher explicit charges, at least with the mainstream platforms. (And lower foreign exchange costs while we’re at it. They’re dreadfully expensive at most platforms.)

However I’m in a minority. As with free banking, we’ve been conditioned to look for cheaper-to-zero explicit costs – and to not think about exactly how we’re the product as well as the customer.

Make any cash in an investment account work for youThe bottom line is that if we’re now back in a permanently higher interest rate world, then you need to have a strategy for what you’re doing with your cash allocation.

We have already seen skirmishes in this battle in the past few months.

For instance, there was the short-lived euphoria over the high interest rate Vanguard was paying – but this has since been reduced.

I suspect the previous charging structure was a legacy of the low-rate era that the investing giant hadn’t got around to updating until customers (and us!) paid attention. See the comments to that article for how things played out there.

We’ve also seen growing interest in money market funds.

My co-blogger is skeptical about these, but I see it a bit differently.

I definitely agree that if you want all the benefits of cash, hold cash. Any funds are riskier, even if those risks are tiny. Both in terms of volatility and risk to capital, but also maybe access in a crunch.

However if you have the bulk of your worth inside investment accounts – and a lot of that is in cash – then the extra income you could get from a money market fund paying you more than 3% versus a broker paying 1.5% could be meaningful.

And given how much we obsess over small fee differences around here, I don’t think we should lightly dismiss the cost of uncompetitive cash holdings. So perhaps putting a portion of whatever you want to hold in cash in to a money market fund could make sense for some.

There are also fixed income ETFs that fit the bill. I own a big slug of the iShares Ultrashort Bond ETF. (Ultrashort in terms of duration, not in terms of ‘going short’!) This holds mostly investment grade corporate bonds close to maturity. It is very stable, can be disposed of in moments, and currently boasts a weight yield-to-maturity of 4.7%, if you believe the iShares factsheet.

Abetter option though if you want to permanently own cash as part of your investment portfolio – to diversify your ‘bond-ish’ 40% or similar of your 60/40 portfolio, say – would be to open cash ISAs again. This way you’d get a tax-free and competitive return on your cash. And that cash would actually behave exactly like cash in a crisis. (That is it would do precisely nothing.)

Just please don’t leave 11% of your portfolio lying around in your investment account as a generic cash balance on a long-term basis. You’re throwing money away.

Or if you do, then maybe also buy some shares in Hargreaves Lansdown or Schwab. That way you might also benefit from such folly!

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The joy of a stocks and shares ISA is that it legally protects your investments from tax on growth and income. That’s more important than ever as tax-free allowances are being slashed or suppressed across the board.

If you hope to build wealth through investing then shielding your gains from unnecessary tax must be a core part of your strategy.

ISAs are tax-efficient ‘wrappers’ created by the UK government to encourage saving. Any investment inside the ISA wrapper can grow tax-free as long as you don’t break the rules.

Stocks and shares ISAs are provided by high street banks, fund managers such as Vanguard, financial advisors, and specialist online brokers or platforms.

You get a new ISA allowance every tax year. You can put the entire amount into a stocks and shares ISA if you wish.

£20,000 is the maximum amount of new money you can pay into a stocks and shares ISA during the tax year 2022-23. (£9,000 in a JISA1). The same limit will apply from the new tax year: 2023-2024. The tax year runs from 6 April to 5 April.

The ISA deadline is 5 April every year. That’s the last day of the current tax year you can use up your allowance. You get a new allowance from 6 April. But you can’t roll over unused ISA capacity from the previous year.

If you’ve left things late then know it’s enough to have the cash taken off your debit card and inside your ISA by close of business on 5 April. You don’t need to have actually invested the cash for it to qualify for tax-free protection.

Why open a stocks and shares ISA?A stocks and shares ISA combines three critical features:

The ability to invest in assets that are expected to grow faster than cash.
Legally recognised tax protection. You don’t have to worry about HMRC handing you a large bill because you invested in some sketchy offshore caper.
Instant accessibility. You can invest in liquid holdings that can be sold to meet unforeseen difficulties or other life events that occur before you reach pension age.

In short, ISAs are a private investor’s top tax-protection shield, along with pensions.

Find out more about the benefits of ISAs vs SIPPs.

Which taxes are not paid in a stocks and shares ISA?The main taxes that you do not have to pay on investments in a stocks and shares ISA are:

Income tax on interest – as earned on bonds and bond funds.
Dividend income tax – as paid by shares, equity funds, and property funds.
Capital gains tax on profits – as paid on the growth in value of taxable assets when you sell them.
Inheritance tax – although it’s complicated, and depends on the ISA passing to a spouse or civil partner who’s not been estranged from the deceased.
Interest and dividends paid straight out of your ISA are not taxed.
ISA withdrawals aren’t taxed, unlike with a pension. (You will pay a penalty if you withdraw from a Lifetime ISA at the wrong time).

Even more reasons to use an ISAInvesting in a stocks and shares ISA is a no-brainer, even if you think your holdings are too small to be caught up in the taxman’s net.

Many providers charge you no more for holding an ISA than they do for keeping your assets in a taxable account.
Though most of us start out small, your investments can grow surprisingly rapidly. Over the years you will outstrip your ability to manage everything within your tax allowances.
Taxes can go up. On top of explicit increases in dividends and capital gains, other UK tax thresholds are being frozen until April 2028. This is a stealth tax, so use your tax shelters while you can.
You don’t even have to tell HMRC about your ISA transactions. (Believe me, if you ever have to fill in a tedious capital gains tax form, you’ll fall to your knees with thanks that all your investments are in an ISA.)

ISAs can be mission criticalIf you’re on a mission to achieve financial independence (FI) before your minimum pension age2 then stocks and shares ISAs will accelerate you towards your goal.

The best course for most will be to combine ISAs and SIPPs to achieve the FI dream. ISA investments can bridge the gap between your FIRE3 date and your minimum pension age.

The minimum pension age for accessing your personal pension is currently 55. But the government has confirmed it will rise to age 57 at some point in 2028. Thereafter the minimum pension age is due to be set to ten years before your State Pension age.

A stocks and shares ISA is also a great place to stash your pension’s 25% tax-free lump sum so that you can expand the amount of income you can take without being pushed into a higher tax bracket.

Investment ISA typesYou can hold investments in the following types of ISA:

Stocks and shares ISA
Lifetime ISA (choose a stocks and shares version not cash)
Junior ISA (again, shares not cash)

ISA providers call stocks and shares ISAs by various names including:

Shares ISA
Self-Select ISA
Ready Made ISA
Share Dealing ISA
Investment ISA
Workplace ISA
AIM ISA

They’re all stocks and shares ISAs. But they are given different marketing labels depending on how the provider is trying to appeal to consumers.

A stocks and shares ISA may also be a flexible ISA. This means you can potentially replenish withdrawals you make without running down your ISA allowance.

You can invest in a stocks and shares ISA from age 18 onwards by opening an account with your chosen platform (bank, fund manager, IFA or similar).

We’ve put together a list of providers in our cheapest online broker table. These providers enable you to invest in a DIY stocks and shares ISA. You can see who offers a flexible stocks and shares ISA in the left-hand column.

Stocks and shares ISA rulesYou can:

Have as many stocks and shares ISAs as you like, so long as you don’t put new money into more than one per tax year.
Split money across a stocks and shares ISA, lifetime ISA, cash ISA, and innovative finance ISA, provided you don’t put in more than £20,000 between them,4 nor open more than one of each type, in the same tax year.
Transfer money from previous years’ ISAs (of any type) into multiple stocks and shares ISAs with any provider. And vice versa.

Transferring old ISA money or assets does not:

Use up your ISA allowance for the current tax year
Break the one-type-of-ISA-a-tax-year rule

You can transfer any amount of your previous years’ ISA’s value. Either transfer the whole lot into one ISA, transfer a portion of it into several ISAs, or do any other combo you desire.

How to transfer an ISAYou must transfer the whole balance if you’re transferring your current tax year’s stocks and shares ISA

You can transfer it into a different type of ISA – provided you haven’t already opened one of that type this tax year.

In that scenario, you can also open a new stocks and shares ISA later that tax year.

This is an exception to the one-type-of-ISA-a-tax-year rule.

It works because transferring from one type of ISA to another means that you now count as subscribing to the receiving ISA type.

For example, you transfer from a stocks and shares ISA to a cash ISA. You can now open a new stocks and shares ISA without falling foul of the ‘one type of ISA per tax year’ rule.

Always transfer an ISA to retain the tax-free status of its assets. Don’t withdraw cash and plop it in a new ISA – that uses up your ISA allowance!

Transfer assets in specie (this avoids them being sold to cash) if you are given the option. In specie moves are also known as re-registration.

See our comprehensive guide on the ISA allowance rules.
How to transfer a stocks and shares ISA.

Other ISA funding rulesYou can’t invest new money in a workplace ISA and a stocks and shares ISA.

If you invest £9,000 per tax year in a JISA for each of your children that does not reduce your own ISA allowance.

Most stocks and shares ISAs have minimum required contributions. They are often as low as £50.

Replacing cash withdrawn from a flexible stocks and shares ISA does not use up your ISA allowance. However you can’t replace the value of shares, or other investment types, that you moved out of the account.

It’s worth checking your ISA’s T&Cs whenever you choose a product. Not all of the government’s ISA rules are mandatory. ISA managers do not have to support all features.

Best ISA fundsThe main investment vehicles you can include in a stocks and shares ISA are:

Mutual funds such as OEICs and Unit Trusts including money market funds
Exchange Trade Products such as ETFs and ETCs
Investment trusts
Individual company shares
Individual government and corporate bonds

The government maintains a comprehensive list of the complete menagerie.

If you are new to investing then our passive investing HQ can explain more.

Remember that the assets listed above are riskier than cash – you can get back less than you put in.

It’s worth regularly reflecting on how much risk you might be able to handle as you build your investing portfolio.

Index trackers are an investment vehicle that combine simplicity and affordability. They are recommended by some of the best investors in the world – and us.

See our list of particularly useful low-cost index funds and ETFs.

The Financial Services Compensation Scheme (FSCS) provides some investor compensation should your ISA or investment manager go belly up. Do take a look at the link. The scheme is convoluted, to say the least.

Stocks and shares ISA costsYou can expect to pay stocks and shares ISA investment fees that cover:

Your ISA provider’s management costs
The cost of owning investment funds
Dealing fees for trading investments in the open market
Fees for special events such as transferring your ISA

All fees should be transparently laid out by your ISA provider and investment fund managers.

Charges that can be paid from monies held outside of your ISA, if your provider agrees, include:

ISA provider’s management costs
Fees for special / one-off events, such as closing your account

Charges that must be paid from funds held within the ISA include:

Dealing fees
The cost of owning investment funds

A flexible ISA doesn’t enable you to replace the cost of ISA charges against your allowance.

Beware of transfer fees that can rack up when your provider charges you ‘per line of stock’. For example they might charge you £15 per company stock and investment fund that you own.

Tax efficiencyYou can’t transfer most unsheltered assets straight out of a taxable account and into your stocks and shares ISA wrapper.

You generally have to sell the assets first and buy them again inside your ISA. This is colloquially, if not popularly, known as Bed and ISA.

Selling an unsheltered investment can cost you capital gains tax on your profits. But you can duck that by staying within your capital gains tax allowance and defusing your capital gains.

You can transfer employee share save scheme shares directly into an ISA in some circumstances.

If you want to invest more than you can squeeze into your annual ISA allowance, then research tax efficient investing to avoid building up a capital gains tax time bomb.

Inheriting a stocks and shares ISAYour surviving spouse or civil partner can receive your ISA assets tax-free upon your death. Although do check that the T&Cs of your particular stocks and shares ISA allow for it to remain tax-free and invested after your passing.

++Monevator Minefield Warning ++ The rules below apply equally to spouses and civil partners but we’ll just refer to spouses for brevity’s sake. Unmarried couples do not benefit from these special inheritance rules. See our article on how unmarried couples can protect their finances.

A surviving spouse is given a one-off ISA allowance that equals the value of your ISAs.

This is called the Additional Permitted Subscription (APS).

A spouse uses the APS to add the value of their deceased partners’ ISAs into ISA accounts held under their own name.

For example, if you die with ISA assets worth £50,000, then your spouse is entitled to an APS of £50,000.

Plus they get their usual annual ISA allowance on top.

The APS effectively means your spouse benefits from the tax-free status of your ISA assets after your death.

The APS is worth the higher of:

Your ISA’s value at the date of your death
Or the value of your assets when the account is closed. (This assumes no part of the APS has been used up to that point)

Surprisingly, your spouse still benefits from the APS even if your ISAs are willed to someone else.

In this scenario, your partner can fund their APS from their own money or other inherited assets.

That said, under most circumstances, a surviving spouse will fill their APS simply by transferring their deceased partner’s ISA assets.

The APS must be used no later than:

Within three years of the date of your death

Within 180 days of the completion of the administration of your estate, if that’s later

The surviving spouse does not have to wait until the estate is settled to use the APS though.

Managing an inherited ISAAssets within the deceased’s ISA can be managed by their personal representatives before it is closed. However they can’t make new contributions into the account.

The ISA continues to grow tax-free until the earlier of:

Completion of the administration of the estate.
Closure by your executor
Three years and one day after your death. The account is automatically closed at this point

If you have multiple ISAs with different providers then your spouse’s APS is divided between them according to the value of the ISAs lodged with each firm.

Your spouse must claim each portion of their APS from each ISA provider involved.

Again, check that the various providers of your ISAs subscribe to these rules as described. Terms can vary.

More ISA inheritance rules(Because there isn’t enough to think about already…)

The other main wrinkle is that your spouse can only receive assets in specie from a stocks and shares ISA by transferring them to the same provider that you held them with.

They can then transfer the assets to another manager once held in their own name.

Another clause is that assets transferred in specie must be the ones held on the date you were told of the death of the investor. (Some might see this rule as pretty heartless. However I don’t know about you but the very first thing I want to know after hearing the news of my partner’s death is the list of non-cash assets they’ve got tucked in their ISAs. Let’s cut to the chase!5)

In specie transfer must be made within 180 days of the assets passing into the beneficial ownership of the surviving spouse.

Your ISAs do not pass on their tax-free status to anyone other than your spouse.

The tax benefits do not apply if you and your surviving partner were not living together on the date of death, or were legally separated, or in the process of becoming legally separated.

AIM-ing for even moreSome wealth managers and platforms market AIM ISAs that twin the advantages of a stocks and shares ISA’s tax efficiency with the inheritance tax-elusiveness of Alternative Investment Market (AIM) shares.

Some but not all AIM shares qualify for inheritance tax relief under peculiar government rules that are subject to change.

An AIM ISA is:

Risky
Not guaranteed to work out
Subject to high minimum investments, which add a naughty elite frisson to the escapade

Check out the links above if you need ‘em.

Stocks and shares ISAs aren’t just for the richSome people think ISAs are a rich person’s concern. That’s because few have experience of paying capital gains tax, or even income tax on share dividends.

However even modest savings can really add up to a big portfolio in a bull market, at which point the tax protection is invaluable.

Shielding your investment returns from tax like this can make a huge difference to your end result from investing.

Finally, if you want to optimise your ISA to the max then take a look at our cheapest stocks and shares ISA hack.

Take it steady,

The Accumulator

Junior ISA for kids.
The moment you can first crack open your personal pension.
Financial Independence Retire Early.
Or more than £4,000 in the case of the lifetime ISA.
Sarcasm.

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The ISA allowance1 is the maximum amount of new money you can put into the range of tax-free savings and investment accounts that make up the ISA family.

The ISA allowance for the current tax year to 5 April is £20,000.

The tax year runs from 6 April to 5 April the following year.

ISAs are a brilliant vehicle for growing your wealth tax-free. But the rules are complicated, and seemingly made up by a bureaucrat with a grudge against humanity.

This article will help you make the most of your ISA allowance.

We’ll iron out the wrinkles leftover from the government’s ISA pages.

What is an ISA?ISA stands for Individual Savings Account. It’s the UK’s most important tax-free account for savings and investments that you want to access before retirement age.

ISAs are called tax-free wrappers because they legally protect the assets inside the account from:

Income tax on interest paid by cash, bonds and bond funds.
Dividend income tax on dividends paid by shares and equity funds.
Capital gains tax paid on the growth in value of assets such as shares, bonds, and funds.

You don’t even have to declare your ISA assets on your self assessment tax return. This can save you a bellyful of tax paperwork.

Your assets remain tax-free as long they’re held in an ISA account. And so long as you don’t have the cheek to die.

You don’t even lose out if you move abroad. (At least, not from the perspective of the UK government…)

Unlike a pension, your ISA funds are typically2 accessible at any time.

You’re also not charged income tax on withdrawals from an ISA – again unlike a pension. So there’s no danger of being pushed into a higher tax bracket by the wealth you accumulate in your ISA.

Read up on ISAs Vs SIPPs to decide how to best allocate between them.

ISA accounts: what types are there?

New Help to Buy ISAs are no longer available. If you have one already you can continue to save into it until 30 November 2029.

What about the NISA? NISA stands for New Individual Savings Account. This term described the new-style ISAs brought in by rule changes in 2014. Today every ISA follows the NISA rules, so the jargon is obsolete.

How much can I put in an ISA in 2022 – 2023?You can save up to £20,000 of new money into your ISAs during the tax year 6 April 2022 to 5 April 2023. That will also be the limit during the tax year 2023 – 2024.

You can put all £20,000 of your ISA allowance into one ISA5 or split it across any combination of the following ISA types:

Cash ISA
Stocks and shares ISA
Lifetime ISA (£4,000 annual limit)
Innovative Finance ISA

The rule is that you can only pay new money into one of each ISA type per tax year.

For example you could put £20,000 into a stocks and shares ISA and nothing into any other type.

Or you might split your £20,000 like this:

Stocks and shares ISA = £14,000
Lifetime ISA = £4,000
Innovative Finance ISA = £1,000
Cash ISA = £1,000

Or any other combination you like. Just so long as you don’t pay in more than £20,000 within the tax year, and you don’t put new money into more than one of each ISA type.

What about money in previous years’ ISAs? That money does not count towards your annual ISA allowance for the current tax year.

For clarity’s sake, we’ll refer to assets in your previous years’ ISAs as old money. Assets in the current tax year’s ISAs we’ll term new money.

Interest, dividends, and capital gains earned on assets already held within an ISA do not count towards your ISA allowance.

Your £20,000 ISA annual allowance is a ‘use it or lose it’ deal. You can’t rollover any of it into the following tax year.

The ISA deadline for using up your allowance this tax year is 5 April 2023.

More ISA wrinkles* Each ISA can be held with the same or a different provider. * Payment into a JISA uses up the child’s allowance, not yours. * Some providers have all-in-one cash ISAs. With these you can split new money between instant access and fixed-rate options, within a single ISA wrapper. That means you only count as contributing to a single cash ISA. * The Help to Buy ISA counts as a cash ISA. If you pay new money into your Help to Buy ISA then you can’t also pay new money into a Cash ISA. A few providers include their Help to Buy ISA within their all-in-one cash ISA. * A workplace ISA counts as a stocks and shares ISA. If you’re one of the three Britons6 who has one, then you can’t pay new money into a standard stocks and shares ISA, too. See below for our cunning workaround. * You can only claim the government bonus when buying your first home from a Help to Buy ISA or a Lifetime ISA. Not both.

Withdrawing from an ISA: the flexible optionIf you withdraw money from your ISA, can you replace it and not reduce your ISA limit?

Yes, but only if your ISA is designated as ‘flexible’.

If your ISA is not flexible (ask your provider) then a withdrawal reduces your tax-free ISA savings as follows:

You put £10,000 into your ISA. That reduces your ISA allowance to £10,000.
Next you withdraw £5,000.
You can only contribute another £10,000 into your ISAs this tax year.
Do so, and you’ll have added £15,000 to your ISAs in total by the end of the tax year.

Obviously £15,000 is less than £20,000, and so you’ll not have maximised your annual allowance.

Flexible ISAs get around this problem. More on them below. Again, ask your provider if your ISA is flexible or check its key features documentation.

How many ISAs can I have?You can have as many ISAs as you like. Or as many as providers are willing to open for you.

However you just can’t contribute new money to multiple ISAs of the same type in the same tax year.

That rule remains the same whether we’re talking about a freshly opened ISA or one that you hold from previous years.

You can put new money into a previous year’s ISA if your ISA provider allows.

If you put new money into a previous year’s ISA of one type then you can’t put new money into another ISA of the same type in the same tax year. You’d have to wait until the next tax year.

For instance, you put money into your existing shares ISA from earlier years. You cannot now put new money into a different shares ISA for the rest of this tax year.

The government calls this the one-type-of-ISA-a-tax-year rule. (Snappy!)

However you can open new ISA accounts by transferring old money into them from previous years’ ISAs.

You could open, say, ten stocks and shares ISAs with multiple providers by transferring old ISA money into them. Let sanity be your guide.

That leads to a workaround for moving new money into more than one ISA of the same type. More on this below.

ISA transfersAn ISA transfer enables you to officially switch an ISA’s holdings to another provider. This way you avoid losing the tax exemption on your assets when moving them.

The transfer rules for any ISA opened in the current tax year are straightforward:

You must transfer the whole balance of your ISA…
…and you can transfer it at any time to another provider.
You can also transfer it to any other type of ISA, or even the same type. (Let’s live a little!)
If you transfer from one type of ISA to another, then you count as subscribing to the receiving ISA type. For example, you transfer from a cash ISA to a stocks and shares ISA. You can still open a new cash ISA without contravening the ‘one type of ISA per tax year’ rule.
If you transfer from a Lifetime ISA to a different ISA type before age 60, you’ll have to pay a nasty penalty charge.
Beware any transfer fees imposed by your current ISA provider.
Transfers into a Lifetime ISA must not exceed the £4,000 current tax year limit.

The golden rule with any ISA move is always to transfer your money. Don’t just go “sod it!” and withdraw your cash in a flounce. If you transfer your ISA to another provider, your assets retain their tax-free status. If you just withdraw the money they don’t.

Find out how to transfer a stocks and shares ISA.

ISA transfer rules for previous years’ ISAsYou have more options with ISAs opened in previous tax years. You can transfer any amount from any of your old ISAs to the same or any other type of ISA.

Any number of your old ISAs can be consolidated into a new ISA of the same or different type.
Any of your old ISAs can be split by transferring a portion of the balance into multiple ISAs of the same or different types.
You can transfer to the same or different providers.

Transferring previous years’ ISAs leaves your current tax year’s allowance untouched.

For example, moving £40,000 from an old ISA into a new ISA still leaves you with a £20,000 ISA allowance for the current tax year.

You could transfer £4,000 into this year’s LISA from an old ISA (of any type), gain the government bonus, and leave your £20,000 allowance entirely intact.

This move maxes out your LISA allowance for the tax year. But you must not then exceed that £4,000 LISA limit by transferring more cash into the LISA during the current tax year.

As before, make sure you transfer an ISA. Employ the new provider’s ISA transfer process to maintain your ISA money’s tax-free status. Don’t withdraw cash or re-register assets using any other method.

As you can see, your old ISA optionality amounts to a near Bacchanalian free-for-all.

Which brings us to our heavily trailed workaround for the one-type-of-ISA-a-tax-year rule.

Hang on to your hats!

Getting around the one-type-of-ISA-a-tax-year ruleLet’s say you wanted to split £20,000 between two new stocks and shares ISAs.

You could do it like this:

£10,000 into a new stock and shares ISA.
Transfer £10,000 from previous years’ ISAs into another new stocks and shares ISA.
Replace the transferred old ISA money by funding a new cash ISA with the remaining £10,000 of your current tax year ISA allowance.

Obviously this manoeuvre requires you having, say, an emergency fund of cash tucked away in your old ISAs. But that’s a good idea anyway.

If you don’t want to open a new cash ISA then you can choose any of the other types except a new stocks and shares ISA. (That’s because of the one-type-of-ISA-a-tax-year rule.)

Flexible ISAsFlexible ISAs let you withdraw cash and put it back in again later the same tax year. Their special sauce is they allow you to do this without grinding down your current tax year’s ISA allowance or reducing how much you’ve saved tax-free.

The following ISA types may be flexible:

Stocks and shares ISA
Cash ISA
Innovative Finance ISA

Flexibility is not an inalienable right. The ISA provider has to decide to offer it and be prepared to deal with the administrative faff. Providers may offer flexible and inflexible versions of the same ISA type.

This example shows how the flexible ISA rules work:

ISA allowance = £20,000
Contributed so far = £10,000
Remaining contribution = £10,000
You choose to withdraw = £5,000

In this case can still pay £15,000 into your flexible ISA before the ISA deadline at the end of the tax year because:

Remaining ISA allowance = £15,000 (£10,000 remaining contribution + £5,000 replacement of the withdrawal.)

If your ISA was inflexible then your remaining ISA allowance would be just £10,000. In other words, you couldn’t replace the withdrawn amount. And it would have lost its tax-free status.

Flexible ISAs: contributing factorsContributions made to an ISA in the same tax year as withdrawals work in this order:

Replace the withdrawal.
Reduce your remaining ISA annual allowance.

Withdrawals from an old flexible ISA can be replaced in the same tax year. This won’t reduce your current ISA allowance, provided the ISA is no longer active.7

Flexible ISAs containing assets from previous tax years and the current tax year work like this:

Withdrawals

From money contributed in the current tax year.
From money contributed in previous tax years.

Replacement contributions

Replace previous tax year’s withdrawals.
Replace current tax year withdrawals.
Reduce your remaining ISA annual allowance.

All replacement contributions must happen in the same tax year as the withdrawal.

Some providers say the withdrawal has to be replaced in the same ISA account you took it from.

More quirky than an octogenarian British actorThe ISA rules enable you to put your withdrawn money back into different ISA type(s) with the same provider, if they make that facility available.

Check your provider’s T&Cs. Or send them thousands of emails in BLOCK CAPITALS until they respond.

A flexible stocks and shares ISA allows you to replace the value of cash withdrawn. You can’t replace the value of shares, or other investment types that you moved out of the account, should they afterwards change.

You can sell down your assets, withdraw the cash, and then replace that cash later in the tax year, and buy more assets with it.

Dividend income should also be flexible in a flexible ISA scenario.

If you transfer your flexible ISA to another provider, then check its product is also flexible.

You may lose the ability to replace withdrawals if you don’t replace them before you transfer a flexible ISA. Again, this is determined by your provider’s T&Cs rather than the rules. (Subject them to a paid Twitter campaign to get an answer on this one.)

If your withdrawals result in your account being closed, your provider can allow you to reopen your flexible ISA in the same tax year and replace the money. That applies to old and new ISA accounts.

Again, check with your provider. (Via a billboard installed outside their office if need be.)

Flexible ISA hack to build your tax-free ISA allowance1. Open a flexible, easy access cash ISA that accepts ISA transfers. 2. Transfer your non-flexible old ISAs into the flexible ISA. 3. Your flexible ISA now accommodates the value of the old ISAs – say £40,000. 4. If your flexible ISA doesn’t pay table-topping interest then withdraw your cash and spread it liberally among the humdinger savings accounts of your choice, or an offset mortgage. 5. Move your cash back into the flexible ISA by 5 April of the current tax year. Fill as much of the current year’s ISA allowance as you can, too. For instance another £20,000. 6. In our example, you now have £40,000 + £20,000 = £60,000 tax-free and flexible. 7. From April 6 of the new tax year: withdraw your cash and liberally spread it. 8. Repeat as required.

This method builds up a large and flexible tax-free shelter. One that could prove valuable later in life, when you have more money to tuck away.

For example, perhaps it could become a place to shelter and grow your 25% tax-free pension cash when you take it. This could be instantly transferred into a stocks and shares ISA, come the day.

Or maybe you’ll sell a business, or receive some other windfall.

Watch out for the £85,000 FSCS compensation limit (see below). Open a new flexible ISA with a different authorised firm before you go over that line.

What happens if you exceed the ISA allowance?HMRC should get in touch if you exceed the ISA allowance. You may be let off for a first offence, but otherwise it will instruct your ISA provider on what action to take.

Action is likely to include your extraordinary rendition to an offshore black site where you will be forced to read HMRC compliance manuals for the rest of your life.

Alternatively, HMRC may require overpayments and excess income to be removed from your account. And also invite you to pay income tax and capital gains (potentially on all assets in the ISA) from the date of the invalid subscription until the problem is fixed.

Eek!

Your ISA provider may also charge you a fee for the hassle.

You can similarly get into hot water for dropping new money into your ISA as a UK non-resident, or for breaching the one-type-of-ISA-a-tax-year rule, or for breaking the age restrictions.

You can call HMRC on 0300 200 3300 to discuss all this.

Just don’t expect them to admit to the Deep State stuff. Open your eyes sheeple! [Editor’s note: we’re joking.]

FSCS compensation schemeWhat if your ISA provider goes bust and your money can’t be recovered? In that case the Financial Services Compensation Scheme (FSCS) waits in the wings.

Cash – You can claim up to £85,000 compensation on cash held with each authorised firm.
Stocks and shares – It’s more complicated, quelle surprise. But you can claim up to £85,000 compensation on investments held with each authorised firm.
Innovative Finance – Not covered by the FSCS. You’re on your own.

Watch out for the definition of an ‘authorised firm’. Often multiple brand names sit under the same authorised firm umbrella.

For example, if you have cash at HSBC and First Direct then you’re only covered for £85,000 across both. They are one and the same authorised investment firm.

Investments parked at the same bank should be covered for another £85,000. That’s on top of your cash.

The Bank of England provides a list of authorised firms and their ultimate parents. It appears to be updated every couple of years.
Check the FCA’s Financial Services Register.
Firms with matching FRN numbers (also known as registration numbers) are sister brands that only provide you with £85,000 of compensation cover between them.

Inheriting an ISAThe tax-free benefits of an ISA can be passed on to a surviving spouse or civil partner.

(We’ll refer to a ‘spouse’ in the rest of this section but the ISA inheritance rules apply equally to a civil partner. Unfortunately they do not apply to unmarried partners).

Upon death, all types of ISA (except a JISA) transform into a ‘continuing account of a deceased investor’.

This so-called ‘continuing ISA’ can then grow tax-free until the deceased’s affairs are settled.

The tax benefits of the deceased ISAs transfer to their spouse using an Additional Permitted Subscription (APS).

The APS is a one-time ISA allowance that enables the surviving spouse to expand their ISA holdings up to the value of the deceased’s ISA accounts.

By this mechanism, the tax-free status of the deceased’s ISAs are passed on to their spouse.

Unfortunately, the rules descend into a bureaucratic quagmire from here.

ISA inheritance rules for the Additional Permitted SubscriptionA surviving spouse qualifies for the APS even if the ISAs are actually willed to someone else.

However, a spouse does not qualify if the couple are not living together at the time of death, or the marriage has broken down, they are legally separated, or in the process of being legally separated.

The value of the APS is the higher of:

The ISA’s worth at the date of death
Its value when the continuing ISA account is finally closed (assuming part of the APS hasn’t already been used)

The APS must be claimed separately from each of the deceased’s ISA providers.

You can choose which of the two valuation options above apply to each ISA provider. You don’t have to pick one option that applies across the board with every provider

The APS can be used from the date of death.

Although you’d normally expect an APS to be funded by the inherited ISA assets, this is not necessary. An APS can be fulfilled by any assets the spouse owns.

The APS must be used within:

Three years from the date of death
180 days after the completion of the administration of the estate, if that’s later.

The APS does not interfere with the spouse’s own ISA allowance. They get that as normal.

APS subscriptions count as previous tax year subscriptions.

Therefore a spouse cannot break the one-type-of-ISA-a-tax-year rule when they use their APS. For example, by filling a new stocks and shares ISA after already opening one in the current tax year.

You should check the terms and conditions of all your ISAs to ensure they adhere to APS provisions. ISA providers aren’t automatically obliged to comply with the APS rules.

APS rules per ISA providerOne common restriction is that the spouse must use their APS with the same provider that runs the deceased’s ISA account. This leads to extra complications, as we’ll cover below.

As mentioned, the APS is divided into separate amounts that align to the value of the deceased’s continuing ISA accounts – as held with each of their providers.

For example:

A continuing ISA worth £100,000 is held with provider A
A continuing ISA worth £50,000 is held with provider B

The surviving spouse can now fund up to £100,000 of APS in ISAs with provider A, and up to £50,000 with provider B.

You can’t fill ISAs worth £75,000 with both providers. You can only ‘spend’ up to the limit of each APS per provider.

However, you can split each APS between any number and type of ISA per provider. (Although there are restrictions on the Lifetime ISA.)

You can fill both new and existing ISAs with each provider.

Transferring inherited ISA assetsIn specie transfers from a continuing stocks and shares ISA must be made within 180 days of the assets passing into the beneficial ownership of the surviving spouse.

The in specie transfer can only be made to a stocks and shares ISA held by the spouse with the continuing ISA’s provider.

The assets must be the same as those held on the date of death.

Alternatively you can sell the investments for cash. The money can then be used to fund the APS with slightly fewer restrictions.

You can always transfer your ISAs to another provider as normal – after you’ve used your APS.

Lifetime ISA APS restrictions You can’t open a new Lifetime ISA unless you’re aged between 18 to 40.

You can’t pay into an existing Lifetime ISA unless you’re under 50.

The APS does use up your £4,000 annual Lifetime ISA allowance.

You can’t pay APS into a Lifetime ISA if you’ve already paid into one in the current tax year.

A continuing ISA’s tax-free growth limitsBefore the deceased assets are transferred via the mechanism we’ve just described, they grow tax-free in continuing ISAs until:

Completion of the administration of the estate
The accounts closure by the deceased’s executor
Three years and one day after the date of death. Then the account can be closed by the ISA provider

The earliest of these dates applies.

The value of the deceased’s ISA holdings count towards their estate. The tax-free benefits are only passed to a surviving spouse.

Inheritance ISAs are a marketing label not an additional type of ISA. Every ISA can be inherited as described above. But please check your provider’s T&Cs for additional restrictions.

What happens to my ISA if I move abroad?You can still put new money into your ISA for the remainder of the tax year when you stop being a UK resident. But you can’t contribute new money again until your residential status changes back.

Your ISA assets will continue to grow free of UK tax. But watch out! Your new country of residence may demand a slice.

In addition:

You should still be able to transfer ISAs without losing your tax exemption.
Ditto for withdrawing money from a flexible ISA and replacing it.
Ditto for inheriting an ISA.

Check with your provider before doing anything, just to be safe.

You should also tell your ISA provider when you’re no longer a UK resident. The UK means England, Wales, Scotland, and Northern Ireland. The Channel Islands and the Isle of Man are excluded.

If you split your time between the UK and other territories you can do a residency test. This will determine your status. Fun!

You don’t lose your ISA annual allowance if you’re a Crown employee serving overseas, or their spouse / civil partner.

Any questions?Well, we’re sure this brief post has cleared everything up… But do let us know in the comments if we’ve missed a bit.

Take it steady,

The Accumulator

Note: This article on the ISA allowance was updated in March 2023. Reader comments below may refer to an older version. Check the date to be sure.

Also known to the government but to nobody else as the ‘subscription limit’.
Exceptions: funds in a Junior ISA before the child reaches age 18, Lifetime ISA, Innovative Finance ISA loan lock-ins, and fixed-term/regular saver Cash ISAs where you’ll pay various penalties for early release.
Max per year, per person.
per child
The max contribution into a LISA is £4,000 a year.
Disclaimer: exaggeration for comic effect.
That is to say you’re no longer filling it with new money.

The post The ISA allowance: how it works and how to use it appeared first on Monevator.

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What caught my eye this week.

Now and then an investing writer will take aim at a staple of the genre – all those articles proclaiming the ‘miracle’ of compound interest, which detail how Precocious Pete who starts saving at 20 will trounce Tardy Tarquin who doesn’t get going until 40.

Nonsense, the doubters say. Pete hasn’t got a bean to spare, and Tarquin is rolling in it. Compound interest won’t do much for either of them (apparently). Instead it’s all about savings.

It’s basically shock jock blogging. Slaying the sacred cow to the awed gasps of onlookers.

And too bad if those onlookers get splattered in blood.

Okay, so there’s some truth in what these iconoclastic articles – which at best champion saving over investing, and at worst throw in the towel – say.

If you have £1,000 and you compound it by 10%, you still only have £1,100. Nobody is retiring on that.

In contrast nearly all 20-year olds reading Monevator can find £100 down the back of the sofa.

Ergo, like a complication-free hookup, compound interest is a myth that will do little for you until you’re too old to be bothered with it.

So forget about it! Save more when you (hopefully) earn a lot more in your 50s. Go to the beach instead.

I paraphrase but that’s the gist.

Them versus usI’ve noticed these articles tend to be written by three kinds of people:

Young people with little yet in the way of assets who wonder where’s their snowball?
Older people who stumble into income or assets in later life, which transforms their finances.
(Usually much) older people who never saved enough to retire early, and seem cross about it.

Notably not on the list are people who did start saving in their 20s. Who saw their snowball. And who now tell you compound interest can do a lot of heavy lifting.

People like me!

I was a regular saver from my teens. I’ve never earned six-figures, and most years didn’t trouble the higher-tax bracket (albeit later thanks to pension contributions). I mostly lived in London, which is expensive.

On the other hand I didn’t have kids, a car, or a drug habit.

And by the time I hit my 40s, my portfolio’s average annual return – the compound interest bit – was more or less equal to my earnings, net of tax.

Undoubtedly I made sacrifices to get there. Maybe I was too frugal. There are reasons why what seemed to me a generously-provisioned life would cause others to chafe. I’m a good enough (active) investor, which also helped.

But none of that disproves the impact of compound interest.

Roll the calendar another ten years and even despite a horrible 2022 – for my portfolio, my earnings, and my mortgage rate – I’m still (touch wood) set fair.

Savings played a big part in this journey. But I’ve never earned enough to be set without compound interest helping out too.

For sure I’m glad the books I stumbled upon in my 20s hit me over the head with a graph that went up and to the right, thanks to compound interest.

Rather than one that told me not to bother – not until I’d climbed over enough rats to get high enough up the greasy pole to stick at it and save in my 50s, 60s, and who knows maybe into my 70s.

Saving versus interest versus timeIn my view savings and investing – and fitting your budget to suit your goals – are all important.

Doh, you say. (Unless you’re drafting your anti-compound interest post as we speak?)

Elsewhere ever-reliable Nick Maggiulli tackled this savings/investing duality in a novel way this week, with what he calls the ‘Wealth Savings Rate’.

It’s a way of seeing how your pot will grow (double) through adding new money via savings, as well as through compound interest.

Early on your Wealth Savings Rate is high. New money moves the dial materially.

But later, a whole year of extra savings might amount to one or two percent of your portfolio’s value. It’s the compounding that’s motoring you forward. By then you can run the numbers on leaving work if you want to.

Nick shows how long it will take to double your money under different saving and return scenarios:

It’s a cool lens he’s come up with, and one I can’t remember looking through this clearly before. Check out the full post on Nick’s blog, Of Dollars and Data.

And do keep saving and investing if you want to be financially independent sooner rather than later!

Have a great weekend.

From MonevatorHow quickly do equities and bonds bounce back after a bad year? – Monevator

UK dividend tax explained – Monevator

From the archive-ator: Status anxiety – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Energy Price Guarantee expected to be extended in April – BBC

Chip giant Arm to list in New York in latest blow to London – CNBC

Pensions dashboard hit with further delays – AltFi

Northern Ireland Brexit deal: at-a-glance – BBC

What is the new Northern Ireland deal? [Video] – Sky News

Oops! Sunak makes the case for our EU membership in selling new deal [Video] – Via Twitter

UK government made £2.4bn from ‘mortgage prisoners’ claims Martin Lewis – Guardian

Since Brexit, foreign interest in owning UK property has cooled – Klement on Investing

Products and servicesWere sub-4% mortgage rates a flash in the pan? – This Is Money

Seven first-time buyer schemes still available after Help to Buy closes – Which

Vanguard to close UK financial planning arm – FT Adviser

Get an interest rate of up to 7% on your cash savings – Guardian

Is your credit card statement as clear as it should be? – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Meet the smart meter addicts – This Is Money

How to save money on books – Be Clever With Your Cash

Homes for sale in foodie hot spots, in pictures – Guardian

Comment and opinionWhy companies are fleeing London’s stock market [Search result] – FT

Do stocks always outperform bonds eventually? – Verdad

The world’s most common forecasting mistake – Klement on Investing

“How did I mess up? I’ve reached 60 with more money than I need to retire” – Humble Dollar

One blogger’s returns from 20 years in residential London property… – FireVLondon

…though rising rates have now sent the UK property market into reverse – Guardian

Frugal or miserly? – Humble Dollar

Keeping investing fees low matters – Dividend Growth Investor

FIRE, Fat FIRE, & Me – FAT’s Substack

‘Generational wealth’ needs a rebrand – This Is The Top

Defending share buybacks mini-specialBuffett on buybacks – Roger Lowenstein

Stop demonizing stock buybacks – The Atlantic via MSN

Naughty corner: Active anticsWhy regret and good investing don’t mix – Intrinsic Investing

Neil Woodford’s epic rise and fall [Podcast] – A Long Time In Finance

How you could [have] become an ISA millionaire via investment trusts – This Is Money

Diving into Warren Buffett’s latest letter – Rational Walk and Fully Invested

US risk-free bills yield more than a 60/40 for first time in 20+ years – Bloomberg via Yahoo Finance

Kindle book bargainsAntifragile: Things that Gain from Disorder by Nassim Taleb – £1.99 on Kindle

Bank of Dave by Dave Fishwick – £0.99 on Kindle

Never Go Broke by Lee Boyce and Jesse McClure – £0.99 on Kindle

Green Living Made Easy: Hacks to Save Time and Money by Nancy Birtwhistle – £0.99 on Kindle

Environmental factorsCO2 emissions may be starting to plateau, says IEA – Guardian

Why China keeps building coal power plants – Semafor

Reuters tracked ‘recycled trainers’ to an Indonesian flea market – Reuters

How heat from an Amazon data centre is warming Dublin’s buildings – Reasons to be Cheerful

Greencoat UK Wind full-year results – DIY Investor UK

Off our beatDo zero interest rates, AI, the gig economy, and FIRE weave a new future? – Not Boring

The unaware snoop – Seth’s Blog

This man went to Disneyland every day for eight years – Guardian

How the Wirecard fraud unraveled [Very long and detailed] – The New Yorker

It’s not case closed on the Covid lab-leak theory – Slate

Ukraine’s Drone Academy is in session – Politico

The tech workers exiled from Europe’s last dictatorship – Rest of World

The luckier you are, the nicer you should be – Morgan Housel

Happiness is a warm coffee – The Atlantic via MSN

And finally…“Over the course of an investing life, stuff is going to happen – both good and bad – that no one saw coming. Instead of playing the guessing game, focus on the opportunities in front of you. And there are always, in all markets, many opportunities. Yes, always!”
– Chris Mayer, 100 Baggers

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: Saving versus investing appeared first on Monevator.

100 Baggers: Stocks That Return 100-to-1 and How To Find Them by Christopher W. Mayer (September 01,2015)

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Another change as of the 2023 tax year for UK dividend tax. This time investors are being clobbered with a further reduction in the already miserly tax-free dividend allowance.

What are dividends?Dividends are cash payouts made by companies:

You may be paid dividends by shares you own that are listed on the stock market.
You might also be paid dividends from your own limited company, as part of your remuneration.

Dividend tax only comes into the picture on dividends you receive outside of a tax shelter.

Using ISAs and pensions is key to shielding your income-generating assets from tax for the long-term.

The tax-free dividend allowanceAs of 6 April 2023, the annual tax-free dividend allowance is reduced to £1,000. That’s down from £2,000 previously.

Dividends you receive within the tax-free dividend allowance are not taxed. But breach the allowance and the excess is taxed according to your income tax band.

Dividends received in ISAs and pensions are entirely ignored. They do not count towards your allowance.

Like other tax allowances such as the personal allowance for income tax, the dividend allowance runs over the tax year. (From 6 April to 5 April the next year).

The £1,000 dividend allowance means you will only automatically escape dividend tax on the first £1,000 of your dividend income. This level of dividend is tax-free, irrespective of how much non-dividend income you earn and your tax bracket.

Pretty stingy, but the situation will worsen again from April 2024. The annual dividend allowance is set to be reduced to just £500.

(You read somewhere about the old Dividend Tax Credit system? It was abolished years ago.)

Dividend tax rates for 2023-2024The rate of tax you’ll pay on your dividends is determined by your income tax band.

UK dividend tax rates are:

Basic rate taxpayers: 8.25%
Higher-rate taxpayers: 33.75%
Additional rate taxpayers: 39.35%

Depending on your total earnings – and where it comes from – you could pay tax at more than one rate on your income.

These dividend tax rates went into effect on 6 April 2022. At that point the tax rate for each band was hiked by 1.25 percentage points.

A pledge to reverse the hike was made with the Mini Budget of 2022. But this in turn was scrapped by replacement chancellor Jeremy Hunt when he took office.

I hope you’re keeping notes at the back.

Note: remember, we’re talking about dividends you’re paid outside of tax shelters. Dividends paid within ISAs and pensions are ignored with respect to tax. Adding up your dividends to get the total for the year? Do not include dividends paid in ISAs or pensions! Forget about them for the purposes of tax. (Enjoy them for the purposes of getting rich.)

What tax rate will you pay on your UK dividends?If your dividend income exceeds the tax-free dividend allowance, you’ll pay tax on the excess.

This liability must be declared and paid through your annual self-assessment tax return.

For example, if you received £6,000 in dividends, then tax is potentially charged on £5,000 of it. (£6,000 minus the £1,000 tax-free dividend allowance).

As we said, the rate you’ll pay depends on which tax bracket your dividend income falls into.

Beware of being bounced into a higher tax bandIf you own dividend-paying shares outside of an ISA or pension then the dividends may add substantially to your total income. Perhaps enough to push you into a higher tax bracket!

To avoid taxes reducing your returns use ISAs or pensions wherever possible.

Watch out for withholding tax on dividendsIf you’re paid dividends from overseas companies, you may be charged tax on them twice. Once by the tax authorities where the company is based, and again by Her Maj’s finest in the UK.

You may even pay this withholding tax on foreign dividends held within an ISA or pension.

However there are reciprocal tax treaties between the UK and other countries. These can at least reduce the total amount of dividend tax you pay.

Your broker should take care of this for you.

Also, some territories do not charge withholding tax on dividends received in a UK pension. The US is a notable one. (This doesn’t apply to ISAs. Choose where you hold US shares accordingly.)

Again, make sure your platform is paying you any US dividends in your pension without any tax having been charged.

It can all get a bit fiddly. See our article on withholding tax.

Why was the old dividend tax system changed?Then-chancellor George Osborne revamped UK dividend taxation in the Summer Budget of 2015.

I believe he wanted to remove the incentive for people to set themselves up as Limited Companies simply to use dividends as a more tax-efficient way to get paid, compared to salaries.

Osborne also said the changes enabled him to reduce the rate of corporation tax.

But whatever his intentions, as we’ve seen today’s regime applies equally to dividends received from ordinary shares.

What’s more an initially fairly generous dividend allowance of £5,000 – designed to avoid small shareholders being taxed on their legacy dividend-paying portfolios – has been steadily whittled away.

Osborne’s problem with dividends

The old system of tax credits on dividends was designed roughly 50 years ago.

Corporation tax rates back then were above 50%. Add in personal taxation and some people saw the income earned by the companies they held taxed by 80% or more.1

Since those days, however, tax rates including corporation tax have fallen a lot. And the Dividend Tax Credit system that used to confuse everyone was a relic from those times, too.

So the government wanted to simplify things.

The good news was the confusing tax credit system got the chop.

The bad news was in practice higher rates of tax on dividends.

This threw a spanner into the works of some older people. They had based their portfolios (and their retirement plans) on how dividends were previously taxed.

Before 2016 the implicit ‘dividend allowance’ was as much as £31,786 if you earned no income from non-dividends above your personal allowance.

Some people saw their dividend tax bills soarMost small investors were not hit by changes to dividend tax. The majority of us own shares within ISAs and pensions nowadays.

However there are exceptions.

Small business owners paid a dividend from their limited companies now pay more tax. Salary-sized dividends almost immediately chew through today’s puny dividend allowance. Any un-sheltered dividends paid from shares they own will also be taxed these days.

There also exists that dwindling cohort of older investors who built up a big portfolio of income shares outside of ISAs and pensions. They’re paying more tax, too.

Always use your tax sheltersFor years I urged these people to move as much money as they could into ISAs. They could do this by defusing gains to fund their ISAs, for instance.

The ISA allowance is a use it or lose it affair. You must build up your total capacity over many years.

Yet inexplicably to me, some investors argued – even in the Monevator comments – that there was no point. Dividends were not taxed until you hit the higher rate band, they said. So why bother?

That was true in the old system. And maybe there was a harder choice to be made if you had massive cash savings. When interest rates were higher, there was more competition for your annual ISA allowance. (A dilemma that’s coming back again with interest on savings accounts back above 3%.)

But regardless, taxes on dividends were always liable to change. And eventually they did.

People who failed to build up ISAs – just to save a few quid – were hit with big tax bills.

I hate to say I told you so. (Truly! I write a blog to help people.)

ISA sheltering costs roughly nothing. There’s at most a trivial cost difference with an ISA versus a general account. Often none.

Get any non-sheltered portfolios into an ISA (and/or a SIPP) as soon as possible, if you can. Not just to avoid dividend tax, but also to shelter from capital gains taxes and other future regulatory changes.

Note: I’ve removed talk about the old way UK dividends were taxed in the comments to reduce confusion. We have to let go! But the discussion may still refer to old (or incorrect) dividend tax rates and allowances. Check the dates if unsure.

Remember, companies paying you a dividend have already paid corporation tax on their profits. That’s before anything is paid to you as a dividend.

The post UK dividend tax explained appeared first on Monevator.

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Serious capital losses can reduce our appetite for risk, just as surely as a night clutching the toilet bowl will put you off eating raw oysters for life.

But our psychological hard wiring presents us with a dilemma.

Foul, nausea-inducing returns now and then come with the territory in financial markets.

And we know these gut-wrenching episodes are liable to impact our future decision-making, because they trigger our impulse to avoid similar unpleasantness in the future.

In other words we’re prone to negativity bias.

But common wisdom among many investing ~~masochists~~ veterans is that outsized profits are made after a market meltdown.

“Buy when there’s blood on the streets!” and all that charming imagery.

And if that’s true then our natural response to shy away from whatever just hurt us could do us more harm than good.

UK equities: ten worst annual returns 1871-2022So which view is correct?

Do awful returns fire the starting gun for massive bargains? Do you just need the testicular fortitude to scoop them up?

Or do market swan dives just as often signal that there’s more pain ahead, as feared by our savannah-ready emotional engineering?

The table below – which features real1 returns – shows how UK equities bounce back – or belly-flop – after their ten most negative single years since 1871.

| Bad year | Return (%) | +1 year (%) | +3 years (%) | +5 years (%) | +10 years (%) | 10yr annualised (%) | | 1916 | -17.4 | -12.5 | -13.8 | -36.2 | 50.1 | 4.1 | | 1920 | -31.8 | 8.6 | 71.1 | 137.7 | 181.2 | 10.9 | | 1931 | -16.5 | 37.8 | 99.7 | 167.6 | 78.5 | 6 | | 1937 | -15.9 | -11.2 | -28.4 | -12.3 | 11.1 | 1.1 | | 1940 | -18.6 | 10.8 | 31.5 | 49.2 | 35.9 | 3.1 | | 1969 | -16.2 | -9.4 | 31.8 | -62.7 | -12.1 | -1.3 | | 1973 | -34.2 | -57 | -22.5 | 1.2 | 75.9 | 5.8 | | 1974 | -57 | 103.4 | 132.6 | 135.4 | 415.7 | 17.8 | | 2002 | -23.2 | 18.6 | 57 | 83.5 | 74.9 | 5.8 | | 2008 | -32.2 | 26.2 | 29 | 65.3 | 87.2 | 6.5 |

Real2 total returns from JST Macrohistory3. February 2023.

One thing jumps out from this table – the severity of the first year’s losses tells us little about what’s coming next.

The very worst year (1974) led directly to the best year in UK stock market history – the 103% doozy of 1975.

Yet the second-worst year (1973) bled straight into the 1974 nightmare. (Indeed the two years fused into the UK’s worst stock market crash since the South Sea Bubble.)

Meanwhile, the third, fourth, and fifth bleakest years in our chart (2008, 1920, and 2002) were all followed by large rallies.

On the other hand, three of the five least worst-drops kept tunnelling down in year two.

More often than not, equities bounce back fastOn balance the table provides tentative evidence supporting the theory that a severe shock for shares can abate quite quickly.

This is conjecture, but perhaps in the best cases the bolder investors quickly see the panic has been overdone and pile in. Their forays restore confidence among the rest of the herd, leading to further gains.

Milder hits may not flush quite enough negativity out of the system within just a year, however. Hence there’s a fairly strong chance that escalating disquiet blows up into a deeper decline in year two.

Or maybe it’s all to do with the credit cycle or a dozen other theories…

The recovery position Whatever the driver, a recovery is usually under way three years after the initial slump.

Seven out of ten aftermaths feature high single- to double-digit average growth. By the third-year mark, the ranges4 rove from 9% annualised (after the Financial Crisis) to 32% annualised (post-1974).

Those return rates are chunky compared to the historical average return of around 5% for equities.

Less happily: we can see three events were in contrast still poisoning the water supply five years out. And one was still pishing in the pond after a decade.

Two of these periods were hamstrung by the World Wars. The other (1969) slid into the 1972-74 crash and the worst outbreak of inflation in UK history.

Yet even these observations don’t enable us to formulate a simple heuristic such as: ‘bail out for the duration of a major war or stagflationary malaise’.

For one, the ten-year returns beyond 1916 are perfectly acceptable, if nothing to brag about.

Next, let’s examine the difference in an investor’s fate after 1973 compared to 1974.

What a difference a year makesThe post-1973 path took a decade to straighten itself out. In contrast, you were skipping along like it’s the Yellow Brick Road straight after 1974.

But realistically, how many investors who’d just been through the 1973 shoeing would be itching to double-down after the -72% roasting inflicted by the end of 1974?

You’d have to be a robot – or rich enough not to really care about losing money – to wade in after that two-year bloodbath.

Still, if you held your nerve you were handsomely rewarded. Returns were close to an extraordinary 18% annualised for the next decade.

The really unlucky cohort were the 1969-ers. These guys suffered a relatively mild recession at the tail-end of the ’60s, but they then ran smack into the 1972-74 W.O.A.T.5, and ended up with negative returns after ten years.

Ultimately, these investors recovered to 5% annualised respectability.

But it took 16 years of keeping the faith to get there.

World equities: ten worst annual returns 1970-2021How does the picture change if we look beyond UK equities? We have good data on the MSCI World index going back to 1970.

Let’s see how quickly (or not) global equities bounce back from the abyss:

| Year | Return (%) | +1 year (%) | +3 years (%) | +5 years (%) | +10 years (%) | 10yr annualised (%) | | 1970 | -10.2 | 2.1 | -2.2 | -25.3 | -37.9 | -4.6 | | 1973 | -22.6 | -38.1 | -10.5 | -27.8 | 7.2 | 0.7 | | 1974 | -38.1 | 23.4 | 16.1 | 0.8 | 116.8 | 8 | | 1977 | -19.7 | 0.6 | -11.5 | 15.8 | 136.2 | 9 | | 1979 | -13.7 | 1.9 | 33.4 | 115.1 | 311.1 | 15.2 | | 1987 | -11.8 | 22 | -2.6 | 26.5 | 112.5 | 7.8 | | 1990 | -35.5 | 14 | 59.1 | 83 | 213 | 12.1 | | 2001 | -15.6 | -28.7 | -11.3 | 8.8 | 4 | 0.4 | | 2002 | -28.7 | 18.1 | 49.4 | 60.4 | 57.4 | 4.6 | | 2008 | -20.3 | 12.4 | 14.1 | 50 | 126.8 | 8.5 |

Real total returns (GBP) from MSCI. February 2023.

Quick aside: last year’s -16.6% loss slots in at no.7 on the World Annus Horribilis chart. But I’ve excluded that result because, well, we don’t know how it turns out yet.

The pattern of the worst routs leading to the best rebounds mostly holds true on the world stage, too. 1973 proves to be the exception once more.

We can also see the past 50 years has been much kinder to stocks than the first half of the 20th Century. There were no World Wars, Great Depressions, or what have you.

Nevertheless it still takes five years before a majority of the sample periods turn positive.

At the three-year mark, half the pathways are underwater.

But five years on, and only two scenarios are negative. Of the goodies, two are positive but miserable, two have average returns, and four above-average to superb.

Finally, at the ten-year mark, three of the timelines were all told a thankless slog. (Think working in the laundromat in Everything Everwhere All At Once.)

The others are all excellent though. Well, except for post-2002. It hovers right around average.

UK gilts: 10 worst annual returns 1871-2021Now let’s consider UK government bonds.

| Year | Return (%) | +1 year (%) | +3 years (%) | +5 years (%) | +10 years (%) | 10yr annualised (%) | | 1916 | -32.5 | -17.7 | -36.7 | -35.2 | -12.7 | 0.8 | | 1917 | -17.7 | -7.5 | -38.3 | 6.1 | 44.8 | 3.8 | | 1919 | -16.8 | -19.7 | 38 | 65.4 | 98.7 | 7.1 | | 1920 | -19.7 | 27.4 | 90.5 | 106 | 188.1 | 11.2 | | 1947 | -19.9 | -6.5 | -17.1 | -38.3 | -50 | -6.7 | | 1951 | -17.2 | -10.2 | 2.3 | -19.3 | -31.7 | -3.7 | | 1955 | -14.5 | -7.7 | -5.3 | -12.4 | -10.1 | -1.1 | | 1973 | -16.6 | -27.2 | -20.5 | -8.7 | 26.8 | 2.4 | | 1974 | -27.2 | 10.9 | 38.3 | 17.3 | 73.3 | 5.7 | | 1994 | -12.2 | 14.5 | 38.2 | 56 | 99.3 | 7.1 |

Real total returns from JST Macrohistory. February 2023.

Quick aside part two. Last year’s -30.2% ranks at number two in the UK gilt all-time losses chart. But again 2022 is excluded due to crystal ball malfunction.

First thing to notice is that the UK’s worst one-year bond losses aren’t much more gentle than our grimmest stock market losses. (And they’d be nastier still if we threw 2022 into the mix.)

Partially that’s because the UK’s historical gilt benchmark was stuffed full of highly-volatile long bonds. Bond drops are gentler if you stick to shorter durations.

But much of the story hinges on inflation. In fact the only three positive years in the ‘+1 year’ column occurred because heightened inflation fears subsided, rather than escalated.

Roll the time-tape on three years, and the only middle-ground is the post-1951 nothing burger.

Every other path is either a double-digit return spectacular, or else it’s negative growth purgatory.

But it’s the five-year column that really shows how a bond bounce-back can be arduous.

Fully 50% of this sample still remains in the red at that point. Whereas we’d seen 70% of UK equities bounce back by the five-year post-crash mark.

What was that about slow and steady?Remember, over the long-term we’re not expecting much more than 1% annualised real returns from government bonds.

Yet by the time a decade has elapsed, only one outcome from our sample of worst starting points has delivered anything like that.

Four of the following decennial returns are equity-hot. (That’s good!) Two are great, at least for bonds. But three would leave you ruing the day.

That latter trio of roads to nowhere (1947, 1951, 1955) were all caught in the middle of the UK’s biggest bond crash. Inflation kept slipping its leash and mauling the real returns from fixed income.

Hope for the best, but be ready for the worstWhile none of this data is predictive of future outcomes, I think we can draw a few general lessons.

Firstly, the worst equity crashes are not predictive of more slaughter to come. The majority are a reset that auger better days ahead. Equities bounce back and usually sooner rather than later.

If you’ve just taken a heavy hit in the stock market then your best (but far from guaranteed) route back to profit is to hang in there. The market should fairly quickly pick up speed again.

Eventually any market will almost certainly right itself. That’s why equities and bonds have positive return records going back 150 years and more.

But the rebound may not happen according to a timetable that suits you. The longest string of successive negative returns for UK equities was 12 years straight.

Incidentally there’s also an outlier pathway in the historical record that does nicely for 18 years, and then collides with World War One. That calamity saddled 1897 equity investors with a negative return after 25 years!

An extreme event for sure. But it helps illustrate why 100% equities is a risk. The expected returns you’d planned for may not be there when you want them.

Do you have bouncebackability? Most of us are likely to go through the investing meat grinder at some stage in our lifetimes. That’s the price of entry as an investor.

Just think of all the big crashes recently. How many investing experts managed to swerve the Global Financial Crisis? The Covid crash? Or the inflationary shock of 2022?

Predictive power is in short supply. Rather it’s staying power that we need.

We say keep your head together after a bad run and don’t chase the market. Give it time and it should turn in your favour. Sooner or later your patience will very likely be rewarded.

Take it steady,

The Accumulator

P.S. This concept was inspired / shamelessly cribbed from US asset manager and author Ben Carlson. See his post on US stock and bond rebounds. But I’d just like to say in my defence that I’m a big fan of Ben’s work. And I’d do it again, so help me!

That is, inflation-adjusted.
Real returns subtract inflation from your investment results. In other words, they’re a more accurate portrayal of your capital growth in relation to purchasing power than standard nominal returns.
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
Three-year annualised return, not shown in the table.
Worst of All-Time!

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What caught my eye this week.

Three years ago this weekend I began to write on Monevator about the new coronavirus, which by late February had gotten the attention of the markets:

Things were definitely feeling freaky by the fourth day of 3-4% declines.

When the US market bounced higher into the close on Friday – perhaps on the expectation that central banks will make some sort of statement about interest rate cuts this weekend – you could almost feel the relief, even though all the main indices still ended the day in the red.

UK government bonds, for the record, are up.

Unstoppable

Just in case you’ve been living in a bunker – which is where we’ll all be in a few weeks, according to some – the cause is the novel coronavirus.

COVID-19, as we groupies have started to call it.

Together with a few geeky friends I’d monitored Covid’s spread via then-obscure health sites and academic services since Christmas. I already had my mother self-isolating. And during a rare meeting with The Accumulator on the first Sunday of February, I’d shocked him by revealing I’d sold a huge portion of my portfolio and was even holding gold.

That all sounds very smart and prescient. But the fuller story is far more muddled.

For starters I’d bought back a lot of my equities just two to three weeks later!

The market wasn’t crashing, you see, and it’s usually right. I started thinking that maybe @TA was correct that this virus could prove to be just another localized SARS-type outbreak.

Notes from UndergroundUnlike many people, I’ve a written record here on the blog – especially in the comments – of my thoughts over the weeks and months that followed.

This reminds me what I believed as our understanding of the virus evolved. As opposed to what I wish I did!

It’s a good check on hindsight bias and selective memory.

Some things I was ahead on, such as the long-term disruption caused by repeated lockdowns. I’d argue the way things played out also vindicated an early belief that we should overwhelmingly concentrate on protecting the oldest people. I was right too to get optimistic about shares again as soon as late March, when the fiscal spigots opened. And I correctly favoured technology firms.

But other stuff I got very wrong.

In retrospect I couldn’t get my head around the virus being a dial-shifting issue for years. I kept looking for signs of a speedy resolution – maybe as soon as the end of 2020. My efforts at being an amateur epidemiologist did afford me moments of insight.

But overall I would have done better just to listen to the pros. Although many of them were, like me, too optimistic about the ability of vaccination to halt transmission.

The PlagueAnyway all these debates played out in the comments on this website – and that itself was interesting too.

In the early days we had a free and open debate. Regular commentators took varied views, but I’d say there was mostly an understanding that there were open questions and we were all feeling our way in the face of something personally unprecedented.

But after just a few months some sort of crystalizing took place. Positions hardened. Politics entered the picture in a big way. And like most things in our benighted political times, what began as a health issue became a binary them-and-us stand-off.

At the least I shuffled across one side of that line too.

Being and NothingnessMy aim in recalling all this is definitely not to do any sort of finally reckoning as to who was right about what – let alone who ‘won’ the pandemic.

Too many are doing that now, especially in the US.

The worst of them are almost willfully dismissing or forgetting just how uncertain and afraid we collectively were in those early months of 2020, as we watched hospitals overflowing with the dying from the enforced confines of our own homes.

And it’s rather that which I want to recall.

Trivially, the time has come to remove my ‘Covid Corner’ as a regular section in the Weekend Reading links.

The virus is endemic. And though some would say the pandemic isn’t over, 60 seconds on any High Street shows that nearly everyone who can do so has moved on.

But it’s more what that crisis confronted us with that I want to put a pin in today – before we trundle into the next furore.

Because it’s rare to see your world turned upside down in a matter of weeks as happened in March 2020.

Even if you’ve come to see the lockdowns as a sort of pleasant holiday from reality, say, the fact is that for a period the authorities compelled you and most people you know to stay at home, while at the same time going out could conceivably get you killed.

Normally a country needs to go to war for such existential disruption. Sadly Ukrainians have had a double-dose of it in the past year, but if we’re lucky many of the older among us may never face such a period again.

I think it’s worth some intentional archiving.

Waiting for GodotFor myself, I want to store away the feeling of uncertainty. The spectrum of fear. The collapse into tribalism. The strangeness of shopping and swerving among the other masked figures. The oscillating emotions towards those who broke the rules. The groping for answers.

The specter that seemed to stalk us.

The debates about this or that policy will continue for a while. But in time they will become accepted truisms, depending on how you lean. Like the Thatcher government’s response to the Miners’ Strikes or US involvement in Vietnam.

The nuance will be forgotten. Yet even now scientists can’t convincingly decide if masks made a meaningful difference to transmission, for example.

It’s nuance all the way down.

I’ll end with some great lines from Yeats. I’ve always liked the sound of them. But the past seven or eight years have also shown me the truth of them:

Turning and turning in the widening gyre The falcon cannot hear the falconer;Things fall apart; the centre cannot hold;Mere anarchy is loosed upon the world,The blood-dimmed tide is loosed, and everywhere The ceremony of innocence is drowned;The best lack all conviction, while the worst Are full of passionate intensity.

Never waste a good crisis, say the politicians. They mean the chance to bury bad news or to take tough decisions.

But I’d hope a crisis might also teach us to be a little wiser too.

Have a great weekend – and let’s enjoy our freedom to do so.

From MonevatorWhat are money market funds? – Monevator

What is a mortgage but money rented from a bank? – Monevator

From the archive-ator: the coronavirus crash, as told by our community – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK in surprise boost after record tax receipts in January – BBC

Interest rates will rise again, warns Hawkish MPC member – Guardian

Tesco and Aldi limit sales of tomatoes, peppers, and cucumbers – BBC

The tenants facing eviction as landlords raise rents or sell up – Guardian

Hedge fund billionaire extracts billions more to retire – New York Times [h/t Abnormal Returns]

Report: why and when do people change their pension saving? – IFS

HMRC shuts down tax refund company – Which

Just 17 of world’s largest 122 firms have exited Russia since invasion – This Is Money

There are more hedge funds than Burger Kings [Search result] – FT

Products and servicesLender pulls 3.75% mortgage rate less than 48 hours after launch – This Is Money

Practically purrfect pet insurance revealed – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Investec’s 3.75% 90-day notice savings account tops tables – This Is Money

Best places to hold cash in 2023 – Foxy Monkey

Will a water meter save you money? – Be Clever With Your Cash

Coventry BS targets first-time buyers’ with 4% savings account – This Is Money

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Homes with big gardens for kids to explore, in pictures – Guardian

Die With Zero mini-specialBill Perkins: optimizing for life fulfillment [Great podcast] – Peter Attia

More Die With Zero: the maths behind the mindset – Flamingo Money

Comment and opinionWhat does centuries of data tells us about housing affordability in the UK? – Schroders

The Credit Suisse Global Investment Yearbook 2023 – Credit Suisse

What’s the surest route to investing excellence? – Morningstar

Uncertainty, 1923 – Fortunes & Frictions

Rich People’s Problems: I just haven’t got enough money [Search result] – FT

Ray Dalio’s all-weather portfolio – Of Dollars and Data

Short-termism is our default setting – Behavioural Investment

REITs can hedge against inflation, but not during a market crisis – Institutional Investor

Monopoly money and the UK property market – Indeedably

The straight way to wealthy – A Teachable Moment

UK housing market valuation and forecast for 2023 – UK Dividend Stocks

Inequality in the care of ailing parents – Humble Dollar

Interview with Vanguard CEO Tim Buckey [Podcast] – The Big Picture

The tax scandal within the Post Office scandal – Tax Policy Associates

Naughty corner: Active anticsActive managers in ‘extreme denial’ about lagging indices, says Charlie Munger – ETF Stream

Value, growth and intrinsic investing revisited – Intrinsic Investing

Interest rates versus earnings in 2023 – Klement on Investing

By this metric the US stock market isn’t as pricey as you might think – WisdomTree

The hard-knock life of short sellers – Finominal

Plenty still left to extract from the value premium – Alpha Architect

Four-day workweek mini-specialFour-day week: ‘major breakthrough’ as most UK firms in trial extend changes – Guardian

The worker flexibility premium – Axios

Kindle book bargainsThe Next Fifty Things that Made the Modern Economy by Tim Harford – £0.99 on Kindle

How to Make the World Add Up by Tim Harford – £0.99 on Kindle

Casino: The Rise and Fall of the Mob in Las Vegas by Nicholas Pileggi – £0.99 on Kindle

The Art of Statistics: Learning from Data by David Spiegelhalter – £1.99 on Kindle

Environmental factorsThe struggle for the soul of the B Corp movement [Search result] – FT

Britain’s cheapest heat pumps will go on sale this year – This Is Money

The beautiful flowers that bees can’t use – BBC

TRIG: full-year results – DIY Investor UK

In cods’ shadow, redfish rise – Hakai Magazine

Off our beatWhy Volodymyr Zelenskyy is a more complex leader than most people know – Politico

The Brexit connection to the tomato shortages – Chris Lowndes via Twitter

The BFG isn’t a BFD – Slate

How it all works – Morgan Housel

Mrs Ermine’s seasonal salads – Simple Living in Somerset

And finally…“You forget what you want to remember, and you remember what you want to forget.”
– Cormac McCarthy, The Road

Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.

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Can you believe it? My own sister uttering the dreaded words:

“I am just throwing money away by renting.”

Ouch! That’s up there with “renting is dead money”.

She might as well have added, “You Only Live Once!” and then spent her ISA savings on a YOLO tattoo.

Before we begin: I’ve learned that it’s impossible to write about UK property without provoking an outburst of emotion – from every faction – so a quick nod to the laundry list:

Yes, people want to own homes for different reasons.
Yes, at the end of 25 years of renting, you’re still renting.
Yes, houses look cheap / expensive, depending.
Yes, a homeowner must pay costs every year to stop the place falling down.
Yes, an owner can make a big tax-free gain on their property investment.
Yes, mortgage rates may go up / go down / do the Hokey Cokey.

But that is not what I’m talking about today.

What I’m questioning is the idea that renting is inherently wasteful and that having a mortgage is inherently productive.

Let’s unpack this to see why my sister has compounded the damage she did by watching The Water Babies on VHS 20,000 times and then crying and claiming I hit her when I tried to make it stop.

Renting is: paying for something valuableFirst off, renting is nothing like throwing money away.

When you throw money away, then – unless you’re Robin Hood, Brewster, or in fear of St. Peter – you get nothing back.

In contrast, when you give money to your landlord, you get somewhere to sleep, eat, make whoopee, and write investing blogs.

Here is Maslow’s famous hierarchy of needs:

Hint: the big ones are at the bottom. (Click to enlarge)

Maslow rightly understood that ‘shelter’ was crucial to human beings. We tend to freeze, rot, dry out, get eaten by animals, or are plagued by packs of foreign exchange students without it.

In fact, Maslow stated shelter was as important as sex, food, and air – but maybe not in that order.

(In the modern world, you don’t get much sex without shelter. Although to be fair you will then get more than your fair share of air.)

Housing, in short, is a basic human need. This is what your landlord gives you in exchange for rent. An essential of life! Maybe my sister should send her landlord a thank you card, rather than a dismissal?

But what about home ownership? Is that essential?

Sadly, Maslow didn’t tell us where “ability to hammer a nail into own wall’ or “opportunity to take part in house price bragging” fitted into his pyramid. He lived in simpler times.

My hunch is – daytime property porn be damned – that Maslow would consider such things to be self-actualization, topping the pyramid alongside philosophy, ballet, and drinking mint juleps.

What is a mortgage in legal terms?A mortgage is a loan used to buy property. It’s an agreement between you and a lender that involves the latter loaning you the money you need to buy a property (or else a way of raising money against the value of a property you already own).

When you take out a mortgage, you agree with your lender to pay it back the capital you borrow – plus any interest accrued – over some prearranged period of time – typically 25 years – and at an agreed interest rate.

The interest rate you’re charged may vary with market rates (a so-called variable rate mortgage) or more commonly be fixed for some years.

In the UK, fixed-rate mortgages typically run for two to five years. After that period you’ll go onto the lender’s variable rate mortgage, unless you take out a new fixed-rate deal.

Other types of mortgages are available. For instance, a discount mortgage varies with your lenders’ variable rate. But a discount is applied so you pay a little less.

Note that in the UK1 interest rates will fluctuate over the lifetime of your mortgage.

This means that when any fixed-rate mortgage or other deals expire – or on an even more regular basis with a variable rate mortgage – your borrowing costs will be recalculated. Hence your monthly payments will vary.

When do you clear the mortgage?Most home buyers take out a repayment mortgage. Here the total borrowing cost – including interest – is calculated at the start of the arrangement. You steadily pay the interest and repay the principle via a schedule of monthly payments.

Interest-only mortgages are also available. These are particular popular when buying investment properties. With an interest-only mortgage you only pay the interest over the term of the mortgage. You pledge to repay all the capital at the end of the term (say 25 years).

Most repayment and interest-only mortgage agreements do allow you to make payments in excess of what was initially agreed, however. These extra payments can dramatically reduce how long it takes you to fully pay off the loan, and hence the total cost of borrowing.

Play with our mortgage calculator to see how you can reduce the cost of your mortgage. (It’s as close as it comes to getting exciting about a mortgage.)

Finally and crucially, note that a mortgage is a secured loan. It is backed by the value of the property you buy with it.

Putting up your home as collateral like this makes a mortgage much less costly than other personal loans. But the quid pro quo is that the mortgage agreement gives the lender the right to seize your property if you fail to keep up with your payments.

A mortgage is money rented off a bankSo far, so conventional. You take out a mortgage to buy a property in exchange for a monthly bill – and the risk of losing your home if you don’t keep up with your payment schedule.

However I believe it’s helpful to think a bit deeper about what a mortgage really is. Like this we can exorcise some of the dogma of home buying.

Because despite that aforementioned fabulous need-solving you achieve by renting, most people still aspire to swap paying the monthly rent for a new life as a mortgage-shackled wage slave.

Even I did the deed eventually.

And there’s nothing wrong with that. Buying their own home is the best investment most people ever make.

However there’s nothing magical about a mortgage.

And it certainly isn’t free.

Rentaghost in the machineWhen you buy a house with a mortgage, the bank gives you money, as discussed.

Let’s say it gives you £200,000.

Party time! (I’m assuming hedonism for you is 30 days and nights on Rightmove.)

Once the initial euphoria of home hunting is over, a new mortgage owner begins the slog of paying the darn thing off.

And it turns out – obviously – that the bank didn’t give you £200,000 for nothing. As we’ve discussed it wants interest on the mortgage.

It’s as if it leased you the money. You’re paying to rent the money off the bank.

At 5% over 25 years, borrowing £200,000 will cost you £833 a month in ‘money rent’

You have swapped rent payments to your landlord for rent payments to your bank.

Note again that if you only ever pay your ‘money rent’ and nothing else, then you must give back the £200,000 borrowed at the end of the mortgage term.

Just like you have to hand back a rented house to your landlord!

To avoid this – and to keep your home – then you must repay the capital also.

Effectively, with a repayment mortgage you’re buying £200,000 in cash off the bank, in monthly installments.

With a 5% mortgage rate over 25-year repayment mortgage deal, you’d need to pay an additional £350 every month to ‘buy’ your £200,000 off the bank.

You might even think of a mortgage as a cash savings account that starts £200,000 in the red. With a repayment mortgage, you’re salting away £350 a month. After 25 years, the balance is £0.

Happy days!

Equally, if you can rent your home for less than you’d pay to buy, then you could choose to save the difference. You might even save up £200,000 that way.

Note: I’ve oversimplified here. As already flagged up, monthly repayments are in reality variable over the mortgage term as they fluctuate in some fashion with interest rates.2 Capital payments are a smaller share of the monthly bill at the start but predominate at the end, as your previous repayments reduce the interest due. Again, check out the graphs via the Monevator mortgage calculator.

Only money under a mattress is dead moneyOf course no bank these days will lease you £200,000 without some security.

The bank tries to protect itself twice.

Firstly it demands a deposit of at least 5%, but frequently much more.

Secondly there’s that inconvenient fact that it can repossess your house should you fail to repay the money you borrowed (/rented) off it.

Let’s say my sister has had enough of ‘throwing money away’ and wants to buy a flat for £500,000.

She’ll likely need at least £25,000 as a deposit – and I’d strongly urge her to aim for £50,000 or more – in order to appease the bank’s money landlord.

Of course, you have to give a deposit to a property landlord to rent their house, too.

But when I last rented a place, I put down one month’s rent – or only about 0.25% of that property’s market value at the time. Bargain!

The opportunity cost of a mortgage depositAs interest rates on cash have recovered, the situation has become even starker. Today, my sister’s would-be deposit cash is only dead money if she keeps her savings under a mattress.

I can think of little worse than looking under my sister’s mattress, but I’m sure there’s no money under there.

Instead, my sister has her money in savings accounts, bonds, and the stock market.

Even if she simply puts her would-be house deposit cash into a super-safe fixed-rate savings account, she can currently earn 4% or more.

That’s hardly dead money.

By the same token, it’s not dead money if the cash is used to get a mortgage.

If you’re paying a mortgage rate of 5%, then your deposit is effectively in the equivalent of a savings account paying 5% interest, tax-free.

That’s nice, too.

Again, I am not saying one arrangement is inherently better or worse than the other. I am saying these decisions have more in common than you might think.

The deal when you pay rentBuying a house basically involves:

Deposit + interest payments + (usually) capital repayments + other costs (legal fees, taxes, new boilers, renovations, and so on) + the gain or loss in house prices

Both private owners and landlords also get an income from leasing out their property.

As a home owner you get the better deal, since you rent it out to yourself, tax-free3, whereas a landlord leases it to a third-party tenant who might not pay and who won’t clean the gutters. Worse, her rental income is liable for tax.

In contrast, as a rental tenant your landlord handles most of the faff for you.

Renting simply involves:

Monthly rent + a month’s deposit

Whereas the deal for the landlord looks something like:

(Everything listed for a private homeowner above) + void risk4 + rent payment risk5 + some landlord-specific costs + income tax + (likely) capital gains tax

Your landlord also takes on risks on your behalf. There’s the risk that house prices will go down for starters, as well as the risk that interest rates will go up.

Of course landlords do all this in expectations of making a profit over time. I expect house prices will rise over 25 years, and rents too. But there’s no timetable – and it’s still a risk.

So a landlord deals with a lot of faff, takes risks, and satisfies a key human need.

That’s quite the deal you get for “throwing money away” by renting a home instead of buying.

You decide if it is a good time to rent moneyOnce more with feeling: none of this is to say that it’s not a good time to buy a property, or vice-versa, or to rent, or vice-versa.

When I wrote the first version of this article in 2013, house prices seemed very expensive to me, especially in London.

Luckily, I noted back then that I’d been wrong about prices for a decade. And now another decade has passed and prices are even higher again! But they’re apparently wobbling…

So who knows.

What I was confident about, however, was that borrowing was cheap in 2013.

I wrote:

I do think it’s a good time to rent money.

With five-year fixes under 3%, a big cheap mortgage looks a steal.

We saw money get even cheaper to rent for many years after that – as low as 1%!

The cost of money eventually did rise quite a bit in 2022, however, as the Bank of England hiked interest rates. Mortgage rates spiked further in October 2022 with the Mini Budget farrago.

But rates have since come down again. Indeed it’s interesting to see people (not me!) predicting 40% price falls when five-year fixes are available at 4%, given that ten years ago money already seemed very cheap with fixes not vastly lower at 3%.

Of course the difference today compared to 2013 is even-higher house prices.

Property prices have grown far faster than wages have increased, too.

Which way will you rent?Sadly, banks will only rent money cheaply to most of us to buy homes, and homes seem expensive. There’s the rub.

But the point is: renting a home isn’t throwing away money. It’s paying for a service.

And a mortgage isn’t free. You pay to rent money.

It amuses me that the conventional thinkers who say renting is dead money are also often the same people who say paying off their mortgage was the best feeling they ever had.

Make your mind up! Do you like renting money or not?

Note: Original article updated in February 2023, so comments below pondering what is a mortgage and/or the meaning of life may be out-of-date. On the other hand this stuff is pretty timeless. See you in 2033, across a rubble-strewn landscape and so on!

Unlike the US where you typically lock in a mortgage rate for the entire term when you buy.
Whereas, for example, dividing £200,000 by 25 years worth of monthly payments is £666 a month.
It is called imputed rent. Please don’t complain to me, follow the previous link if you want to learn more.
The income-less gaps between tenants.
The money stolen by tenants who don’t pay.

The post What is a mortgage but money rented from a bank? appeared first on Monevator.

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A money market fund (MMF) is an open-ended investment fund that holds short-term debt issued by governments, banks, and large corporations. MMFs play an integral role in the global financial system as pools of short-term funding for organisations such as governments, pension funds, insurers, companies, local authorities, and charities.

Money market funds have also acquired a secondary function as a cash reserve for ordinary ‘retail’ investors (that’s us!) chasing a better rate of interest than they can get from a bank account or cash ISA.

But is the higher yield potential of a MMF worth the extra risk that comes with them? We’ll aim to answer that question – and more – in this guide.

What are the main investment objectives of money market funds? The primary investment aims of money market funds are:

Stability
Daily liquidity
Credit risk diversification
Returns aligned to the prevailing money market rate

Because MMFs are relatively stable investments they’ve been marketed to ordinary investors as ‘cash equivalent’ products.

However while money market funds are low volatility, their extra yield does come with additional risk strings attached.

Moreover, those risks are most likely to materialise during a period of heightened market stress, when ready access to cash is paramount.

Are money market funds considered to be cash?Money market funds should not be thought of as cash. The Financial Conduct Authority (FCA) makes this point crystal clear in its Resilience of Money Market Funds paper:

As an investment, MMFs do not guarantee principal, and the investor must bear the risk of loss. MMF investments are equity liabilities, unlike bank deposits which are debt liabilities whose value is supported by equity capital.

It is true that money market funds are low-risk in comparison to equities and bonds.

But MMFs are riskier than cash because:

They offer same-day redemptions to their investors
But the majority of their assets are less liquid than cash and may not be immediately sold

This means there’s the potential for a liquidity mismatch if too many MMF investors make a ‘dash for cash’ during a market shock.

Under extreme conditions, money market funds can struggle to meet investors’ demands for their money back. That is exactly what happened during the Global Financial Crisis and the Covid crash.

It’s an extra dimension of risk for investors who think of their money market fund as a cashpoint.

What’s inside a money market fund?It becomes obvious that money market funds aren’t just cash when we look at the list of financial instruments they typically invest in:

Commercial paper (unsecured, short-term corporate debt)
Corporate and sovereign floating and fixed-rate bonds
UK Treasury bills (ultra short-term government debt)
Repurchase and reverse repurchase agreements (short-term borrowing and lending in government securities via the repo market)
Bank certificates of deposits (CDs)
Cash deposits

This chart shows the break down of assets held by GBP money market funds:

Source: FCA. Resilience of Money Market Funds.

And here’s a typical list of the top ten holdings from a single money market fund:

Source: Vanguard. Sterling Short-Term Money Market Fund.

As you can see we’re not just talking about cash.

Do money market funds pay interest?Money market funds do pay interest, but the rate is variable and not guaranteed. You won’t see an annual interest rate attached to a money market fund as if it were a bank account.

Typically, GBP money market fund interest payments resemble the Sterling Overnight Index Average rate known as SONIA.

The benchmark SONIA rate is supervised by the Bank of England. It is aligned to the overnight borrowing costs of banks.

You can check out the latest SONIA rate for yourself.

The next chart shows how SONIA has risen in the past year. Interest rate fans should notice that SONIA is closely tethered to the UK’s official Bank Rate:

Source: Bank of England.

Estimating money market fund interest rates We can use SONIA to approximate the annual rate of interest available from a GBP money market fund.

However, SONIA can only ever be a rough guide to MMF income payments. That’s because the rate fluctuates daily and you must also deduct your investment fees.

For example, let’s say today’s SONIA rate is 3.92%.

From that you would deduct your following investment costs:

The MMF’s Ongoing Charge Figure (OCF) – e.g. 0.11%
Transaction costs (the fund’s underlying transaction costs, applicable spreads, and your broker’s dealing fees, if any.) – e.g. 0.01%
Your broker’s platform fee – e.g. 0.25%

Your potential money market fund interest rate is thus:

3.92% – 0.37% = 3.55%

Comparing your estimated money market fund interest rate against a bank account Pop your estimated money market fund interest rate into a compound interest calculator such as this one. Match your inputs to the calculator’s fields like this:

Initial investment = £1
Interest rate = 3.55% yearly (or whatever is your estimated MMF annual interest rate)
Years = 1 (this ensures the calculator gives us an annual compound interest rate)
Compound interval = Daily
Effective Annual Rate = 3.614%

The calculator’s Effective Annual Rate is the figure to compare against the Annual Equivalent Rate (AER) touted by your bank account. It gives us an apple-to-apples compound interest comparison.

Both rates assume you reinvest your interest throughout the holding period.

However you won’t get exactly this rate if you hold your money market fund for a year. Your MMF may not track SONIA perfectly. And SONIA varies daily in any case.

But at least this calculation provides a way of estimating if a money market fund offers any kind of interest rate advantage over a bank account.

Other money market fund yields On a money market fund’s webpage you may see a percentage rate called something like ‘dividend yield’, or ‘net yield’, or ’12-month trailing yield’, or similar.

Such yields are typically calculated by summing up the last year’s worth of interest paid divided by the fund’s current price or Net Asset Value (NAV).

If interest rates are rising then a trailing yield will probably underestimate your near-term income from the fund.
If interest rates are on a downward trend then a trailing yield is likely to overestimate your expected income.

This assumes that your principal remains absolutely stable. We’ll explain why you can’t take that assumption to the bank shortly.

Note: your interest is automatically reinvested if you choose an accumulation fund.

An income money market fund will pay out interest at the frequency indicated on the fund’s webpage.

Are money market funds taxable?Yes, any interest or excess reportable income earned is taxable at your marginal rate of income tax as per normal cash savings.

Money market funds will often describe their income distributions as dividends. However they are taxed as interest.

There’s no tax to pay if you hold your money market fund in a stocks and shares ISA, or pension.

Your Personal Savings Allowance might also shield your MMF interest payments earned outside tax shelters from tax, depending on how much you have saved.

The Personal Savings Allowance enables non-taxpayers and basic rate taxpayers to earn £1,000 of interest tax-free. The amount is £500 for higher-rate taxpayers.

Low earners may be eligible to earn another £5,000 in tax-free interest using the little-known starting rate for savings.

Does your money market fund pay interest gross or net?You typically receive interest with 20% income tax already deducted if your money market fund is registered as an OEIC or Unit Trust. (See its webpage or factsheet.)

So a basic-rate taxpayer has no more to pay. (Yay!)
A higher-rate taxpayer owes another 20%
A non-taxpayer is due 20% back (Double yay!)

A money market ETF pays interest gross – that is, with no tax already deducted.

Capital gains tax (CGT) applies as usual in the unlikely event you make a significant capital gain from an MMF.

If you invest in a foreign-domiciled money market fund then check its webpage or factsheet to ensure it has UK reporting fund status. If not, then any CGT liability must be paid at your income tax rate.

Money market funds tucked safely inside an ISA or pension are exempt from CGT.

Can money market funds lose money?Money market funds can lose money. They typically invest in low-risk assets and are subject to close regulation. But you’re still not guaranteed to get back all the money you invested.

The clearest warnings come from the money market fund managers themselves.

BlackRock’s Cash Fund explicitly states the risk on its webpage:

Capital at Risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

A Money Market Fund (MMF) is not a guaranteed investment vehicle. An investment in MMFs is different from an investment in deposits; the principal invested in an MMF is capable of fluctuation and the risk of loss of the principal is to be borne by the investor.

BlackRock goes on to list some of the risks that money market funds are exposed to:

Loss of Capital: an automatic share redemption may occur which will reduce the number of shares held by each investor. This share redemption will result in a loss of capital to investors.

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

Credit Risk: The issuer of a financial asset held within the Fund may not pay income or repay capital to the Fund when due.

These risks are not merely theoretical. A huge and reputable US money market fund called the Reserve Primary Fund faced a run on its assets during the Global Financial Crisis in 2008.

Reserve Primary suspended redemptions and was eventually forced to liquidate its assets at a loss that impacted its investors.

The lessons of the Global Financial Crisis led to widespread reform of the $4.8 trillion money market industry both in the US and in Europe.

The MMF sector was again severely tested at the height of the Covid crash. Major institutional investors pulled their money as they scrambled to solve their own liquidity problems.

Money market funds subsequently faced massive redemption demands. And these were amplified by the unintended consequences of the previous round of reforms.

Fortunately, central bank action alleviated the pressure. Another wave of reform is now underway.

Cash crunchThe significant takeaway for ordinary investors is that – despite successive attempts by global regulators to strengthen money market fund resilience – what seems to be a low-risk vehicle in normal times can become unstable in extreme conditions.

The fact is that money market funds are not primarily designed to serve the needs of ordinary investors.

And the two most recent global crises illustrate that adverse feedback loops could restrict your access to cash at the worst possible time.

“Help! My money market fund is losing money” false alarm If you do invest in a money market fund and you see an apparent capital loss shortly thereafter, check that you’re not being misled by the fund’s standard dividend payment operating procedure.

The following chart shows what looks like a repeating cycle of gains and losses by the Vanguard Sterling Short-Term Money Market Fund.

However, these share price fluctuations are just the regular monthly accumulation and distribution of interest from an MMF:

Source: Vanguard. Sterling Short-Term Money Market Fund.

Every month, the fund’s net asset value (NAV) rises above its £1 par value due to the accumulation of interest paid into the fund from its assets.

That accumulating interest temporarily fattens the fund’s value before it is distributed to investors.

The fund falls in value on its ex-dividend date. That’s when the interest payments are set aside by the management team in preparation for payment to shareholders.

Hence the apparent loss is entirely compensated for by the income you receive from the fund on its distribution date.

This cycle repeats as the money market fund continually harvests and pays out interest.

Note that despite the dramatic scale of peaks and troughs on the chart, the differences in NAV amount to a tenth of a penny on the pound.

(With all that said, your investment would be much more volatile if you held a MMF in a foreign currency as you’ll then be exposed to the gyrations of the FX market, too.)

Are money market funds safe?Money market funds are not as safe as cash. The additional risk inherent in their operation subjects them to pressures and rules that don’t apply to a simple bank account product.

The Financial Stability Board (FSB) spells out the two main MMF vulnerabilities in its 2021 report Policy Proposals to Enhance Money Market Fund Resilience:

“They are susceptible to sudden and disruptive redemptions”
“They may face challenges in selling assets, particularly under stressed conditions”

A wide range of large financial institutions use money market funds for cash management.

But some money market fund holdings have relatively limited liquidity, especially when markets are stressed.

This means that MMFs cannot guarantee daily redemption under all circumstances.

The cost of liquidating harder-to-shift assets can rise during a market slump, or dry up completely. This creates an incentive for some money market funds and their investors to redeem early in a crisis – before the cost of doing so increases, or the regulations impose firebreaks on selling.

The FSB comments that:

Taken together, these features can contribute to a first-mover advantage for redeeming investors in a stress event and thus make individual MMFs, or even the entire MMF sector, susceptible to runs.

The FCA spell out how this contagion spread during the Covid Crash:

In March 2020, financial markets reacted to the unexpected effect on economic activity of the Covid pandemic and the public health measures introduced to contain its spread. This shock exposed underlying vulnerabilities in the financial system, which catalysed an abrupt and extreme dash for cash. As a result, financial markets experienced increased selling pressure, volatility and illiquidity.

MMFs also came under severe strain across major currencies, including in sterling, as investors quickly sought access to cash. Investors redeemed their units in MMFs to make necessary payments elsewhere, such as margin payments.

However, some investors may also have redeemed or made additional redemptions partly due to fear of being unable to redeem at a future date.

Some MMFs struggled to maintain the required liquidity levels as set out in law and regulations, which increased the perceived (and actual) risk of funds being suspended, which in turn may have increased investor outflows from some MMFs.

I think that conclusively answers the question: “Are money market funds safe?”

UK and European regulation can impose the following penalties on MMF redemptions:

Additional liquidity fees
Restrictions on the amount you can withdraw (known as ‘gating’)
Suspending the fund
A low-risk MMF must transform to a riskier type if it’s suspended for more than 15 days within a 90-day period

These penalties could make life more difficult for an ordinary investor who needs cash in a hurry.

As citizens, however, we should be reassured to see such measures that aim to protect the wider financial system from the systematic vulnerabilities of MMFs.

Money market fund classification There are four types of money market fund available in the UK and Europe.

From the most conservative type to the least, they are:

Public Debt Constant Net Asset Value (PDCNAV) MMFs

99.5% of assets must be invested in public sector debt issued by central government, local authorities, and quasi-governmental bodies.
Investors are able to buy and sell at a constant NAV price of £1 calculated to two decimal places. Volatility should be minimal under normal circumstances.

Low Volatility Net Asset Value (LVNAV) MMFs

Can invest in private debt as well as public sector securities.
Otherwise, liquidity requirements are as stringent as those that apply to PDCNAVs.
The fund’s price is maintained at a constant £1 NAV under normal circumstances.

Short-term Variable Net Asset Value (STVNAV) MMFs

Liquidity rules are looser than with the first two MMF types.
Pricing is variable, meaning capital gains and losses are possible under normal circumstances.

Standard Variable Net Asset Value (VNAV) MMFs

The least restricted money market fund type.
Enjoys the wider liquidity bounds of a STVNAV but adds longer maturity assets to the mix.
Variable pricing.

The FCA produced this table summarising the liquidity and maturity restrictions governing the four different money market fund types:

Source: FCA. Resilience of Money Market Funds.

DLA = Daily liquid assets – the percentage of assets that can be disposed of in 24 hours
WLA = Weekly liquid assets – as above but disposal is allowed within a week
WAM = Weighted average maturity – the average time taken before the fund’s current holdings will be repaid by their issuer
WAL = Weighted average life – the average time taken before the fund’s holdings will repay the amount invested. Similar to Macaulay duration for bond funds

Risk is all relativeCompared to the differences between, say, equity funds, all MMFs are so conservative that it’s like comparing four Mrs Thatcher clones by the colour of their headscarves.

However, the FCA draws out this key distinction:

As noted, evidence from major MMF domicile jurisdictions strongly suggests that in a large-scale market stress, private sector-backed MMFs suffer large outflows, while public debt backed MMFs receive large inflows. LVNAV MMFs invest predominately in private sector assets, while the PDCNAV must invest almost entirely (minimum 95.5%) in public sector assets. The evidence also indicates that public sector debt markets are less likely to become seriously illiquid in large market stresses than private sector debt markets.

Your money market fund provider may mention what type it is on the product’s webpage or somewhere within its documentation. (Burying the info somewhere within a 200-page prospectus is a favourite wheeze. World’s. Worst. Word search.)

You can find more detail about the money market fund classification system here.

Does the FSCS compensation scheme apply to money market funds?If a money market fund provider defaulted then you’d be entitled to a maximum payout of £85,000 per authorised firm – including their sub-brands. Sadly, the restrictions of the FSCS compensation scheme means that limit is the most you’re entitled to. That’s regardless of how many investment funds you own from that provider. The £85,000 does not apply per fund.

Moreover, the FSCS scheme does not cover investments – including money market funds – that are domiciled outside the UK.

If you own investments in Ireland or Luxembourg then you’re subject to the statutory compensation scheme followed by those countries. This limits compensation payments to a meager €20,000.

Best money market fundsYou can buy and sell money market funds from investment brokers like any other fund.

Not every broker makes it easy to find MMFs on their platform, however. Your best bet is to drop the name of your favourite money market fund into your broker’s search bar.

But how do you compare money market funds in the first place?

For money market ETFs, use justETF’s ETF screener switched to the money market category.

There’s only a handful of prospects. You can easily compare them using justETF’s tools.

Note that some of the products are synthetic ETFs that use a financial derivative called a total return swap to match the SONIA rate.

For a broader trawl, go to Morningstar’s Fund Screener.

Flip the screener’s Morningstar Category to GBP Money Market – Short Term or GBP Money Market.

Compare the characteristics of your candidate MMFs using Morningstar’s Investment Compare or the slicker FT Fund Compare.

Personally, I’d concentrate on:

Long-term performance – Morningstar show up to 10-year annualised returns where available
Fees – Money market funds are typically actively managed and costs vary a great deal
Assets under management – big is beautiful
12-month yield – to gauge how generous previous interest payments have been
MMF classification – this will require a deeper burrow into the fund documentation

Still want a money market fund? The pros of a money market fund are typically advertised as:

More diversified than cash in bank
May offer juicier interest rates
No early withdrawal penalties (not entirely true as we’ve seen)

Yet having done the spadework on money market funds I can’t imagine why I’d choose one over a decent instant access savings account, except where tax comes into the equation and for some reason you don’t want to use a cash ISA.

There’s another narrow use case for someone who wants to earn a little more on cash that would otherwise be parked in a SIPP at derisory rates.

But I can’t see that the extra smidge of interest is worth it versus the additional risks you’re running with a money market fund.

If you want the simplicity and safety of cash then put your money in a bank.

Take it steady,

The Accumulator

The post What are money market funds? appeared first on Monevator.

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What caught my eye this week.

Will house prices fall, steady, or crash? I’d say a decline was the consensus view as we closed the door on 2022, with memories of Liz Truss still swirling about the porch like a frightful CGI spirit.

Yet having competent technocrats back in Downing Street after a multi-year hiatus has had such a calming effect on markets that the prospect of a proper slump seems to me to be abating fast.

PM Sunak and chancellor Hunt still can’t offer much in the way of growth. And that’s a problem in the long-term.

But even the slow puncture Brexit economy doesn’t seem quite so bad after October’s multi-lane pile-up.

Choose your poisonThe major reason that if we’re going to economic hell in 2023 it’s on a Stannah Stairlift not a handcart is lower mortgage rates.

Declining swap rates had suggested there was room for lenders to reprice their mortgages cheaper if they wanted to play for market share.

And happily for anyone needing a mortgage, they’ve done so.

Massive lender Nationwide is the latest to cut rates across the board and join the sub-4% five-year fix club. Recent Weekend Reading links have flagged previous entrants including Virgin Money, Natwest, HSBC, and the Yorkshire Building Society.

Hardly universal, but far better than average five-year rates above 6% following the Mini Budget.

Getting the best rates does typically require lower loan-to-value ratios of 60% or less. Across the spectrum, lenders seem to be being more judicious about who they lend their cheapest money to.

Whether you’re buying or remortgaging, putting in a little extra cash might save you a lot of money if it unlocks a cheaper rate band.

Resetting the gameFor sure lenders aren’t chucking money around like its confetti again. The days of less-than 2% five-year fixes have gone, at least for the foreseeable. Hence the froth is coming off the pandemic-era price pop.

But while employment remains strong – and with many of those who are leaving the workforce apparently doing so because they can afford to, to the dismay of the chancellor – it’s hard to see rates at today’s more reasonable levels being a catalyst for a ginormous crash.

Maybe we’ll even stumble into what the UK economy both needs and fears – stagnant prices.

More young people would then get a chance to move out of the chillingly expensive rented sector sooner, and start building housing equity instead.

Inflation will have to abate though for the economics of stable prices to work for home builders, if we’re to avoid the knock-on of even fewer new homes being built. Workers are too scarce now for a big government house building program. We need to the commercial sector to keep at it.

And of course mortgage rates could start to rise again. The US stock market wobbled this week as various economic stats have suggested it will be longer before interest rates can be cut there.

Rates remains the greatest guessing game in town. Which is very unfortunate for anyone having to make long-term choices about paying for the roof over their heads.

But everyone would suffer in a big slump, and after the past few years we can do without one.

Have a great weekend!

From MonevatorThe UK’s biggest bond market crash – Monevator

FIRE-side chat: domestic geo-arbitrage made it possible – Monevator

From the archive-ator: Reviewing The Rules of Wealth – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Brexit has cost UK £1,000 per household in lost productivity, says MPC member – The Overshoot

Renters leaving London at highest rate in a decade… – BBC

…while 73% of its workers would rather quit then return to office full-time – This Is Money

…and one in five of Britons are out of the workforce altogether – This Is Money

UK risks ‘disastrous’ food scandal due to lax post-Brexit borders, says NFU chief – Guardian

HMRC chases 4,300 social media influencers and online earners over tax [Search result] – FT

More risk, fewer rules: the plan to revive the City of London [Search result] – FT

Products and servicesOpen an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Navigating the rollercoaster UK mortgage rates ride – Guardian

How are high mortgage rates affecting renters? – Which

Premium Bond prize rate up to 3.3% from March – Be Clever With Your Cash

Monzo launches a 3% instant access savings option – AltFi

Open a SIPP by 28 February with Interactive Investor and get up to £1,000 in cashback, plus pay no SIPP fee for six months. Terms apply – Interactive Investor

15 ways to find the secondhand vintage furniture of your dreams – Guardian

VCTs: buyer beware, the tax benefits may not be worthwhile [Search result] – FT

Popular savings app Marcus raises rates, if you claim a bonus – This Is Money

Comparing the cheapest ways to cook a roast chicken – Which

Homes for book lovers, in pictures – Guardian

Comment and opinion“It’s just not worth it”: why work no longer pays in the UK – Guardian

What four faddish investment concepts still teach us today – Humble Dollar

How many more bad apples are in the financial advisor barrel? – FT Advisor

Hands off our ISAs – The Motley Fool

Would you sell your business to your staff via an EOT? [Search result] – FT

Avoiding an inheritance tax shock like Sonia Fowler’s on EastEnders – Yahoo Finance

The unspoken risks of NOT retiring early – The White Coat Investor

A friendly reminder – Humble Dollar

The ten most important things Allan Roth tells clients – Advisor Perspectives

Fighting the last bull and bear market – A Wealth of Common Sense

Bedrooms and bank accounts – Finding Joy

Crypt o’ cryptoCrypto has become more correlated to stocks [and its timing sucks too] – Institutional Investor

Naughty corner: Active anticsWhy the Medallion fund is the greatest money-making machine of all time – Of Dollars and Data

Breaking up Big Tech could be a positive catalyst for investors – Bloomberg via Yahoo

Thoughts on ‘the Berkshire system’ – Neckar

Hedge funds revisited – Morningstar

Valuing the unknowable – Investment Talk

Why meeting fund managers doesn’t much help you pick funds – Behavioural Investment

The case for volatility as the most useful measure of risk [Geeky!] – Verdad

‘Zombie VCs’ haunt tech investors as plunging valuations hammer industry – CNBC

AI mini-specialWhat is ChatGPT doing, and why does it work? – Stephen Wolfram

Why AI matters and how to invest – Shares Magazine

Bing AI can’t be trusted… – DKB Blog

Man beats machine at Go in human victory over AI [Search result] – FT

How AI will upend and extend existing copyright and royalty frameworks – Dror Poleg

Unplug the evil AI right now [Petition, even I think it’s premature!] – Change.org

Covid cornerThree years on, Covid lab leak theories aren’t going away. Here’s why – Prospect

Kindle book bargainsHow to Make the World Add Up by Tim Harford – £0.99 on Kindle

Casino: The Rise and Fall of the Mob in Las Vegas by Nicholas Pileggi – £0.99 on Kindle

Fooled by Randomness by Nassim Nicholas Taleb – £1.99 on Kindle

The Art of Statistics: Learning from Data by David Spiegelhalter – £1.99 on Kindle

Environmental factorsInvesting in Swedish heat pump maker NIBE Industrier – DIY Investor UK

How pesticides impair our senses – BBC

Big Oil won’t be ‘Big Renewables’ anytime soon – Semafor

Is carbon offsetting a con? – Prospect

Paleotsunami detectives hunt for ancient disasters – Hakai

Off our beatCheating at golf – Seth Godin

The weird reasons there still isn’t a male contraceptive pill – BBC

Why you can’t trust the media – Slow Boring

The new gatekeepers [Excellent presentation, slides] – Benedict Evans

I am not a dog person anymore – Cullen Roche

And finally…“Democracy requires the ability of a population to pay attention long enough to identify real problems, distinguish them from fantasies, come up with solutions, and hold their leaders accountable if they fail to deliver them.”
– Johann Hari, Stolen Focus

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor.

The post Weekend reading: sub-4% is the new cheap money for the property market appeared first on Monevator.

Fooled by Randomness: The Hidden Role of Chance in Life and in the Markets (Incerto)

The Rules of Wealth: A personal code for prosperity and plenty

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Welcome back to the Monevator snug! Settle in for another interview with a reader who has achieved financial freedom (aka FIRE). This month we learn how moving to a cheaper part of the country – or geo-arbitrage – enabled Jake’s young family to live their dream.

A place by the FIREHello Jake, how do you feel about taking stock of your financial life today?

It’s the first time I’ve publicly discussed our story. I’m a little nervous and excited. I’m also happy that hopefully I can give something back to the FIRE community.

How old are you?

My wife and I are both in our mid-40s. We’ve been married for 16 years.

Do you have any dependents?

Two children who are both at junior school.

Where do you live and what’s it like there?

During 2020 we relocated from the Home Counties to East Anglia.

It was a big decision and move for us, as our children had to leave their friends behind and start again at new schools. It was difficult at the time with the lockdowns and schools closing. Thankfully they’ve settled in well.

The move was a lifestyle choice. My wife and I agreed we would like a slower and more relaxed pace of life, so we could spend more time with our children. It was also part of our FIRE strategy – specifically, domestic geo-arbitrage.

Property prices and the cost of living are lower in East Anglia than in the Home Counties.

When do you consider you achieved Financial Independence (FI)?

Using the 4% rule as guidance, we reached our FI number during 2022. That’s based on living costs of between £34-35,000 a year, suggesting a required net worth of between £850-875,000.

Of course, our net worth can fluctuate by large amounts on a monthly basis. But so far, after every big dip the market has recovered enough for us to remain comfortable with our plan. We’re aware this may not always be the case.

There is also the mental side to consider. Self-doubts as to whether we have enough. The nagging feeling that we could do with a little more, and a little bit more after that.

It can be scary – even overwhelming. You question if you have made the right decisions.

How do you deal with such doubts?

We try to block out as best we can the external noise and not compare ourselves to others.

At some stage you must take action based on your circumstances. Otherwise progress will not happen, and you will continue being fearful.

We feel we are in a good place and have enough. We’ve talked about the need for us to be fluid, and adjust if required.

Did you retire when you achieved FI?

I left employment towards the end of 2022 and currently have no intention of returning. But that is not to say that I will never work again. One day I may find a part-time role that suits me.

After I discovered the FIRE community in 2017, my wife and I discussed how we wanted our future to look. I was commuting into London daily and was physically and mentally exhausted and frustrated. For a long time I had wanted out of the rat race. The discovery of the FIRE community was a glimmer of hope.

I find it strange to label myself retired. I dedicated a lot of my energy to the Financial Independence part of FIRE. The retiring early part is an option that becomes a real possibility if you wish.

I had become disillusioned with my employer. Reaching our FI number when we did in 2022 allowed me to end that relationship. It can be hard to take a step back and understand how unhealthy a work situation is for you and your family.

Assets: overweight AmericaWhat’s your net worth?

Our net worth is £874,500; additionally our house is valued at £475,000.

How is it comprised?

Two ISA accounts (invested in S&P 500 passive index funds) £175,000
Two ISA accounts (invested in a UK bank) £119,000
Two taxable general trading accounts (invested in S&P 500 passive index funds) £128,000
Three pensions (two are SIPPS invested in S&P 500 passive index funds) £441,000
Cash and Premium Bonds £18,500
Debt is on a credit card (charging 0%) -£7,000
Total net worth (excluding house) £874,500
Total net worth (including house) £1,349,500

Your allocation towards the S&P 500 jumps out…

Our investments are not as diversified as is usually encouraged in the FIRE community. It could be argued though that the bigger companies in the S&P 500 have operations worldwide. Thus a reasonable percentage of the revenue and profit is diversified.

But why not a global tracker?

It was probably partly the influence of the American FIRE blogs that I spent time reading when we started investing in passive index funds. I also wanted to avoid any more exposure to the FTSE 100 as we had our investment in the UK bank.

For some unknown reason I am not attracted to the European markets.

Through my research the S&P 500 appealed on many levels. The large global companies, the high global market share, the strict regulation, the global revenue exposure, the historical returns. I also think that the American markets have a very good reputation worldwide.

Rightly or wrongly, I arrived at the conclusion that American companies are diversified international companies with global reach. But I am not closed to the idea of a more traditional approach to diversifying. I’ve been thinking about moving some money into a global tracker in the future.

What about that single company holding?

A legacy holding built up over many years before we discovered the FIRE community. It’s a bank that pays out dividends, which we automatically re-invest.

As it’s in an ISA we don’t have to worry about the dividend allowance.

You have no mortgage…

We own our home, and it is mortgage-free due to our domestic geo-arbitrage. We sold our house in the Home counties for more than the purchase price in East Anglia.

Do you consider your home an asset, an investment, or something else?

This is a more complex question than it initially seems.

There are a lot of people who consider their home an asset. Some even refer to it as their pension. I guess the definition is in the eye of the beholder.

In my opinion it’s a mixture of all the above. It is partly an asset, as it has a value – the price that someone is willing to pay. And in our case there is no mortgage.

As an asset it is not immediately liquid. The selling process will normally take a couple of months, at least. But you can realise the value once it’s sold.

On the flip side it costs us money on a monthly basis via council tax, electricity and gas, water, broadband, and general upkeep.

We don’t include our home in our net worth when we calculate it every month.

Earning: doing it the hard wayWhat was your job?

I worked in the commodities industry and my wife in the fashion industry. We both had various roles in different industries over time. Neither of us had clear career paths.

What was your annual income?

When I finished at the end of 2022, it was a base salary of £68,000 plus a yearly bonus, which varied between £3-5,000.

My wife gave up work approximately eight years ago, when we had our second child. She was earning £24-25,000. We lived on a single salary after that as a family of four.

How did your career progress – and was pursuing financial independence part of your plan?

I’ve worked full-time for 24 years, but it was only for the last 12 years or so that I earned over £40,000. Before that I earned between £12-30,000.

My most important career move was when I moved within the same industry but to a different department. That increased my salary by £10,000. It was huge to us – going from £30,000 to £40,000. I’d been trying to make the move for several years, both internally and externally. But it was very competitive and my employer placed a lot of new graduates into the role I was aiming for.

Fortunately, I persevered. I found out an external company was looking for someone in the role that I wanted. Interestingly, I’d interviewed there previously. I contacted the person who interviewed me the first time. This time I was offered it. Looking back it was a pivotal point on my way to a higher income.

Intentionally pursuing FI only became our plan in 2017, so it did not affect my career.

Did you learn anything about building your career you wish you’d known earlier?

In the first half of my career, I had to be very patient regarding progressing into higher-paying roles.

I switched industries a few times – mostly for potentially higher earnings. The tradeoff I discovered was that with higher earnings came higher levels of stress and pressure. Having to deal with volatile, aggressive and sometimes untrustworthy individuals higher up in the food chain.

I struggled with this more once we became parents. I felt guilty that I was not spending as much time at home with my family. Even when I was there physically, mentally I was consumed by work.

I wondered if I should have worked for myself rather than a corporate machine. If I had my time over again, I would probably either try working for myself or be more intentional at the start of my career.

In the first ten years of my career, I had more energy, motivation, and desire. I would have been better suited to working longer hours then – to arrive at a certain level before I became a father.

Do you have any sources of income besides your main job?

No. We did raise some extra cash to invest by de-cluttering our home and selling unwanted items online. Almost £2,000 after costs.

Did pursuing FIRE get in the way of your career?

It didn’t get in the way, but I was spending a lot of time thinking about it and researching.

After discovering the FIRE community, I spent months reading the different FIRE blogs. There was so much information, amazing content, and thought-provoking ideas. My head was spinning. I was in a daze, I could not stop thinking about this amazing discovery. I had found like-minded individuals, who had a similar mentality and way of thinking.

This community wanted to save and invest in an optimal way, working towards a better future – a flexible one with choices. I had been trying to do it my own way for years, with mixed success.

Saving: Automatic achievementWhat is your annual spending? How has this changed?

We have tracked our expenses over many years.

Our annual spending has crept up a little. Based on our 2022 expenses – the highest we’ve had, and what we expect to maintain – we require between £34-35,000 per year.

This includes a little bit of wiggle room for price increases or an unexpected bill or two.

Do you stick to a budget?

We have a good understanding of where our money goes. We don’t have a specific monthly budget, but we’re aware of our spending habits. We will know how we are doing as the year progresses.

As a family we have never been extravagant with our spending and have always made sure that our basic needs are taken care of first. In addition, we make sure our children have opportunities to learn and enjoy different activities. We sign them up for after-school activities and trips, and pay for them to follow their interests and hobbies. They enjoy birthdays and Christmas.

We very rarely make impulsive purchases. If we decide we want something, we research prices and sometimes wait until the item is on sale or we can purchase a slightly older model.

Occasionally after waiting patiently, we decide we do not need it!

What percentage of your gross income did you save?

I didn’t track our savings rate early on. Even when I attempted to, I wasn’t sure I was doing it correctly. I was unsure whether to include my employer’s pension contribution, and the mortgage repayment after interest.

After some conflicting research, I settled on a calculation method.

I’ve had a look through some old spreadsheets, and it appears our saving rate was around 60%. I would guess even in the earlier part of my career my savings rate was approximately 50%.

Impressive. What’s your secret?

I’ve always been good at avoiding impulse purchases. Also, I automated savings and investments. These would be taken from my bank account when I received my monthly salary.

I didn’t consider that this was money available to spend. It was taken like tax.

Do you have any hints about spending less?

I believe mindset is very important when it comes to cash management. It may be you become bored or impatient easily, or you fear missing out. Try to learn to be disciplined and strategic. Put a basic budget in place. Automate, and avoid impulsive spending.

Do you have any passions, hobbies, or vices that eat up your income?

I’ve been slowing reacquainting myself with fishing. I still have a lot of equipment from my youth and I purchased a few secondhand items. So currently it’s not costing me too much.

I hope to find some new interests now I have more time. But surprisingly so far it hasn’t felt like I have had much! Our days are still structured around the school runs.

Investing: pick up a pensionWhat kind of investor are you?

Originally I was an active investor through individual companies and active funds. There was not a great deal of transparency regarding the fees. I was not aware of passive index investing.

Now most of our investments are in index funds. We are still invest in the one individual company, but have not made any additional purchases for years (except for the dividend re-investment).

What was your best investment?

One oil company share I made a profit of £9,000 on years ago. I am not sure I could classify it as an investment as it was short-term. I didn’t have a well thought out investment strategy back then.

My investments in my pension have probably been my best long-term decision. Especially when you consider the employer contributions, the tax relief, and the years of compounding still to come.

Did you make any big mistakes on your investing journey?

My biggest and most costly mistakes were investing in individual companies.

At the beginning I was influenced by day traders and the potential profit that could be made quickly. I read article after article about oil companies. The money they could make, the new discoveries of oil fields all over the world, and the expected oil reserves each field could contain.

Even though I made a profit out of one, I lost a lot more on the other companies I invested in. It taught me a valuable and expensive lesson.

I always remember losses much more than any profits!

What has been your overall return?

I didn’t track or record percentage returns. I have partial records that I have pieced together from the first part of my investing journey. I made a profit on my active managed funds that were in an ISA, but losses on most of the individual companies. I calculate I made an overall loss during this period of around £10,000.

At the same time, I also had money in premium bonds and savings accounts, I had started paying into a pension, and we had taken out our first mortgage – which we overpaid on each month.

Did you fill your ISA and pension contributions?

I’ve invested in ISAs since early in my career. Most years I was not able to use the full allowance. We also sold a large portion of our ISA investments to help with an earlier house deposit.

In the last few years we have used our full allowances. Our domestic geo-arbitrage house move enabled us to do this with the money that was left over. The rest is in our taxable trading accounts.

In my first few roles I didn’t have a pension, so I didn’t start as early as I should have. But over the last 15 years I have invested heavily in my pension.

I couldn’t contribute the full allowance of £40,000, although I was able to increase my contributions for a few previous years via the carry forward rules. I normally contributed between £15-22,000 a year, including employer contributions.

My wife has a small pension from her time working. In recent years we’ve invested £3,600 a year in it. (That’s the allowance for a non-taxpayer, including the tax relief received).

Did tax influence your strategy?

It played a major role once we truly understood the full tax incentives on offer with a pension (especially for a higher-rate taxpayer)

In the last six years of my career, I increased my pension contributions every year. Including the employer contribution, it was 33% of my salary by the end.

We also invested in our ISAs where possible.

How often do you check or tweak your portfolio or other investments?

We track our net worth once a month via a spreadsheet. Occasionally I’ll check certain parts more often.

I have a further spreadsheet split into pre and post access to pensions. This models different growth scenarios for our investments. For example, a low assumption of 2% average growth per year – up to 7%. I also include the withdrawal of our living costs as part of the calculation in the same forecasts.

It’s not perfect but it gives us a starting point, allows us to see how we’re progressing, and assists with forecasting. Hopefully it will flag any potential issues so we can be pro-active if needed.

Wealth management: dealing with de-accumulationWe know how you made your money, but how did you keep it?

As my salary grew, we tried not to give into lifestyle creep. Bonuses were normally invested as lump sums.

One intentional tactic we implemented from our very first mortgage was to overpay every month. We continued with every mortgage we had. This enabled us to build up a large amount of equity and pay less interest, as we reduced the term of our mortgages with the overpayments. I understand this was at the opportunity cost of investing that money in the markets.

Also, as mentioned previously an important part of our FIRE strategy was domestic geo-arbitrage.

After we relocated, the money left over was invested in passive index funds. We made a lump sum payment into my pension, using the carry forward rules. We also transferred some older pensions from higher-fee companies into SIPPs with lower fees.

I continued to work from our new home until the end of 2022. Those two and half years of working from home saved us around £10,000 on commuting costs.

We decided to spend money on our new home from my salary, before I left work. This way the large, planned-for costs were paid for while I had a monthly salary.

Which is more important, saving or investing, and why?

They are both important. I’ve placed more importance on investing. But it must be the right type of investing for your own circumstances.

Long-term investing is key so that you benefit from compounding. You need to be disciplined and patient to see the rewards. It’s probably best to get into the mindset of forgetting about the money invested – especially if you are young, with a passive index tracker – so you’re not tempted to fiddle. This is how I approached paying into my pension.

Was financial freedom a goal with a timeline?

I always had a dream of some form of financial freedom in the future. A desire to break away from the path much-travelled. But I was unsure if and how this was achievable, until I discovered FIRE.

I made plenty of mistakes in my younger years. I was lacking relevant knowledge, direction, and intentional decision-making. These missing components are exactly what the FIRE community has provided me with, and so much more. Once we came up with our FIRE plan in 2017, I was hopeful of achieving freedom before we were 50.

For us the pivotal part of our strategy that allowed us to reach financial freedom by our mid-40s was domestic geo-arbitrage. This unlocked the home equity we had built up.

Can you share more of your thinking on your domestic geo-arbitrage?

I realised we would need to release the large amount of equity we’d built up in our house in order to be financially independent before we were 50.

I’d read about international geo-arbitrage, but we wanted to stay in the UK. My wife and I discussed the possibility, and we were both open to a new adventure and lifestyle.

We started by considering cheaper areas or houses in the Home Counties. But we were unable to find anything in the right price range that would work for us.

It was at this point I mentioned the possibility of East Anglia. As a boy I use to spend some time with family that lived in the area. I had very fond childhood memories – maybe slightly rose-tinted – and suggested it might be the right place to start our new life.

We did a lot of research online and came up with a list of potential areas. My wife and I visited these areas and later took our children along. The rest, as they say, is history!

Working from home really helped with the transition, as I was not wasting hours a day commuting. This allowed me to be more involved with our children.

We did move further away from family and friends, but fortunately they come and visit. We have also made new friends, mostly with other parents.

There is not anything else we miss from our old life. We’re looking forwards rather than backwards. Now that I’m no longer working, we can slowly piece together the lifestyle that suits us.

Postcard from FIRE: moving to big sky country also meant big housing savingsDid anything unexpected get in your way?

The biggest challenge was the psychological aspect of re-locating our family to a new area away from family and friends.

Looking back our worries were unnecessary. It is easy to say that now, but it turns out our children are very resilient. They just got on with it!

How are you de-accumulating your pot?

The de-accumulation stage is a scary prospect when you’ve spent so much time saving and investing. It feels like an unnatural shift in mentality. One that I’m not completely at ease with yet.

We’ve split our costs into two sections. Costs that have to be paid out of our bank account by direct debit – council tax, electricity and gas, water, costs for children’s activities – and all other costs that can be paid for by credit card.

This is because we have some 0% interest credit cards that don’t have to be paid back until 2024.

We have enough cash for approximately 16-18 months’ worth of costs. These are paid out of our bank account by direct debit. Most of this cash is in an easy access savings account paying interest of 2.75%. When we need to top up our bank account, which will be on a monthly basis going forward, we will transfer some cash from the savings account.

I believe this strategy – earning interest on cash we’ve saved and using 0% credit cards that are not charging interest – is called ‘stoozing’. The 0% cards will be paid off by selling units of our funds.

Sequence of return risk is a danger. We plan to sell some units of our funds from our taxable general trading accounts by the end of March 2023 (for the current tax year). We will then re-invest this money to utilise our ISA allowances for the new tax year, starting in April 2023.

We’re also planning for the reduction in the Capital Gains Tax (CGT) allowance over the next few tax years. We’re considering selling more units of our funds from our taxable general trading accounts by the end of March 2023. There is a strong possibility we may be selling these additional units of our funds at a lower price than we would have wanted.

Any cash raised will probably be split between savings accounts and premium bonds, until we can use it for the next tax year’s ISAs or to pay off the 0% credit cards or our living costs.

Do you have any further financial goals?

We may have to help our children financially in the future, so we’d like to maintain or even grow our pot as best we can.

It’s a fine balancing act, and we don’t have all the answers. It’s like being a parent. You do the best you can and adapt to the circumstances.

What would you say to Monevator readers pursuing financial freedom?

Monevator readers are very knowledgeable, and share interesting, helpful, and thought-provoking comments on the articles. I hope some will find our story inspiring! I always find real-life examples helpful, and so I have tried to be as open and transparent as possible.

There are so many moving parts to consider when deciding upon your strategy. I would say make a start as soon as possible – even if you are unsure or scared. Taking action is important. You can spend too much time researching, putting a plan together, and worrying about the right decision. If you are not actually taking any action, you are holding yourself back from progressing and the future you want.

You can evolve your strategy. You do not need everything to be perfect from the first step.

Learning: from the US to the UKWhen did you first start thinking seriously about your finances?

In my early 20s after starting my first job. My father encouraged me to save and invest. He introduced me to ISAs and explained how they worked.

Did any particular individuals inspire you to become financially free?

My parents played an important role. I could see from their example that working hard, having a strategy, and trying to make the right decisions could provide you with future opportunities.

Can you recommend your favourite resources for anyone chasing the FIRE dream?

I split my time between US and UK websites, blogs, and podcasts.

Initially when I first discovered the FIRE community it was via the American websites and blogs. The first one I ever read was Millennial Revolution. I saw Kristy and Bryce being interviewed on a television program. A podcast I found interesting and helpful was Choose FI with hosts Jonathan and Brad. I also spent a lot of time reading the stock series on the J L Collins blog.

I then progressed onto the British blogs. They were directly relatable to my circumstances.

Monevator is a great source of information. I especially like the comments as you can learn so much from the different opinions and debates. I also enjoy Banker on Fire and Alan Donegan.

What is your attitude towards charity and inheritance?

We make donations to our local school and donate unwanted clothes, toys, and household items to charity shops. At some stage I would like to volunteer at a local organisation. Maybe give some of my time to people who are lonely, or who don’t see their family.

Regarding inheritance, we plan to leave everything that’s left to our children.

What will your finances ideally look like towards the end of your life?

Depending on market returns and our spending, we hope to have enough to see out our lives on our terms. We will leave our investments as they are for now. We hope there will be enough in the pot for it to keep growing in the long-term. We’re both due to receive state pensions, though not for the full amounts. They have not been included in our FIRE planning, so may add a little extra buffer.

Finally, we want to create many happy family memories and have a life well-lived.

Nice, eh? FIRE by your mid-40s, mostly on one (sizeable, but not sky-high) salary – and with kids! Clearly moving helped mightily, but saving and investing for 20-odd years was crucial. Questions and reflections welcome. Please remember Jake is just a reader and a one-time poster sharing his story to inspire others. Constructive feedback is fine, personal attacks will be purged. Thank you!

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There’s a skeleton lurking in the UK’s financial closet. It’s the ghostly remains of a terrible bear market – one that makes Japan’s 31-year stock stagnation look like a temporary blip. This multi-decade decline was the UK’s ugliest bond market crash (and we’ve had a few).

It took 40 years to reach rock bottom. Losses peaked at -79% in 1974. Full recovery took until 1997 – over two decades later.

The whole horror show lasted more than 62 years and unfolded like this:

Data from JST Macrohistory1. February 2023.

Note: This chart – and this entire article – uses real returns2 that incorporate reinvested income.

The two sides of the graph form a jagged hell mouth that swallowed bond investors in the 1930s.

The magnitude and duration of the drop should dispel forever any notion that bonds are inherently ‘safe’.

Bonds are risk assets. It’s the often-divergent nature of their risk – as opposed to any supposedly invincibility – that can make them a useful complement to equities.

Well… sometimes.

The great bond market crash of 1935-97A log view of the same chart shows how each downward leg of the bond market crash compares:

The -46% ledge-drop of 1972-74 alone was deeper than many stock market implosions.

But we must go further back – to the aftermath of World War One – to find the dark roots of this nightmare.

The trauma of that war gave way to mass unemployment as the Government cut spending and raised interest rates. Its priority was to recover Britain’s preeminence in international trade, and it was prepared to sacrifice the living standards of the general population to achieve that goal.

As wages and demand fell, Britain was wracked by deflation during the 1920s and early 1930s.

Deflation is like steroids for bonds – real yields rose, propelling gilts to a 480% return from 1921 to 1934.

But the Great Depression and unemployment as high as 22% put paid to the Treasury’s tough medicine – the market pushed Britain off the Gold Standard as the Bank of England’s reserves drained.

Yet ironically, the forced policy-reversal proved a blessing (and not for the last time).

The abandonment of the Gold Standard devalued the pound and gifted the Chancellor the freedom to cut interest rates. The resultant cheap money stimulated the economy3 but it also sparked inflation back to life.

And inflation is the arch-nemesis of bonds.

Inflation nation Our next graph shows how surging inflation triggered gilt losses, while decelerating inflation eventually precipitated the bond market’s recovery:

The sharp spikes in the green annual inflation line correlate with a collapse in bond values. A recovery only began in the 1980s when the general trend pointed down.

If this were a game of Cluedo then it’s case closed. It was RPI inflation that did it, clobbering bonds over the head with the ‘basket of goods’ on the trading room floor.

The 60% loss incurred by 1956 is directly connected to the accelerating inflation that erupts on the chart from the late 1940s. That inflation reached double digits in 1952.

When Prime Minister Harold Macmillan said, “You’ve never had it so good,” he clearly wasn’t addressing bond investors.

The 1960s did provide some relief. Both inflation expectations and gilts drifted sideways.

But then inflation exploded. It jumped over 9% in ’73, 16% in ’74, and peaked at more than 24% in ’75.

1974’s -27% loss inflicted the third largest annual bond defeat of all-time (after 1916 and 2022).

The UK’s worst stock market crash reached its nadir that same year – but by New Year’s Eve the worst was over, despite inflation remaining in double figures for the rest of the 1970s.

A key takeaway from the chart is that nominal bonds aren’t crushed by high inflation per se.

Gilts made an annual gain of 11% in 1975 even though inflation was 24%, for instance.

Why? Because inflation wasn’t as high as the market had feared, and bond yields had already risen to compensate.

Do you yield?The following long-term yield chart for the bond market crash period proves that investors aren’t defenceless in the face of inflation:

The graph tells us three things:

As bond prices fall yields rise. It’s the law. (It’s also maths).
Investors’ demand higher yields to protect their returns against galloping inflation.
The stage is set for outsized bond returns if yields outpace future inflationary risks – and especially if interest rates trend down after you’ve locked in a good yield.

Back in 1935 the long-term yield was 2.9%. As yields spiralled they inflicted capital losses that – coupled with soaring inflation – explain the damage sustained by long-term legacy gilt holders:

| Year | Yield | Cumulative loss | | 1951 | 3.8% | 50% | | 1956 | 4.7% | 60% | | 1974 | 15.2% | 79% |

Fast-rising gilt yields – accompanying inflation breaking loose in 2022 – similarly administered a -30% bond shock last year.

Peak yieldBack in 1975, the yield had already dropped down to 14.6% as inflation crested. That crumb of comfort meant a small 11% bump in bond prices that year – just about visible as the beginning of the recovery in the gilts vs inflation chart above.

Inflation can remain blisteringly high when we think of it as consumers. But it is high and unexpected inflation that pains us as bondholders.

Inflation and yields trended down through the 1980s and 1990s, and at last those 1934 bondholders saw a positive return for the first time. Or perhaps their grandkids did.

As unseen Movietone News commentary of the era put it with characteristic plumminess:

Yes, it’s 1997! New Labour sweeps to power ending 18 years of Tory rule, and Aqua’s Barbie Girl is top of the Hit Parade!

Meanwhile, the class of ’34 are going bond bonkers! They’ve earned 3.4% in 63 years, or a whopping 0.05% annualised. The lucky blighters!

Movietone was not known for the depth of its financial analysis.

Survivor’s giltAs benighted as the path was for investors caught in the jaws of that great bond bear market, anyone brave enough to bet on a comeback in the 1970s was set to earn equity-like returns.

Buying into 1975 gilts delivered annualised returns of 5.7% over the 10 years, and 6.5% over 20 years.

1982 rolling gilt returns were 9.3% annualised for the next decade – and 8.5% over two decades.

Which, incidentally, is a clue as to why it’s so tricky to call the bond market now.

If inflation subsides, you could be locking in a good yield that’ll deliver decent returns in the future – including substantial capital gains if interest rates fall.

But if inflation continues to go rogue then our nominal bonds will be as useful as a woolly bath.

What to do? We’ve previously explained why every asset class has a place in a diversified portfolio.

It’s best to spread your bets when reckoning with uncertainty.

Take it steady,

The Accumulator

PostscriptsP.S. It’s worth reiterating: this article uses inflation-adjusted total returns to understand exactly what investors’ earned during the bond market crash. Bond articles that don’t deal in real returns do their readers a disservice. For example, the 1935 bond bear market covered above is fully recovered by 1941 when judged in nominal terms.

P.P.S. The second most hideous UK bond market crash began in 1898 and hit -71% in 1920. Those investor’s were made whole by 1932, thanks to that deflationary bond bull market that followed World War One.

P.P.P.S. There’s one grim path that sees 1879 bondholders still underwater 102 years later in 1991. Their returns are perfectly respectable until World War One ruins them. They claw their way back into the black during the deflationary era, but the 1974 FUBAR leaves them staring at a loss again. Finally the 80’s bond boom pushes them back into positive territory where they remain today.

P.P.P.P.S. For a grounding in the mechanics of bonds, please read our pieces on rising bond yields and bond duration. We also have a handy jargon-buster that clarifies some bond terms that are useful to know.

Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
Real returns subtract inflation from your investment results. In other words, they’re a more accurate portrayal of your capital growth in relation to purchasing power than standard nominal returns.
Triggering a housing boom which left us the legacy of countless streets of 1930s semi-detached properties that still make wonderful homes today.

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What caught my eye this week.

For anyone who owned US technology stocks that cratered in 2022 partly because society had not, after all, accelerated many years into the digital future, UK offices seem like a bit of a Twilight Zone.

Supposedly life is back to normal, so there’s less need for Zoom or Amazon – let alone ASOS or Peloton. The extra capacity these companies scaled-up to provide during the lockdowns is thus redundant. Cue plunging valuations, and mass layoffs of skilled tech sector workers.

That’s the narrative we’ve heard for at least six months. Yet I personally only know one former office worker who is back to doing (full) time.

Most of my friends with office jobs only do some days of the week. They say they are loath to lose the freedoms they discovered during the pandemic.

I was getting my hair cut before an office reunion this week – and I had to admit to my hairdresser that I’d misspoken when he asked whereabouts. These guys don’t even have an office any more.

Elsewhere my daily walk to my gym takes me through one of those modern campus business parks that’s a bit like an activity centre for adult Tellytubbies. These days it has an underpopulated feel that reminds me of the childless playground in Children of Men.

There’s the coffee kiosk on the corner that now closes by midday on Friday. The once-crammed food truck event that’s become just a man in a van. The gym that has more student bros than workers.

Brent overWe have been discussing this in Weekend Reading every few months for a couple of years. A clear majority of readers who’ve commented have said they’d never go back to five days in the office – at least not without a fight.

I had put it down to either hope over expectation or else our special audience. But it’s proven to be both a common aspiration and proven out in wider statistics.

For example, a new report from property specialists Remit Consulting found that:

…while numbers coming into offices are slowly rising — the national average office occupancy of 34.3% in the week ending January 27 was the highest since the group began tracking the figures in May 2021 — there are few signs of a rush back to five days a week “presenteeism”.

Almost three years into the pandemic – with all its disruptions fading into the memory like a broken fever dream – and yet offices are still only a third full.

Meanwhile London’s Evening Standard this week asked every FTSE 100 company about its current working arrangements. The responses suggest:

…that the old Monday- to-Friday office week that was once the default is far from making a comeback.

The research found almost all respondents offer the option of flexible and hybrid working although there are some businesses that want people in for at least a certain number of days weekly.

It suggests that for most private employers the new normal is for workers to be in offices for between two and three days per week, often between Tuesday and Thursday.

Britain appears to be at the vanguard of this Monday-Friday refusenik movement. I’ve heard it chalked up to everything from our longer commutes, worse public transport, even worse weather, or more positively to our love of gardening.

One thing is clear though – if this changed working pattern continues to hold (and by now who’d bet against it?) then the ramifications will be massive. Surplus offices rezoned, new build homes designed with a study as standard, maybe a change in how we support (or don’t support) childcare.

But for my part as someone who discovered and championed this way of life two decades ago, I just wonder what took you all so long?

Have a great weekend!

From MonevatorWhy a diversified portfolio needs more than just bonds – Monevator

A cheap portfolio of cheap assets – Monevator

From the archive-ator: How I tricked myself into financial independence – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK households to suffer £4,000 blow to finances in 2023 – Guardian

MPC member Tenreyo believes UK rates are too high and may need to be cut – Guardian

What three luxury homes reveal about who owns UK real estate – BBC

UK trade deficit with EU hits record as Brexit frictions curtail exports – Bloomberg

Housebuilders have five weeks to agree to the Government’s cladding deal – Which

Nicola Sturgeon’s tax rises “will spark an exodus of wealthy Scots” – Bloomberg via YF

Getty Images sues AI art generator Stable Diffusion in the US over copyright – The Verge

What does a world with billions of old people look like? – Grid

Products and servicesFirst five-year fixes under 4% since Mini Budget launched by HSBC – Guardian

Vanguard going all-in on direct indexing says CEO – ETF.com

Open an account with low-cost platform InvestEngine via our link and get £25 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine

Broadband and phone bills to be investigated by Ofcom – Sky

The extra cost of shopping at the convenience store – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Fancy launching an ETF? Think twice [US but relevant] – Factset

The latest on the confusing rules about passports when traveling to the EU – Which

Bestinvest introduces free dealing on US shares [Beware FX costs] – This Is Money

Homes for sale with beautiful windows, in pictures – Guardian

Comment and opinionAll markets are uncertain – The Uncertainty of It All

Why everything you buy is worse now [Video] – Vox via YouTube

How to retire at 38 – Humble Dollar

Where do millionaires keep their money? – Of Dollars and Data

Entertainment versus investing – A Wealth of Common Sense

Do you know how to find lost pensions? – Which

Is hiking rates in the face of supply shocks counterproductive? – KoI

Risk and regret – Morgan Housel

The difference between active income and passive income – Financial Samurai

Deep dive into the past and potential future returns of the [US] 60/40 portfolio – CAIA

Academic evidence of insider dealing disguised by trading using ETFs [Research] – SSRN

Naughty corner: Active anticsThe UK has more than its share of 30-baggers – Schroders

S&P 500 CAPE valuation and forecast for 2023 – UK Dividend Investor

The core principles of momentum investing – Validea

The AI bubble of 2023 – The Reformed Broker

Different levels of mistake: overpaying versus over-gearing – The Rational Walk

Short-selling mini-specialThe art of shorting – Net Interest

Marc Cohodes short selling strategy explained – Macro Ops

Kindle book bargainsHow to Make the World Add Up by Tim Harford – £0.99 on Kindle

The Making of a Manager: What to Do When Everyone Looks to You by Julie Zhuo – £1.99 on Kindle

Fooled by Randomness by Nassim Nicholas Taleb – £1.99 on Kindle

The Art of Statistics: Learning from Data by David Spiegelhalter – £1.99 on Kindle

Environmental factorsThe enormous heat pumps warming cities – BBC

Battle of the botanic gardens – Guardian

The ESG investing backlash is having an impact [Video] – FT via YouTube

Astrophysicists propose mining the moon to send Earth-shading dust into space – Guardian

HS2 miscalculating impact on nature, wildlife studies find – BBC

How did millions of dead crabs wind up in the abyss? – Hakai

Off our beatiPhones are made in hell: three months inside China’s iPhone city – RoW

Value investing – Indeedably

Climate ripples and the rise of the right [Superbly scrolling content] – NPR

The four horseman of the tech recession – Stratechery [Also see visualizations]

11 thoughts on living in 2023, from a follower of stoicism – Ryan Holiday

Are we racing towards an AI catastrophe? – Vox

And finally…“The intelligent investor is a realist who sells to optimists and buys from pessimists.”
– Benjamin Graham, The Intelligent Investor

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The post Weekend reading: Office complex appeared first on Monevator.

The Intelligent Investor Rev Ed.: The Definitive Book on Value Investing

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While nothing is always true in investing, it’s generally the case that buying cheap assets gives you a better prospect of higher future returns.

With bonds the relationship is clear. Lower bond prices mean higher yields – and your starting yield with a bond is an excellent indicator of the return you’ll ultimately receive.

With equities and other assets, the relationship is muddier, but still broadly true. Cheaper buys you future cash flows at a lower cost. Hence you should earn a higher return on your investment.

The track record of value investing beating growth over the long-term is testament to this truth.

But caveats abound!

Value doesn’t always outperform, even broadly. And many individual cheap shares do terribly. By the same token, a particular expensive company might prove to be the next Amazon. There also exists a ‘quality factor’ – a cohort of costlier companies with strong operating metrics that beat the market, at least on a risk-adjusted basis, despite their higher valuation.

Oh, and price is a terrible short-term timing tool. Even over ten years, its forecasting ability is weak (if better than the alternatives.) Expensive shares can get more expensive.

All that said, when you invest in a frothy bull market with high valuations (1999 or 2021) you’ll usually do much worse compared to when you invest in a lowly-rated market (2003 or 2009).

How expensive assets become cheap assetsThe obvious question for the wannabe Scrooge McDucks among us is: what are cheap assets today?

Well like the aesthetics of a mullet, cheapness is somewhat in the eye of the beholder.

But it’s not controversial to say that prices (and hence valuations) came down sharply with the wealth destruction of 2022.

With these lower prices should come higher expected returns. (Not guaranteed. Expected).

Who says so? GMO says soTracking, crunching, and forecasting such returns across all asset classes is a full-time job. It’s handy then that one very respected shop – GMO – makes its output public.

And the good news is these often-gloomy guys seem much more chipper in 2023.

In a recent quarterly letter, GMO’s co-head of asset allocation Ben Inker first looked back to the end of 2021. Most assets then seemed priced to deliver little gain (return) for the pain (volatility):

Again, expected returns are not set in stone. But if you were a betting person, all that clustering below the 0% real1 return line would have given you the willies.

True, GMO was notoriously gloomy for most of the past decade – during much of which time the US market continued higher on a tear.

But the firm’s warnings were at least somewhat vindicated by the rout in global assets in 2022.

Cheap assets in 2023The good news is last year’s crash means GMO’s new forecasts are much rosier:

As you can see, there’s now plenty of stuff expected to deliver decent-ish gains over the next seven years, at least according to GMO.

At a glance we can see that most of the risk-to-return line – imperfectly fitted though it is – now sits above the 0% mark.

Also, notice how the slope of the line has steepened? This shows that in GMO’s view, investors can more confidently expect to be rewarded for investing in riskier assets.

Rejoice?

Indeed – but not quite by turning the party dial up to ’11’.

Firstly, lots of these expected returns are still quite miserly compared to history.

Worse, GMO continues to see kegs of disappointment-powder stashed beneath the global market in the shape of expensive US assets.

The US makes up 60% of a typical global index tracker fund. So US equities mired below that 0% waterline might curb expectations for huge global tracker fund returns for the next few years.

GMO’s fund full of cheap assetsBut what if instead of our beloved global tracker funds, we went went naughty and tried to only own the stuff that GMO reckons is priced to deliver a stronger return?

Well as a fund shop, GMO provides its clients with just that in the shape of portfolios that accord with its forecasts.

In his letter, Ben Inker flags up what one such fund now holds according to GMO’s ‘Benchmark-Free Allocation Strategy’:

Do you like what you see? Then you can buy into GMO’s fund and hopefully profit.

That is… you can buy into that fund if you have a minimum of $25m to invest. (And £10 leftover to pay for a stiff drink afterwards.)

But fear not!

I did it my wayFor the rest of us mortals, I’ve had a bash at approximating a similar portfolio that uses investment trusts and ETFs accessible to UK investors.

Please remember the result is just for fun and (possibly) educational purposes.

It is not a close replication of GMO’s strategy. And it is definitely not investment advice.

Cheap tricksI’ve made several executive decisions in creating this portfolio, most of which we could debate:

I’ve used low-cost ETFs where possible.
In a couple of cases a better vehicle to my mind was an investment trust.
Some elements of the strategy (especially the structured products and liquid alternatives) are hard to replicate as a UK private investor. (Even US investors have seen mixed results with ETFs that implement the strategies). I’ve fairly arbitrarily picked a couple of relevant ETFs for this slot.
GMO’s global value versus growth allocation is a long/short strategy. We can’t easily replicate that. Instead I made a (smaller) allocation to global value and increased the holdings in the small cap ETFs. Hopefully this will capture most of the benefit from any continued re-rating of value versus growth (/the market), albeit without the downside protection of shorting growth.
There will be overlap in the underlying portfolios of the ETFs. (GMO states it gives resource stocks a low direct allocation specifically because they feature in many other positions.)
I’ve picked some funds more relevant to UK investors – notably the high-yield debt fund – that can be expected to further change the returns from what GMO sees. (On the other hand, we wouldn’t have to pay GMO’s fees!)
I’ve made allocations in increments of 5%. Finer weighting is spurious for our purposes.
I do not have an encyclopedic knowledge of ETFs. There are other choices to pretty much all the funds I’ve selected. Some will be cheaper. Feel free to share your suggestions in the comments.

Also note GMO is based in the US and in certain cases (say for fixed income) currency factors may be influencing whether or not something is included in its portfolio.

Bottom line: this is a cheap portfolio of cheap assets inspired by GMO. It’s not a slavish copy.

Do I need to stress again this is just for fun?

The cheap assets portfolio: 2023Here is what I came up with.

Portfolio of cheap assets for a UK DIY investor

Source: Author’s research

As I’ve stressed, this portfolio rhymes with the GMO one. It isn’t a replica.

More notes on the selected securitiesI’ve mostly chosen iShares ETFs for simplicity. Other ETFs are available.

I chose a general small cap Japanese ETF rather than say a Japanese value-tilted active fund. So we’ve lost the value tilt here. But broad Japanese equities look cheap to me.

I couldn’t find an ex-USA global value ETF. Also hard to allocate to is the tiny ‘US Deep Value’ slot. I might have further increased the global value ETF, but that has 40% in US equities. Instead I again increased the allocation to small cap and emerging market value ETFs.

A commodities investment trust covers resource stocks. With an income bias, it should tilt to value.

Cyclical quality is an odd GMO-bespoke factor I believe. I went with a general quality factor ETF.

I rounded up both resources and high-yield because too-small allocations are pointless.

The thorniest issues were the structured products and liquid alternative allocations.

Liquid alternative ETFs – which basically attempt to wrap an investing strategy into a tradable fund – are not popular in the UK or Europe. Some recent launches here have already delisted.

In the end I arbitrarily plumped for a couple of fairly-applicable iShares ETFs.

The first is a global minimum volatility ETF. It doesn’t seem to have achieved very low-volatility to me. Still, unusual times. More problematic – given GMO’s expected returns – is its 60% US weighting.

I also added a momentum ETF. This, alas, is flat out US-focused. But it should at least have the advantage of being in what’s recently winning. (The downside will come in reversals of trend).

Both of these ETFs are very debatable. Another option would be a multi-factor ETF such as the JPMorgan Global Equity Multi-Factor ETF (JPLG). But it felt more useful to break things out.

Finally I added a chunk of the UK-listed macro hedge fund BH Macro Global. This investment trust has a record of diversifying portfolios, especially in recent years. However I dialed down the exposure to 10%. There’s a lot of idiosyncratic risk when you invest in a costly managed fund.

Could you hold your nose and these cheap assets?Would I buy this portfolio today?

Well, no. For starters I have my own ongoing active investing adventures to get on with.

Creating it has been an interesting exercise though. It’s revealed to me how relatively expensive my own portfolio probably still is, even after it went through the wringer last year.

It’s also made me wonder whether I shouldn’t rejig things a bit to include some cheap value, and more emerging market assets.

Can you imagine owning such a wildly-off benchmark fund, with all the attendant emotional drama if and when things don’t go according to plan for a while? Let us know below!

But I don’t think anyone sensible would suggest even GMO’s ‘proper’ fund should be the only thing an investor should own. It’s diversified in that it owns a bunch of different and hopefully-cheap assets, but it’s not a proper diversified portfolio constructed to reduce risk.

Also remember GMO’s real-life strategy will be dynamically managed. If value got expensive, say, it would trade it for cheaper growth. The fund wouldn’t hold its allocations indefinitely.

That will make evaluating how my Frankenstein copy performs a rather quixotic endeavour.

Nevertheless, I think unless the market goes totally bananas (sorry, technical jargon) the allocations should be good for a year or so before rebalancing is required.

Perhaps we’ll check back in 2024 to see where we’re at – and what we’d change?

That is, inflation-adjusted.

The post A cheap portfolio of cheap assets appeared first on Monevator.

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After a gruelling year in which bonds got pasted, it’s time to take a hard look at the other defensive assets that can comprise a truly diversified portfolio. Bonds alone are not enough.

We Brits imported the idea that government bonds can shoulder the burden of defensive duties alone from the US. But their perspective is misleading, because their bonds have performed much better than ours:

Data from JST Macrohistory 1 and Aswath Damodaran. January 2022.

The chart shows annual real returns2 of US equities against US government bonds over the past 123 years.

When the blue equity bars head south, we want the orange bond bars to point north.

In a nutshell, the case for US government bonds is pretty sound:

US Treasuries are often negatively correlated3 with US equities in a crisis. (They tend to rise when equities fall).
US bond losses have been quite merciful. Up until 2022, that is!
For a defensive asset US bonds have done pretty well: 1.44% annualised from 1900 through 2022.

(All returns quoted in this piece are inflation-adjusted real returns.)

The track record of UK gilts is less impressive:

Data from JST Macrohistory and FTSE Russell.

As an aside, as a proud citizen of Blighty I can’t help but notice how the thick-wooded mass of positive US equity returns in the first graph contrasts with the stunted scrub-land of their UK counterparts in the second. It’s a reminder of why we need to be globally diversified.

The really unflattering comparison though is with our government bonds.

Bungling bondsThe UK experience is that our gilts relatively rarely put in a positive performance when equities are down.

In fact, the rise of gilts when equities tumble is mostly a 21st Century phenomenon.

Gilts are more temperamental than their US cousins. They’ve meted out bear market losses five times and breached -30% losses twice.

To top it off, their long-term growth contribution is a measly 0.91% annualised return.

UK government bonds have been less effective than US Treasuries in large part because we’re more vulnerable to inflation over here.

Why a diversified portfolio needs a multi-layered defenceBonds hate accelerating inflation. So we need to layer in additional diversifying investments, which aren’t as susceptible to the inflationary money bandit.

Click to enlarge. Gold GBP data from The London Bullion Market Association and Measuring Worth. Cash data from JST Macrohistory and JP Morgan Asset Management. January 2022.

This chart shows how several key diversifying asset classes perform when we narrow the focus to years when equities posted a negative annual return.

Exciting technical note: In this chart I’ve used the performance of UK Treasury Bills as a proxy for cash. Ordinary investors can hope to do better with ‘best buy’ savings accounts. Gold returns are priced in pounds.

UK equities ended the year down 42 times out of 123 from 1900-2022. That’s 34% of all occasions. Ideally we’re looking for defensive assets that pop their heads over the 0% parapet whenever the going gets rough with shares.

We can see cash offers some limited resistance at times. Gold wins a medal for defying the big, bad bears of the 1970s and the Global Financial Crisis.

But not a single asset class relieves the pain with convincing regularity – not across the entire timeframe.

There are also wasted years when nothing works.

This muddy picture suggests we need a bit of everything.

How often defensive assets support a diversified portfolio The bar chart shows how often each asset class succeeded in diversifying against equity losses. By which I mean they weren’t as bad as equities that year. It doesn’t mean they always clocked up a positive return.

Gilts softened the hard equity rain in just under 70% of all stock market down years. Gold rode to the rescue almost 80% of the time. Meanwhile cash deployed its emergency parachute on 86% of occasions.

On the other hand, each diversifier sometimes made matters worse:

Gilts 31% of the time
Gold 21% of the time
Cash 14% of the time

Remember we’re talking inflation-adjusted returns here, which explains why cash can be a loser even when shares are down.

Nobody’s perfectI don’t think the fallibility of portfolio diversifiers is widely understood. Many investors expect their portfolio countermeasures to work perfectly every time. They don’t.

In fact, all three diversifiers failed simultaneously 10% of the time. That means equities were actually the least-worst asset class to own during those particular down years.

Oh, you were hoping your defensive assets would actually produce a positive return during a crisis were you?

Tsk! Some people.

Okay, just for you let’s see how often the diversifiers landed sunny-side up.

Frequency that diversifying asset classes produce positive returnsHmm, not great.

Gilts coughed up a positive result barely 29% of the time. Gold scrapes over the 40% line and cash manages a 42% hit rate.

And all three turned negative simultaneously in 36% of years that equities fell.

Psychologically that’s going to grind down anyone if they don’t realise it’s perfectly normal!

Portfolio diversification isn’t broken. This happens sometimes. More often than we’d like to think.

Although it’s easier to live with if we remind ourselves that storms pass and the long-term outlook is highly favourable.

What is the best diversifying asset class when equities fall? Which asset class generates the strongest performance during a down year?

Cash dominates the field, then gold. Gilts head up the defence only 17% of the time.

Again, that blue wedge shows that the diversifiers fell further than equities four years out of 42.

(Note: The pie doesn’t sum to 100% due to rounding errors and The Investor’s allergy to decimal points.)

But not all stock market slumps are equally terrifying. How do the diversifiers offset the risks of equities during the biggest disasters faced by UK investors?

Defensive diversifiers vs the UK’s eight worst bear marketsOur historical record contains some dark days. The all-time low occurred when the stock market collapsed -72% in 1972-74.

Meanwhile, World War One and the Spanish Flu combined to smash stocks -57% from 1913 to 1920.

World War Two was the awful sandwich between two bears. The first letting rip in the late 1930s, with the second only subsiding by 1952.

Here’s how often each asset class blunted the UK stock market’s eight biggest blows:

| Asset | Outperformed equities | Positive return | Best diversifier | Failed | | Gilts | 6 | 3 | 1 | 2 | | Gold | 8 | 4 | 4 | 0 | | Cash | 7 | 4 | 3 | 1 |

By this measure gold and cash still look like the UK’s leading emergency first responders.

Gold beats equities in all eight nightmare scenarios. It delivers a positive return four times, and was the best diversifier four times. Cash notches similar numbers.

That’s especially worth noting if you’re a retiree whose sustainable withdrawal rate depends on your portfolio surviving an investing tsunami of a similar magnitude.

If you combine the three defensives into a single diversified portfolio then:

All assets outperformed equities six times out of eight.
All assets were in negative territory on three occasions.
At least one asset managed a positive return five times.

There wasn’t a single calamity when all three assets failed to improve portfolio returns.

Horses (of the Apocalypse) for courses World War One and its aftermath was terrible across the board. Cash was the top-performing asset on this occasion. But it was still down a cumulative 45% by New Year’s Eve 1920.

The Great Depression wasn’t as big a shock to the UK system as it was to America’s. Our equities were down -29%. But gilts and cash both rose by over 20%, with gold not far behind.

Also note that:

The diversifiers all have a pretty good record against deflation. Especially gilts.
Everything fell into the red during World War Two and stayed there.
Gilts really benefit from negative correlations with equities from the Dotcom Bust on… until 2022.

The connection here is interest rates. Gilts are likely to perform in a crisis when interest rates are cut rapidly to deal with falling demand. But gilts are typically a loser when interest rates rapidly rise – especially when inflation rears its ugly head. (Hello 2022!)

Gold also has a solid track record during 21st Century slumps. Partly thanks to the role of the dollar as a safe haven.

King dollar to the rescueSterling generally weakens like a balding Samson during ‘risk-on’ events. Which means that UK investors who own USD-priced assets – including gold – will often experience a welcome ‘bounce’ in that corner of their portfolios when the dollar appreciates.

If you’re intrigued but not convinced enough to hold unhedged US Treasuries in your diversified portfolio, then gold is another way to benefit from that currency shift during a market storm.

Would you like to play a game of Risk?Inflation, pandemics, and war are the major threats that are hard to adequately defend against.

The years when all three diversifiers turn simultaneously negative occur around World War One, World War Two, the Suez Crisis, and the Covid/Ukraine polycrisis.

Government bonds were useless in four out of five of those onslaughts. But you wouldn’t have wanted to be without them in the Great Depression, the Dotcom Bust, or the Global Financial Crisis.

A realistic reading of history admits the scale of those events is not predictable.

Remember that a number of smoking crises had already been snuffed out before Europe combusted into World War One. Even then the major players thought the war would be short.

The Great Depression was preceded by the euphoria of the Roaring Twenties.

Hitler could have been stopped earlier.

The world was unprepared for Covid. And Putin’s Ukraine atrocity, too.

I could go on.

The point is we don’t know what will happen. So why not lean into diversification and spread your bets across every useful defensive asset class?

Isn’t there anything better to diversify risk? Property REITs, private equity, infrastructure, dividend stocks, and other equity sub-asset classes are all highly-correlated when there’s a global FUBAR.

So I say: “Next!”

Index-linked bonds and broad commodities are the two obvious next stops. But our short-term index-linked bond fund pick was beaten by gold and cash in 2022. That’s despite its supposed role as an inflation hedge.

The short answer to that conundrum is that index-linkers can provide good protection against prolonged, unexpected inflation – provided you buy individual index-linked gilts for a reasonable price, and hold them to maturity.

The even shorter answer is it’s complicated. Especially with index-linked gilt funds.

Non-retirees may well be better off relying on equities to simply outpace inflation over time.

Broad commodities are a wild card. They’re occasionally awesome as in 2022 and 1973-74. But more often they’ll drag you down like concrete Ugg boots.

Moreover, commodities’ long-term returns look like chump change. Which brings us to another important point.

Diversifiers must be growth-positive Why not just ditch government bonds? Here’s one reason: gilts’ long-term growth rate is better than gold or cash.

The 1900 to 2022 scores on the doors are:

Equities: 4.85%
Gilts: 0.91%
Gold: 0.82%
Cash: 0.45%

Gilts are twice as good as cash, as measured by UK Treasury bills. It’ll be a closer run thing with best buy cash accounts. But the point still stands.

The expected returns of government bonds are higher than gold and cash.

Diversifying risks in a down marketDoubtless we can dial up an optimal blend of assets based on historical returns to reassure ourselves we have the best diversified portfolio possible.

But the truth is there’s no point in finessing asset allocation to the last percentile when past is not prologue.

What the UK’s historical asset class returns tell me is we need them all – because we need to be ready for anything.

For portfolio equity allocations of 60% and above, I’d personally take the defensive remainder and split it evenly three ways between government bonds, gold, and cash.

Or four ways if you are keeping the faith with index-linked bonds. (I am.)

This is a rough-and-ready solution but that’s fine because ‘Man plans and God laughs’.

Apologies to all the non-men out there but it’s a good adage.

Take it steady,

The Accumulator

PostscriptsP.S. If I was starting my diversified portfolio from scratch, I’d invest in global government bonds hedged to GBP rather than just gilts. Here’s some ideas for the best bond funds.

P.P.S. You may conclude that you should just invest in US securities and be done with it. But there’s no guarantee that America’s charmed run will continue. Not because its superpower status is imperilled but because US returns have lagged the rest of the world for entire decades in the past. Ultimately, equity results rest upon valuations. If the prices of US securities are bid too high then they will disappoint those who buy based purely on recent performance. Stay global!

P.P.P.S. I examined UK returns going back to 1871, but equities were only down one year in the Victorian Golden Age. Our top-hatted forebears had to cope with a -1.1% thrashing in 1891, triggered by the Baring Crisis. Gilts and cash were both marginally positive that year, with treasury bills just edging it.

P.P.P.P.S. This is getting silly now.

Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
Real returns subtract inflation from your investment results. In other words, they’re a more accurate portrayal of your capital growth in relation to purchasing power than standard nominal returns.
A positive correlation of 1 indicates two assets move up or down together in perfect sync. A negative correlation of -1 indicates they move in opposite directions: when one rises, the other falls. We want diversifying assets to be negatively correlated with equities when stock markets slump. Although we don’t want them to nose-dive when equities rise, either, so ironically it’s best that two assets aren’t perfectly negatively correlated. A correlation of 0 shows that two assets are randomly correlated. In other words, their movements have no relation to each other.

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What caught my eye this week.

Much younger readers who’ve known nothing but the lifestyle-curbing consequences of Brexit – not least no right to live and work across the continent like their parents enjoyed without a thought – may find this hard to believe.

But Monevator lost a big chunk of readers in the aftermath of the 2016 referendum.

Many leave voters didn’t like it when I de-cloaked as someone who thought the whole thing was a crock – and threw this little website into the (futile) fight against the hardest Brexit on the table.

You see, at the time the investing media and forums were dominated by 50-something Blimps spouting a bizarre blend of nostalgia for Empire, shipbuilding and coal mines, and a hyper-free market capitalism which they claimed would get us past centuries-ago proven laws of economics.

To say it was incoherent is to flatter their position with a label.

And today only the most shameless Brexiteers try to make any economic case for Brexit.

I commend this Leave voter on this week’s Question Time for at least not blaming perfidious Remainers for the glaring absence of a Brexit dividend:

Newsnight audience member on voting leave: “I don’t regret it … it’s a generational thing ”.https://t.co/7kmessYy9v pic.twitter.com/LujZ4ab3hl

— BBC Newsnight (@BBCNewsnight) January 30, 2023

Still, it takes some cognitive dissonance to say on national TV that Brexit was touted as something that would take 20 years to deliver economic benefits.

I know you can’t be bothered with me running through the laundry list of campaign claims again.

But like the many Leave voters who also say their Referendum win had nothing to do with racism – somehow forgetting a decade of bile from Farage culminating in Nazi-inspired propaganda on the eve of the vote – anyone claiming Johnson and chums warned it’d take a couple of generations to see any financial benefits of us leaving the EU faces the inconvenient fact that 48% of us were also there.

And I for one will never forget what they really said.

Three years of counting the costAs I will also always note, there was a credible – albeit to my mind quixotic – political argument for Brexit.

If the fullest possible technical sovereignty for the UK was all-important to you (despite any apparent downsides to its absence) then Brexit was a reasonable price to pay for it.

And at another end of the multi-faceted coalition to Leave, racists and xenophobes also had a case.

But if you truly believed Brexit would deliver economic benefits – or if you knew it wouldn’t but you were a leading Brexiteer who decided to dupe the public – then when will you put your hands up?

There is a feeling among the commentariat that the waters have broken on this dam of denial.

I’m not convinced. But three years on from Brexit, and it is striking how even the ever-timid BBC couldn’t find much to ‘balance’ the economic argument on its Newsnight special this week.

The latest for those who’ve lost track of the score:

The UK is the only G7 economic yet to recover its pre-pandemic size – Reuters
The IMF says we’ll fare worse than Russia, which is under international sanctions – Sky
Almost all the 71 post-Brexit trade deals just replicate our EU arrangements – BBC
The Bank of England says we can no longer grow more than 1% without inflation – FT
Brexit has left the UK economy 5.5% smaller – Bloomberg
Brexit supporting areas have fallen even further behind post-Brexit – Bloomberg
UK car manufacturing output is back to 1956 levels – Fleet News
Farmers aren’t happy with Brexit – Guardian
Fisherman aren’t happy with Brexit – IntraFish
Xenophobes aren’t happy with Brexit – The Migration Observatory
We’re seeing the worst strikes and industrial unrest since the 1970s – Bloomberg
No wonder: Brexit has ‘cracked Britain’s economic foundations’ – CNN
Net retail sales of UK equity funds have been negative every year since the Brexit referendum in 2016, with cumulative outflows reaching £33.6bn – FT

The numbers are in. From an economic perspective Brexit has been a car crash.

Here’s what you could have wonWhat, if anything, can be done about it?

Well we could rejoin the EU. Personally I believe that’s far more likely to happen in 20 years than the economic reality-defying renaissance envisaged by the Question Time audience member above.

But for now it’s off the table.

At least PM Rishi Sunak seems somewhat pragmatic, even if he has to keep throwing the same rhetorical discombulation to the loons in his party.

If his government can sort out the (entirely predictable) issues in Northern Ireland, then perhaps it will pave the way for a renegotiated trade settlement with the European Union.

Maybe even something sensible like the softer sort of Brexit that was thrown off the table in the aftermath of our very close run Referendum.

I appreciate it is unlikely. Free movement remains a lightning rod. Even dashed dreams of effortlessly retiring to the Spanish costas have not persuaded enough Leave voters of the benefits of a quid pro quo.

(With immigration from non-EU countries soaring post-Brexit, maybe these Leavers would support reciprocal free movement deals struck with Kabul or Mogadishu instead? They’re not racist, after all. So I’m sure they’d feel at home under the sun there.)

In the meantime sensible politicians like Jeremy Hunt are left scrambling for anything to take the edge off.

Hunt’s recent speech touting the UK as a centre for innovation was all very well.

But people familiar with, for example, the London-based fintech scene he lauded knows it was built with significant input from a wave of talented immigrants working alongside Brits. Some top players such as Revolut were even founded by immigrants.

What’s more, the government has actually been cutting back on support for innovation. See for example its curbing of R&D tax credits for smaller companies.

With the numpty-wing of the Tory party already calling for income tax cuts just months after the Truss fuss, you can understand why Hunt’s March Budget will blather on about ‘Brexit benefits’ in the way a parent calms a stroppy child by making promises about Father Christmas in April.

But there are no benefits and there’s ever less money to offset the damage.

That’s it. That’s the bottom line.

Don’t believe the hypeBrexit was of the same fantastical populist thinking that saw man-child Donald Trump vow to build a giant continent-spanning wall and Hugo Chávez give communism a second go in Venezuela.

But unlike those disasters, we’ll be living with ours for decades to come.

Maybe the optimists are right and the tide is changing. Perhaps Brexit support will dwindle and be contained to the right-wing of the Tory party and other useful idiots, and the rest of us can try to inch back towards a more sensible economic integration with the giant on our shoulder.

But I think it’s more likely that when this recession ends and the dead cat of the UK economy bounces, Brexiteers will seize on it as evidence that their mendacious project is working.

There will definitely be investment in the future in Britain. There will be new and fantastic British companies. Our universities will continue to turn out some of the brightest innovators in the world.

None of that will have anything to do with Brexit – but when some of it inevitably delivers, it will be claimed as a Brexit dividend.

Our GDP will grow a bit, and Leave supporters will hail it as evidence we’re not shrinking.

There will be no understanding of the counterfactual. Or that we’ll be starting hundreds of billions of pounds in the hole.

I asked an AI for its impression of Brexit.

All very gloomy, but I will add that – aside from ripping away the rights and freedoms you were born with – Brexit needn’t curb your life chances on an individual level.

The long-term advocates of Brexit were always the free-est marketeers of the Tory party.

Similarly, by looking after your own finances – and judiciously investing in global markets, perhaps rebalancing into currency gyrations whenever the pound has a funny turn – clever Monevator readers of a capitalist bent can prosper in a post-Brexit regime.

Have a plan B, in case it all goes truly south. (I mean a second passport or similar).

But I personally think that’s less likely to be needed than it was six months ago. (I’d guess less than 5%?)

The Mini Budget threw a bucket of cold water over the majority of politicians and business leaders. Now nearly everyone understands that rhetoric doesn’t pay the interest on our debt, nor nurses’ wages. Hopefully this has innoculated us against the worst populist derangements.

No, it’s a decade or more of falling behind our European peers that’s nailed-on for us now. Perhaps with more drama to come over Scottish independence.

And for what, eh? Crown stamps on pint glasses?

Ho hum.

Have a great weekend.

From MonevatorFIRE: Emergency midwinter broadcast – Monevator

Family Investment Company: the FIC FAQ – Monevator

From the archive-ator: reasons to rent a house instead of buying – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Bank of England raises interest rates to 14-year high of 4% – Yahoo Finance

We’re aware we mustn’t push rates too far, says BoE’s chief economist – Guardian

House prices fell for the fifth month in a row in January… – Sky

…even as rental prices surge to hit a new record – In Your Area

Bill to extend maternity protections passes in House of Commons – Guardian

Shell reports highest profits in its 115-year history – BBC

FTSE 100 closes at new all-time peak – BBC

Cardboard box demand plunging at rates unseen since Great Recession – Freight Waves [h/t AR]Are we headed towards a ‘polycrisis’? The buzzword of the moment explained – Vox

Products and servicesNS&I brings back one-year fixed rate bonds paying up to 4% – NS&I

Will the interest rate rise trigger a stampede for tracker mortgages? – Guardian

Transfer your ISA, SIPP, or general investing account to Bestinvest and get up to £1,000 in cashback. Existing customers included! Terms apply – Bestinvest

Cost of fixed-rate mortgages to fall as UK inflation outlook brightens [Search result] – FT

Scams: FCA blocks more than 10,000 ads from Instagram, Facebook, and YouTube – Guardian

Push into illiquid assets exposes UK pension savers to higher fees [Search result] – FT

What to do if you’re one of the 600,000 who missed the self-assessment deadline – Which

British homes for sale in areas perfect for spring walks, in pictures – Guardian

Comment and opinionWhat is retirement? – Humble Dollar

How to survive the financial shocks of redundancy [Search result] – FT

Why gold is valuable – Of Dollars and Data

Are the new private pension reforms enough? – FT Advisor

The best and worst decades to be a saver and investor [US but relevant] – AWOCS

We’re probably not in a low-return world – Morningstar

Retiring at 62? The French have it absolutely right [Search result] – FT

Victor Haghani and Nobel Laureate Myron Scholes on the golden rules of investing [Podcast] – Elm Wealth

How long it takes different asset classes to recover [as measured via fund proxies] – Morningstar

The cost of being single – Yahoo Finance

Retired early and wondering what to do? How about fighting for everyone else – Guardian

Crypt o’ cryptoUK government consulting on future regulation of crypto assets – GOV.UK

Proposed rules set a modest post-Brexit diversion from the EU – Coindesk

Work-in-progress mini-specialPeople are more receptive to radically re-imagining their work lives – Paul Millerd

American’s fever of workaholism is finally breaking – The Atlantic via MSN

Ten harsh lessons from ten years of entrepreneurship – Darius Foroux

Endless diversification won’t get you deep work you love doing – Young Money

The real cost of shadow work [Search result] – FT

Naughty corner: Active anticsThe importance of long-term earnings forecasts – Klement on Investing

The value rotation is just getting started in Europe – Verdad

This is a really trashy rally [Search result] – FT

An old letter from Seth Klarman on the forgotten lessons of 2008 – Investment Talk

Weighing up recession risks vs the prospects for a new bull market – Investing Caffeine

Kindle book bargainsHow to Make the World Add Up by Tim Harford – £0.99 on Kindle

The Making of a Manager: What to Do When Everyone Looks to You by Julie Zhuo – £1.99 on Kindle

Fooled by Randomness by Nassim Nicholas Taleb – £1.99 on Kindle

The Art of Statistics: Learning from Data by David Spiegelhalter – £1.99 on Kindle

Environmental factorsIn Norway, whale watchers churn a “soup of chaos” – Hakai

How much is a sustainability label worth? – Klement on Investing

Trouble at sea – Biographic

The coming wave of climate legal action – Semafor

Off our beatEverything you can’t have – Morgan Housel

The antidote to envy – More To That

The hidden link between workaholism and mental health – The Atlantic via MSN

The ‘OK’ computer [History of the pioneering Apple Lisa] – The Verge

Easy steps to improve your health in old age – Humble Dollar

Nothing drains you like mixed emotions [Couple of weeks old] – The Atlantic via MSN

And finally…“I have taken to living by my wits.”
– Sherlock Holmes, The Adventures of Sherlock Holmes

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.

The post Weekend reading: Brexit, still crazy after all of these years appeared first on Monevator.

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This article on the pros and cons of a Family Investment Company covers some nuanced issues around accounting and tax. It will not be relevant to the finances of 99%+ of readers – though we expect many more of you will find it interesting, and anyway we want the 99% to understand what the 1% are up to. The article is certainly not personal guidance. You should not act on ANYTHING in this post without seeking professional advice. This article is for entertainment purposes only.

Can you avoid dividend tax by investing through a limited company – specifically by investing via what’s sometimes called a Family Investment Company (FIC)?

And with the pending cut in the dividend allowance to £500, is it worth setting one up, pronto?

I’ve been running a Family Investment Company for nearly 20 years. In that time I’ve made many mistakes, and been asked many questions about the structure.

Today I’m going to answer (nearly) all of them.

It’s a long one. Grab a coffee. Maybe pack some sandwiches.

Family Investment Company 101Here’s a somewhat idealised scenario for a potential Family Investment Company owner:

You’re an additional rate taxpayer and you expect to remain so for the foreseeable.
You have a £1m portfolio of dividend-paying equities held outside any tax shelters.1
Your £1m portfolio yields 5%.
That’s £50,000 a year of dividend income.

There currently exists a £2,000 dividend allowance (falling to £500 soon). At the additional rate tax band you pay a 39.35% dividend tax rate.

(£50,000 – £2,000 allowance) * 39.35% = £18,888.

Subtracting that tax from your £50,000 of dividends leaves you with £31,112.

Why is this portfolio so exposed to tax?In this scenario you’ve already used up all the other tax-efficient wheezes.

You already fill you and your spouse’s ISAs every year. You’re both over the Lifetime Allowance (LTA) in your pensions. You’ve paid off the mortgage. You’ve maxed out the kids JISAs. You have £50,000 worth of premium bonds each. You’ve realised VCTs are a rip off…

…you get the idea! You’re out of options for sheltering your investment income.

If you do have any of these other options left, then you can stop reading right now. A Family Investment Company is going to be much more hassle.

However if you are out of alternatives, then you could use a limited company to defer – and perhaps avoid that dividend tax.

But before we dig into how it works, there’s a couple of things you need to be familiar with.

UK corporation tax for limited companies UK companies pay corporation tax (CT) on their profits (at 19%) and pay dividends to their shareholders after tax.

Corporation tax is rising to 25% in April 2023 (to pay for Brexit). But that doesn’t matter for us from a FIC perspective, because our limited company doesn’t intend to ever pay it.

Companies don’t have to pay corporation tax on dividends that they receive from their shareholding in other companies.

Why? Because the company that made the profits has already paid the corporation tax. The exemption avoids double taxation.

Realised capital gains on those shareholdings, however, are taxable at the corporation tax rate. And this has serious implications that we’ll come to later.

Directors’ loansDirectors can lend money to their company. If there’s no interest charged on the loan – and as long as the company owes the director money2 – then there are essentially no tax consequences, for either the director or the company.

By simply keeping a spreadsheet of loans and repayments, you can just wire money in and out of your limited company.

That’s all the tools we need to make the Family Investment Company route potentially attractive.

Enter the Family Investment CompanyIn our stylized example:

We set up the FIC with, say, £1 of share capital and ourselves as sole director.
The company is furnished with banking and brokerage accounts.
We lend the company £1m.
And then transfer that £1m to the company brokerage account.
We buy a magical share that pays out a 5% dividend yield and has absolutely no price volatility. (Let me know if you find one!)
Every year the company receives £50,000 of dividends and uses that cash to repay the directors loan.

The cash flows look like this (with costs ignored for clarity):

(Click to enlarge)Your company receives £50,000 a year in dividends (tax-free), and uses the full £50,000 to repay the director’s loan. You therefore receive £50,000 per annum from your £1m invested instead of £31,160. Saving yourself £18,888 per year – or £377,760 over 20 years – of tax.

(I ignored the change in dividend allowance, again, for simplicity).

Getting the million back… after taxAt the end of 20 years – with the director’s loan having been paid off with the dividends – you’d obviously like your £1m back, please.

How do you do that?

The company sells its shares (for zero profit, so no corporation tax), and pays out the £1m cash as a dividend. On which, of course, you need to pay 39.35% dividend tax, so approximately £393,500.

Hence you’ve not actually avoided any tax at all! (Nor mitigated tax, which is a better way to think these days).

We didn’t even include the various costs to pay. In fact we seem to have gone to a great deal of trouble to simply enrich our accountant.

And this is the main objection to this structure. Because whatever you may have heard, a Family Investment Company does not necessarily avoid dividend tax at all, but merely defers it.

Is deferral useful? Well… it depends.

My Family Investment CompanyLet’s move beyond our stylized example, and get down to the nitty gritty.

But first an important reminder and disclaimer:

Wealth Warning You should not act on ANYTHING in this post without seeking professional advice. This post is for entertainment purposes only.

What’s the point of deferring tax? Once money is gone it’s gone. Obviously I’d rather avoid the tax altogether, but I’ll take deferral if that’s the only option.

The Family Investment Company structure essentially enables me to choose the timing of the tax incidence of the dividends. And the FIC decides to pay me dividends when I’m paying the 8.75% rate, rather than the 39.35% rate.

I’ve enjoyed a feast-or-famine career – years when I’ve earned a great deal of money, and years when I’ve earned nothing at all. Dividend payments from the FIC can be stuffed into the lean years.

I have no DB pensions (sadly), so I can control the timing of withdrawals from my SIPPs. There will potentially be years in retirement when I can engineer being a lower-rate taxpayer.

Unfortunately, obvious wheezes like moving abroad for a year don’t work – there’s a specific anti-avoidance rule for ‘close companies’ in this situation.

Winding up the FIC at CGT rates may be possible. But I’ve never done it, so can’t attest to the process.

What if taxes go up?You can certainly make a reasonable argument that deferral is bad – because taxes in the future will be higher than they are now.

My personal experience is taxes only ever go up. The dividend allowance cut itself is a case in point.

Allowances are cut, or withered away by inflation, or ‘tapered’, or ‘withdrawn’.
Reliefs are removed, restricted, or ‘means-tested’.
Lifetime ‘Allowances’ are introduced, where before you didn’t need to be ‘allowed’ at all.
Taxes are ‘simplified’ in a supposedly neutral way, and then the motivation is quietly forgotten and rates ratcheted up a few years later.
The indexation allowance is removed because we no longer have inflation.

And so on. It only ever gets worse.

Given that the only escape from this is economic growth – something both the UK government and the opposition now appear to be ideologically opposed to – there’s every reason to expect taxes to continue to rise. Indefinitely.

In which case you’d be better off paying taxes now rather than later. And not bothering with a FIC.

How is my Family Investment Company structured?I’m the sole director. My wife is the company secretary. I own about 30% of the shares. My wife 25%, my children the remaining. My wife and I therefore control the company.

One of my kids is an adult, the other is not.

We have ‘Alphabet’ share classes. Different individuals own different mixes of share classes.

There is some flexibility around paying different levels of dividends on different classes. Lower tax-rate shareholders may happen to enjoy larger dividends than other shareholders. This is slightly complex to set up and the consequences of getting it wrong can be severe, but it does provide some flexibility.

For example, family members may be having a career break, or be in full-time education.

We didn’t pay dividends to non-adult children though. In the opinion of my accountant, this is generally treated as parental income for tax purposes.

How does a FIC compare with setting up a trust?I’ve no idea. I Googled around a bit and I didn’t think there was much in the way of tax benefits to trusts. That seems to be more about control of assets.

I would say that the directors of a company, if the articles are drafted properly, have a great deal of flexibility to do whatever they like with respect to taking risk. That would not necessarily be appropriate in a trust where there are fiduciary duties.

Does the FIC open up inheritance tax (IHT) options then?Not obviously. Unfortunately shares in the FIC don’t qualify for IHT Business Property Relief.

Also – and inconveniently – gifting shares in the FIC is a disposal for the giver and are therefore subject to capital gains tax (CGT). Especially inconvenient with the CGT allowance also being cut soon.

My accountant is happy with the value of the shares being the proportional NAV of the FIC at the time, for CGT purposes. So you can do this early on, before the company has accrued much value. But giving away more than 50% potentially introduces control issues.

And don’t be thinking you can just fiddle with the rights associated with each share class to make the kids shares ‘worth’ more. The tax man will see straight through this.

There’s nothing to stop you setting up a second Family Investment Company and giving 49% of the shares to your kids on day one. But then you’re doubling your admin and costs.

Our (loosely held) plan is that once the next generation are proper adults, we (or perhaps grandparents) can subscribe for shares, at NAV effectively, and gift them immediately to the (grand) kids. These are a Potentially Exempt Transfer (PET) under the IHT rules

Our intent is to do enough of this to pass majority control to them during our lifetime. We’ll then leave the minority shareholding to the generation after in our wills. (Yes, subject to IHT).

Someone has suggested holding the FIC shares in a trust… but my head hurts already.

I personally would prefer to just live forever.

Which broker do you use?Most brokers offer a company or corporate account. We use Interactive Brokers (IBKR).

Why do we use IBKR?Cheap margin loans. As any Private Equity associate will tell you, debt interest is tax deductible for companies. So if you’re going to apply leverage anywhere in your portfolio then the FIC is by far the best place to do it.

There was a good decade when my FIC was borrowing money from IBKR at about 2% (tax deductible), and repaying my directors loan so that I could use it to offset my mortgage (costing about 3%, not tax deductible).

You probably shouldn’t have one of these structures if you still have a mortgage though.

If you think Interactive Brokers is for you, then please DM me on Twitter for an affiliate link.

How much leverage do you use?Lots! Between 50-100%. (Where 100% means the FIC owns £100 of stocks for every £50 of capital)

When interest rates were very low – and the interest is an allowable expense to offset against capital gains – why would you not run it hot?

How do I manage the leverage? In theory the size of the margin loan never exceeds cash that I could feasibly access at close to zero notice and lend to the FIC as a director’s loan. We keep an effectively un-drawn offset mortgage against our Principal Primary Residence (PPR) for just this purpose.

In reality this rule has been ‘passively breached’ on one occasion, when I had to draw down the entire mortgage at the peak of the COVID slump. That was, as they say, ‘squeaky bum’ time.

(For quants-only: I also ensure that there are always sufficient available free funds in the brokerage account to cover the max of the parametric and historical two-day 99.9% Expected Shortfall.)

We’re reducing leverage now that interest rates have risen.

Which bank do you use?Pretty much all banks offer a business account. Turn up with your incorporation documents and ID, and you should be good to go.

I’ve heard from others that banks don’t like FICs. I’m not sure why this would be, or what would cause the problem. It’s not something I’ve experienced.

If you’re only used to personal banking, then you might be annoyed to learn they could expect you to pay for things.

We use a Santander business account and don’t pay any fees, I guess because we don’t do the things you might pay fees for. (Paying in cash would be an example).

This was not an active choice. We used to use Abbey National, and it merged. Possibly our free account was grandfathered in.

What stocks do you own in the FIC?This is my most favourite question, because anyone familiar with my stock picking skills would think I was the best person in the world to answer this question.

We’re looking for stocks that don’t go up – something I do appear to be an expert on!

Actually, we’re looking for stocks where most, if not all, or even better, more than all, the returns come from dividends.

This is because dividends are tax-free to the FIC and capital gains are not. So we want lots of dividends and the minimum capital gains – or even capital losses.

For example, all the assets below deliver the same returns, but the tax consequences are very different. (RIP Modigliani & Miller).

Stocks with high yields that never seem to go anywhere are what we want.

Why do you want to generate capital losses?The FIC pays corporation tax on any realised capital gains, although we can offset expenses and losses.

Effectively we try to avoid ever paying corporation tax by ‘sterilising’ gains. That is, by only realising them if we have sufficient offsetting losses in some other stock, or running costs.

For this reason we want a portfolio of stocks and not just a high-yield dividend-focused ETF like Vanguard’s VHYL, for example. We’re after some dispersion of returns.

This does still lead to some shareholdings being sufficiently ‘in-the-money’ that it’s hard to have the tax capacity to sell them.

When you see the portfolio in a minute, there’s some stuff that’s been held for a very long time for this reason that is no longer particularly high yield.

Any other constraints on potential stocks?Yes. It’s very important that the dividends are actually tax free to the FIC. There are some specific examples of cases where they are not. The source of the stock has to be a ‘qualifying territory’ on this list.

Tempted to stuff the FIC full of London-listed infrastructure or renewables trusts? Large capitalisation, high-yield, low volatility – perfect, right?

I’m afraid not. They are pretty much all domiciled in Jersey or Guernsey, and guess what? The Channel Islands are not on the list.

But most proper countries are, including, importantly, Ireland (where most LSE-listed ETFs are domiciled) and the US, with over 50% of global stock market capitalization.

However, and I’m sorry about this, but we need to talk about dividend withholding tax before we go any further.

A word about dividend withholding tax (WHT)Explaining dividend withholding tax fully is beyond the scope of this post.

But in summary…

Most countries level a withholding tax on dividends. This means you don’t get the dividends ‘gross’. You get them ‘net’ of withholding tax.

For example, the Netherlands WHT rate is 15%, so if a Dutch company pays a €1.00 dividend, you will receive €0.85.

As an individual UK taxpayer you may be able to use the 15% as a credit against any dividend tax you owe in the UK. But as a limited company we can’t, because we don’t pay (UK corporation) tax on dividends anyway.

In theory, the tax treaty may say we can get a reduced rate. But good luck getting your broker to take any interest in that. “Sorry they are held in ‘street’ name”.

You could also ask the foreign tax man for the money back. Good luck with that, too. “Sorry, your broker shouldn’t have withheld the tax in the first place”.

So what does WHT mean for a FIC?It is a long way of saying that we only really want the FIC to hold stocks domiciled in countries that don’t levy dividend withholding tax.

Significant countries where this is the case are the UK, Hong Kong, and Singapore – plus funds in Ireland.

Hong Kong is, of course, not on the qualified territories list, and Singapore is not very interesting.

So this leaves us with… UK-domiciled companies and Ireland-domiciled ETFs. Although we may break this rule if the (post-WHT) yield is high enough.

The ETF / fund structure doesn’t avoid this issue, by the way, it just hides it. (There’s the exception of ‘swap-based’ ETFs tracking US indices. Maybe we’ll cover that another day.)

Individual US stocks that pay dividends should be held in your SIPP, where you should pay no withholding tax.

We also want to avoid things where the distributions are interest not dividends, because interest is taxable for the FIC.

So we might buy preference shares – although they are usually not marginable – because they pay dividends. But not AT1 bonds, because they pay interest.

Great, but what have you actually got?I just alluded to another, personal, constraint – I want my stocks to be marginable at IBKR. Which means big and liquid.

I’d also prefer they were denominated in GBP and paid their dividends in GBP because otherwise it complicates the accounts. This is not much of an additional constraint given the dividend withholding tax issues above.

I’m left with a portfolio that looks very much like the sort of thing a classic UK equity income investment trust might own.

What can I say?

GACA is the only non-marginable share. And I think we can all agree there’s not much danger of these stocks going up much.

Aren’t you letting the tax tail wag the investment dog?Yes, absolutely, I am. But look at it this way – maybe my portfolio outside the FIC is the global market portfolio minus these stocks in these weights?

I mean, it’s not, obviously, but it could be.

We’re aiming for this:

How actively do you trade this portfolio?I have an ambition to go a whole year and not do a single trade. I’ve not succeeded yet. We do a handful of trades a year, but some of these positions haven’t changed in at least a decade.

Do companies still benefit from the ‘indexation allowance’ on capital gains?Sadly not, this was quietly removed in 2017. In my opinion it made the FIC structure substantially less attractive.

What other expenses can I get away with charging to the FIC?One way of essentially withdrawing money tax-free is to have the FIC pay expenses that you would otherwise have to pay yourself. (‘PA’ as they say).

These effectively get you, as an individual, ‘tax-free’ money out of the company, and are tax deductible for the company. A double win.

The extent to which you can do this appears to be down to the judgement of your accountant. You have to be able to make the case that it’s for legitimate business purposes.

We don’t do as much of this as we should, probably. The company pays for the occasional bit of computer equipment. “It’s for managing the portfolio!” This is depreciated over three years, so basically we get a laptop every three years.

We could probably expense the Financial Times subscription and our mobile phones, but we don’t.

I once tried to persuade the accountant that the FIC should pay from my MBA, but failed.

Can I expense my accountant’s bill for my personal tax return to the FIC?No. I guess you could come to an ‘understanding’ with your accountant. One where they overcharge you for FIC work and under-charge you for your personal stuff. But I don’t have that kind of accountant.

Do you hold UK REITS in the FIC?No. This could be quite a good idea, because the FIC should receive the Property Income Distributions (PID) gross. Although PIDs are taxable.

It might work if we have sufficient expenses. However Interactive Brokers don’t pay the PIDs gross, regardless of what the tax rules say.

Attempting to reclaim them from HMRC is theoretically possible, and something my accountant would be delighted to help me with – at a cost.

We don’t really have enough tax-capacity to make this worthwhile.

Can you have direct properties (buy-to-lets) in the FIC?Actually, yes! We have one, un-mortgaged, rental property in the FIC. We sold it to the FIC in early 2016. Just before the extra stamp duty for companies came in.

The income from the property is, of course, taxable, but it is tiny. We run enough general ‘management’ expenses to offset the income.

I have thought about moving one of my other buy-to-let properties into the FIC, but I’ve not been able to make it make sense.

To be honest if I’m going to sell it – with all the (personal) tax and hassle – I’d rather sell it to some other mug.

Do you have any other assets in the Family Investment Company?We once did quite a bit of peer-to-peer lending. You know the sort of thing: Lendy, Archover, Funding ’Secure’.

At least it provided us with a deep well of tax-deductible write-offs.

Could I just use the FIC for all my shares? You could, but it would likely be a bad idea, especially now that the indexation allowance has gone.

Your minimum tax rate on capital gains is 19% (rising to 25%) – and it could be as high as 54.51%. (The company pays 25% tax on gains, then you pay 39.25% on the dividend to you. That’s: 100 -> 75 -> 54.51%).

You’re much better off just holding those assets in your own name and paying 20% CGT.

This all sounds like a great deal of work. Is it?I spend less time administering the FIC every year than I spent writing this article.

The ongoing obligations are:

File a ‘confirmation’ statement with Companies House every year. (Takes five minutes. It’s nearly always the same as last year’s).
File accounts with Companies House every year. (The accountant does it).
Prepping the information for the accountant and checking their work takes about as long as it does to do our (again, fairly complicated) personal tax returns.
Filing a tax return with HMRC. (Again, the accountant does it).
There’s a bit of other admin, like renewing your Legal Entity Identifier periodically. (Interactive Brokers does that for us.)

How much does it cost to run?It costs us about £2,500 per year. This is almost all accountants’ fees.

I know, I know, it should be less than that.

The costs are proportional to the nature and volume of transactions. But they are essentially fixed with respect to the size of your balance sheet.

(That said, I suspect an accountant would charge the £10m company a bit more than a £1m company, even if they did the same amount of activity).

How much do I need to put in to make this worthwhile?Well, you know the costs now . You do the maths. Maybe £1m, if you’re starting from scratch?

It might be less if you’re using an existing company, or setting up a FIC that has a relationship with your trading company. I’ve never done this though. Once again, seek professional advice.

Can you recommend your accountant to help me set up a similar arrangement? No.

Does this cause a problem with your employer?Potentially. My employment contract explicitly forbids me from owning more than some percentage of a company, or being a director of another company, without my employers ‘written permission’.

The key here is to ask for the ‘written permission’ in good time.

I simply asked, by email, for them to confirm there was no problem with the arrangement in the same email I accepted their job offer. I have done this four times now and it’s never been a problem.

This sort of arrangement is a lot more common than you might think. Human Resources have seen it all.

In jobs where I was subject to compliance ‘personal account dealing’ rules, the FIC was obviously subject to the same rules.

Again, never a problem, if you follow the rules.

While we are talking about transparency…Anyone can go to Companies House, click ‘Search the Register’, put in your name, find the company you are a director of, and look at the accounts.

There is nothing you can do about this. If this is going to cause you embarrassment, then a FIC probably isn’t for you.

Can I pay pension contributions for directors?Yes, you can, but I’m not sure why you would?

These are ‘employer’ contributions that are made gross to the scheme – and are a tax-deductible expense for the FIC. You’re saving the company 19/25% corporate tax on the contributions, but you’ll pay anything from 15%-55% on withdrawals (from tax-free amount and basic rate all the way up to the LTA charge). So is there any point?

Again, this is a deferral of tax liability, more than an avoidance. It might be worth considering if the FIC is otherwise becoming liable for corporate tax and ‘needs’ some expenses, and if you have directors who are unlikely to get to the LTA and will be basic-rate tax payers in retirement.

But, again, if you’re rich enough to make this structure worthwhile, you probably don’t have those people in mind.

Can I pay salaries to the family members instead of dividends?Yes. You could make the kids (once they are adults) directors and pay them a salary – although there’s quite a bit of paperwork involved with having employees that I could do without to be honest.

The advantage over dividends is obviously that their salaries are tax-deductible for the FIC – and you’re just using their nil-rate allowance. (I’m assuming you’re only doing this while they are students, basically).

Into the weedsCan the company pay interest on the director’s loan?I believe so, but you do have to do some withholding / filing with HMRC. It’s a bit of a pain – and, again, why would you do this? Presumably the last thing the director wants is taxable income?

Can I convert a regular trading company into a FIC?I get this question quite a bit.

The classic case is the 1990s/2000s City IT contractor type who contracted through a pre-IR35 personal service company. They now have a few hundred grand sitting in their limited company and don’t want to pay dividend tax to get it out.

Be very careful here. There are some reliefs associated with being a proper ‘trading’ company that you may jeopardise.

This, as with every other word in this article, is something you should take proper professional advice on.

How does a FIC compare to some sort of ‘offshore’ arrangement?I have a high level of confidence that the FIC structure is 100% above board and has zero retroactive compliance risk from HMRC.

This does not mean that the rules won’t change to make some aspect of it not ‘work’ any more.

The only thing I’m confident about with offshore arrangements is that they are expensive to set up.

In any event, it’s not trivial. You can’t just set your FIC up in the Caymans and pay no tax. HMRC will treat any company that is ‘controlled’ from the UK as if it were UK domiciled and tax it accordingly.

I do know people with offshore companies that they don’t ‘control’ – but are controlled by a chain of shadowy proxy entities that they also don’t ‘control’.

I am sure this is all completely legit, the way they’ve done it. But I also don’t have the sort of money that makes this level of risk or complexity worthwhile.

Is a FIC a ‘close company’ and does this matter?Yes, most likely your FIC will be a close company. There are a few anti-avoidance measures that target close companies specifically – for example, targeting manoeuvres such as you moving abroad for a year and paying yourself a big fat dividend.

Unless you’re trying to use those avoidance methods, being a close company shouldn’t really make much difference.

There have been different tax rules for close companies in the past. This is certainly a potential vector for the government if they wanted to attack this sort of structure.

Is there anything you haven’t mentioned?Yes – there are a few other tricks that I don’t want to discuss openly on the internet!

Thanks to Foxy Michael, who met Finumus on Twitter and was kind enough to review this article for gross falsehoods. If this Family Investment Company FAQ has whetted your appetite, visit his site. You can also read more from Finumus in his *archive, or follow him on Twitter*.

Ideally you’d own them in tax shelters, of course, but you might have a larger portfolio or some other reason for owning un-sheltered assets. This brings the FIC into the picture.
Not the other way around – going overdrawn on the directors’ loan account.

The post Family Investment Company: Frequently Asked Questions (The FIC FAQ) appeared first on Monevator.

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Often times when somebody goes a little off-piste with their investments, I will make clear in the introduction that this site is for informational purposes only. It is not personal advice as to what you should do. Well, with my co-blogger apparently having gone off his rocker, I’m double underlining that today. Read on for enjoyment – but subscribe to his kind of cool at your peril!

One unfortunate development liable to banjax, derail, or otherwise severely stress-test a financial independence plan is galloping inflation and a cost of living crisis.

Oops! One minute my energy bill was a national average £1,200. The next I was being quoted north of £4,0001 as my old-skool affordable tariff expired – with me clinging on to it like Rose to a freezing Jack at the end of Titanic.

Time to dust off the emergency action plan I’d devised for precisely this scenario.

Ahh, about that…

Chapter 12: How to respond in the event of quadrupling energy costs.

I found I’d left that page curiously blank. Someone hadn’t covered off all the angles had they?

But I wasn’t entirely naked in the face of danger (and at these temperatures, thank God!)

In fact, my best way out of this, I decided, was to clothe the bejesus out of myself.

Cold comfort“Wouldn’t it be fun…” I said to Mrs Accumulator in that disarming way that instantly puts her on her guard.

“…if we challenged ourselves to use as little energy as possible this winter?”

Thankfully Mrs Accumulator’s action plan on “How to respond if TA turns out to be an utter nutjob” is also remarkably underdeveloped.

I mean, it’s not as if she hasn’t had fair warning.

“Yeah, alright then, Romeo,” she said.

So we set off on an adventure – like the Natural Born Killers of energy-saving.

Just how low could we go? Both on the thermostat’s dial and in terms of the social unacceptability of our chosen course?

And how many layers of thermals, fleeces, winter woollies, and the very best in technical gear would it take to live comfortably* in a house as warm as a tomb?

*Your mileage may vary.

Enter the Chillbreaker His and Hers survival suits made everything seem possible.

Get a load of this bad boy:

Several togs worth of quilted, walking sass.

Added bulk pour homme et padded booty pour femme.

Made by Refrigiwear and rocked by Americans working in industrial freezers or extreme Midwestern winters, this quilted beauty was the answer to our prayers.

Indeed I am writing to you from within its cosy confines now.

Polyester fiberfill insulation? Tick.
100% Taslon nylon 3-Ply outershell? Tick.
Storm flaps for the front zippers. Double-tick!

The Chillbreaker comes in any colour you like. As long as it’s Mao’s Workers’ Paradise Blue. Guaranteed to automatically crush any attempts at individual expression or insurrection.

Excellent news! Especially as I wasn’t sure Mrs Accumulator was 100% committed. (And we might both be committed by the time this experiment is done – so that padding could come in doubly handy.)

Have I mentioned the hip length leg zippers? Perfect if you start to boil in temperatures of over 12°C, or want to give a cheeky flash of your thermals.

IWOOTI know what you’re thinking.

Where can you get one of these dream-makers?

I’m glad you asked.

These babies are not available in the shops. Not in the UK at any rate.

But for a mere $110, plus shipping, import duty, VAT, and handling fee, you too can be the proud owner of your own adult romper suit.

In GBP, they cost us around £243 each. Plus some “can you ship to the UK hassle?” with US vendors.

But let’s not get bogged down in the details. The goods should pay for themselves in cubic metres of gas not burned.

So has the plan ‘worked’? (Put that in scare quotes, please – Ed.)

Do we live in an icebox sustained by our suburban space suits and balaclava helmets?

Does net zero now refer to the temperature of our house?

The icebox challengeThis was the temperature reported by my smart thermostat during the depths of the December cold snap.

The outside temperature was -8°C while inside at Chez Accumulator we were enjoying a positively ~~balmy~~ barmy 6.6°C.

I could tell I was still breathing because I could see it. Great gusts of exhaled air condensing into fog. Fun.

Actually somehow it was fun.

A greater challenge than living at 6.6°C will be persuading the sceptics that I’m not living in frostbitten misery and that Mrs Accumulator hasn’t left me for any dude with his thermostat set to 21.

But let’s give it a go.

Draught dodgersA big part of what’s made this work is we set it as a challenge for ourselves. One that we’re solving together, while taking it in stages, alongside regular check-ins to make sure neither of us is hating life.

Starting in late October we rationed ourselves to two hours of heating a day in the morning.

When it’s freezing outside, our draughty old Victorian home struggles to get over 17.5°C, even with the heating on 24/7.

We’ve never been able to ponce around in T-shirts and pants in the depths of winter anyway.

In student days, we spent one winter in a flat sans central heating. And we have heard plenty of tales from boomer parents about nights spent huddled together in front of the one fire in the house.

Britons didn’t used to live in dwellings heated to 21°C. More like 12°C.

That sounds bleak by today’s standards. But we started out thinking no more ambitiously than: “Let’s find out what we can put up with. Let’s save some energy. Let’s put the money to better use than heating a house that doesn’t want to be heated.”

And we wouldn’t be eschewing all mod cons – as the short, sharp fashion parade above makes plain.

A big difference between Britain today and Britain before central heating is that most of us can now afford whatever clothing it takes to give us a personal tog-rating worthy of a double duck duvet.

Just chillin’ in my cribThe science of thermal insulation using clothing is also now widely understood. Indeed you’ll know most of it already.

The bulk of the work is done by wearing three distinct layers:

The base layer that wicks moisture away from the body. Ideally this is made from merino wool or appropriate synthetic fabrics.
A thick insulating mid-layer that traps air. Think heavy wool jumpers (as worn by a fisherman) or a fleece. (Those sheep know what they’re doing).
A windproof outer layer. Not needed indoors unless your windows are outrageously gappy.

There’s even a US unit of measurement of clothing insulation called the ‘clo’.

A warm clo insideYou can award every garment you’re wearing a clo rating. Add up your clo units to find out whether your outfit can handle the prevailing temperature even as your sweet backside is parked on the sofa.

That last distinction is not only a beautiful image. It’s also a crucial part of maintaining our thermal comfort zone.

Experience tells us that our 21st Century sedentary lives do not help us stay warm.

But 1 clo’s worth of clothing is enough to keep humans comfortable at 21°C while at rest.

An example of a 1 clo ensemble is a military uniform. A three piece suit – plus undies – is also worth a clo.

Interestingly, 1 clo equals 1.55 togs, which is the British unit we know and love from our duvets.

Anyway, every extra clo you wear means you can comfortably lower the temperature another 1°C. Which saves another 10% in energy use.

A superb article called Insulation: first the body then the home by Kris De Decker shows you how to use this clo-business to throw together outfits from your wardrobe that can handle any temperature.

But I didn’t do any of that.

I just kept piling on layers as the thermostat ticked down like the depth gauge in a bathysphere:

16°C – a comparative doddle.
14°C – was totally bearable. I took to wearing my woolly hat indoors.
12°C – felt quite hardcore. Mrs Accumulator and I exchanged glances. Neither one of us caved.
10°C – I appeared on Zoom wearing full body bag, muffler, and hat. My mum pished herself.
8°C – I regularly popped a hot water bottle down my padded pants. If this thing burst I was done for.

Mrs Accumulator sensibly used a microwavable heat pack instead. No third-degree crotch burn danger for her.

How are we doing now? Still smiling? I couldn’t believe it. Though we needed to adapt at every stage we were both completely comfortable.

Granted, I felt cold at times. But no more than living in this house during a normal winter – when the heating was on full blast but we didn’t think much about what to wear.

The heat pack is genius. As long as your core is warm then that good-time glow extends to your hands and feet.

We both spend too many hours tapping into keyboards (witness the waffle above.) But even that’s not a problem at 8°C when you’re inside a heated Chillbreaker.

And it’s never going to get any worse than that. Because it transpired 8°C was our minimum room temperature provided we got two hours of heating. And that on the coldest day ever recorded in my part of the world. (Right now it’s 5°C outdoors and 12°C indoors.)

You quickly adapt to a new mean temperature. (With the emphasis on the mean.) I used to feel chilly at 17.5°C. Now that temperature seems like tropical spa break luxury.

And how’s Mrs Accumulator holding up?

She just challenged me to do without our two hours of daily heating.

Gulp!

Back to The Good LifeI’ve told you this story for your (possible) entertainment. It’s not meant as a “Come on Britain, put your bloody backs into it!” polemic about how we’ve become a nation of softies.

I’d prefer to live in a Putin-less world of wind turbines and heat pumps keeping us all toasty. One in which the Chillbreaker remains hanging on its peg because power is too cheap to meter.

Nor do I think state-sponsored Selk’bags should be compulsory for the frail and elderly, the very young, or those with illnesses exacerbated by the cold.

If we have visitors then we don’t write “dress warm” on the invite. We crank up the heating to make everything seem ‘normal’ by the time they arrive. We get that not everyone will dig our ‘frugal casual’ look.

But you’d be mistaken if you read into this a tale of forced frugality and the folly of FIRE. We could burn the cash on heating if we wanted to.

We’ve just got better plans for it.

Take it steady,

The Accumulator

Bonus appendixOur annual energy bill looks like it’ll tot up to around £1,200 on the standard rate if we stick to our current regime. That’s roughly what we would have paid before the energy crisis.

Whereas our energy provider is now estimating £2,750 for the year if we opened the gas taps like it was 2021.

If anyone would like to buy a Chillbreaker, then may I recommend purchasing from Legion Safety. They were the one company I found in the US who would (a) send the goods to the UK and (b) charge a reasonable shipping cost.

Their online reviews aren’t uniformly brilliant, so I thought I was taking a chance. However, Legion’s customer service was very good. Getting the item through UK customs was straightfoward, too.

I’ll write a brief guide in the comments if anyone’s interested.

There is a French company who will ship Chillbreakers, too, but it was more expensive.

I’d also love to hear people’s thoughts on alternative outfits. Sleeping bag suits look viable. What about skiwear?

Finally, apparently the British unit of insulation, the ‘tog’, was derived from ‘togs’, the classic slang term for clothing. Togs was borrowed in turn from ‘toga’ – the Latin word for the famed Roman fashion item. Love that.

This was before the UK Government’s Energy Bills Support Scheme was announced.

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What caught my eye this week.

After several false alarms, the past week saw National Grid throw the switch on its demand flexibility service.

Like much else in modern life, there’s a bit of double-speak going on here.

The ‘service’ on offer for those taking part actually involves degrading something we in the UK take for granted – electricity at the flick of a switch, whenever we want it, and the luxury of use without guilt or much thought.

Instead those who sign-up (and who must have a smart meter) are paid an incentive for using less power than they normally would during set peak periods.

For example, on Tuesday from 4.30pm to 6pm window.

According to The Guardian:

During the trials, typical households saved about half a kilowatt hour, which will be worth about £2 on Tuesday, putting the cost to National Grid at £2m. Those funds will be passed on to those participating, with suppliers keeping a share to cover their costs.

In total, National Grid is expected to pay just over £3m to suppliers for the service over Monday and Tuesday – with about £850,000 on the first day, and £2.1m for the longer session on Tuesday.

Octopus Energy – which has been running trials since early last year – reckons 400,000 of its customers took park in Tuesday’s session. They were offered £4 for each kilowatt hour of electricity they avoided during the hot zone.

(Interestingly, that incentive had been bumped up on account of National Grid lifting its payouts. Competition counts.)

In total more than £1m was paid out to Octopus customers on Tuesday. That’s meaningful money. But of course you have to divide it by the large number of customers taking part.

Which in turn leads to headlines like This Is Money’s ‘Would you switch off your cooker and washing machine for an hour to save 39p?’

Cognitive loadWhile the This Is Money angle rankles, I don’t blame it for going there. The small amounts saved do seem derisory if you pay attention to them.

Even doing it every week isn’t going to move the dial for many families. It’s been estimated that Octopus customers who took part in 25 powering-down events over winter might save just £100 in total.

That’s not nothing, but there are easier ways to save money than having to think about how you’re using energy a couple of dozen times for three months.

Instead, just remembering to never use big electrical appliances between 4.30pm and 6pm every day would cut the cognitive load. But at some point you’d presumably stop saving money that way, as your smart meter would get wind of your new pattern of usage.

Which means there’s actually an incentive to keep using power at peak times during the rest of the week. That seems a perverse incentive!

Vanishingly beneficialWith all that said, as a prophet of environmental danger myself I’m all for this direction of travel.

The key is for the system to become invisible, and ubiquitous. All consumers should have smart meters and their bills should be lowered whenever they use more energy outside of peak demand. These peak times should just become generally known, the same way we all understand that if we want to travel at rush hour there will be crowds.

Consumers shouldn’t have to police their bills to ensure they see savings. And in time AI and other smart home features should respond to known patterns of demand, too.

For example, you might switch on your washing machine at 5pm only for it to chirp back: “Do you want to wait until 6pm to save money?”

An emergency load can still get done. But I’d bet 90% of washes would simply be punted forward to beyond the peak period.

Every little helpsApparently Tuesday’s scheme saved energy equivalent to the city of Liverpool shutting down for an hour.

That’s a result, and I think this will scale.

Critics of renewables understandably raise issues about intermittent supply, peak demand, storage and so on. There’s no single killer fix, but I believe there are myriad small fixes – from using electric vehicles as a vast distributed battery to devising fossil fuel power stations optimised explicitly for short-term back-up, to these sorts of energy demand schemes.

Nobody said it will be easy, but if saving the planet involves not tumble drying my underwear at 5pm on a Tuesday then sign me up.

After that signing though, I don’t want to have to think much about it. That’s crucial.

Enjoy the links, and have a great weekend!

From MonevatorThe excellent Vanguard cash interest rate hiding in plain sight – Monevator

Swap rates and mortgage rates – Monevator

From the archive-ator: Beware the lure of the exotic – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

British business output falls at steepest pace for two years – Yahoo Finance

Plans for more banking hubs as branches close – BBC

UK equities no longer a ‘must own’ asset class, warns shareholder group [Search result] – FT

CBI boss urges Sunak to show more ambition on economy – Guardian

Flybe: all flights cancelled as airline ceases trading – Guardian

“I was lied to by Boris Johnson”: UK fishing industry waiting for [cough] Brexit benefits – iNews

Post-pandemic, more people are feeling disengaged from their work – NPR

Products and servicesHappy 30th birthday to the ETF [Search result] – FT

Banks slash mortgages rates, as five-year fixes edge back 4% – This Is Money

Low-cost housing: how can you escape the rent rat race? – Guardian

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Santander launches new £200 current account switching bonus – Which

Netflix crackdown on password sharing to begin in coming months – Guardian

NS&I boosts premium bonds prize fund again, now 3.15% – Be Clever With Your Cash

What can we expect from the upcoming pensions dashboard? – Which

English homes where your money goes further, in pictures – Guardian

Comment and opinionHow long is the long term? – Retirement Researcher

Is this the start of a great buy-to-let sell-off? [Search result] – FT

Learning the hard way: [US] 2022 portfolio rankings – Portfolio Charts

Challenging Morningstar’s Safe Withdrawal Rates [Two weeks old] – Alan Roth

Walking around money – Humble Dollar

UK pension age may rise to 68 in the 2030s: what’s going on? – Guardian

Bear markets and identity crises – Young Money

Why the French want to stop working at 60 – The Atlantic via MSN

Study reveals cognitive dissonance about passive funds by active managers – TEBI

Why we can’t stop changing our investment process – Behavioural Investment

Who should pay on a date? Money, dating, and dealbreakers [Podcast] – Ramit Sethi

Layoff brain – Culture Study

Compound interest only spreads its wings at dusk – Simple Living in Somerset

Musical investing mini-specialShould you be investing in stringed instruments? – Inside Hook

“You’ll go a long way…” Music financing boom reverberates to markets [Search result] – FT

Justin Bieber’s $200m sale to [hugely discounted] UK investment trust Hipgnosis – Billboard

Naughty corner: Active anticsFTSE 250 CAPE valuation and forecast for 2023 – UK Dividend Investor

After a timeout, back to the meat grinder [PDF] – GMO

Hedge fund investing, turnover, and taxes – Albert Bridge Capital

UK fallen angels: is it time to buy? [Video] – Vox Markets via YouTube

Even software start-ups with long runways can’t grow into 2021 valuations – PitchBook

(Don’t) buy back large cap growth just yet mini-specialDotcom Redux – Verdad

What are growth stocks? (Really?) – Finominal

Alternatively: sticking with quality growth stocks – Quality Share Surfer

Crypto o’ cryptoThe price of Bitcoin – Fortunes & Frictions

Wild West crypto firms fail FCA corruption checks – This Is Money

Kindle book bargainsWhat Should I Do With My Life? by Po Bronson – £0.99 on Kindle

The Investment Trusts Handbook 2023 by Jonathan Davis et al – Free on Kindle

Stuffocation: Living More With Less by James Wallman – £0.99 on Kindle

Factfulness: Ten Reasons…Why Things Are Better Than You Think by Hans Rosling – £0.99 on Kindle

Environmental factorsHow climate change threatens to close ski resorts – BBC

UK pension schemes search for forestry investments [Search result] – FT

Farmer, the world may not be your oyster – Hakai

Off our beatWhat the poet, playboy, and prophet of bubbles can still teach us [Search result] – FT

Why success doesn’t lead to satisfaction – Harvard Business Review

Remote work saved workers 72 minutes a day, study finds – Axios

Six healthy lifestyle choices to slow memory decline named in ten-year study – Guardian

Interesting stats on how much Japan has changed in recent years – Noapinion

Bernie Madoff: the monster of Wall Street [Podcast] – A Long Time In Finance

And finally…“If you think your odds of solving your problem are bad, don’t rule out the possibility that what is really happening is that you are bad at estimating odds.”
– Scott Adams, How to Fail at Almost Everything and Still Win Big

The post Weekend reading: we shouldn’t have to think twice about energy demand appeared first on Monevator.

How to Fail at Almost Everything and Still Win Big: Kind of the Story of My Life

Factfulness: Ten Reasons We're Wrong About the World--and Why Things Are Better Than You Think

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For sure I’m not the only homeowner who has been refreshing their mortgage options every day for the past few months. But are you also following swap rates?

Swap rates might sound like the relative popularity of Lionel Messi versus Cristiano Ronaldo in the Panini sticker trading game.

But they’re actually a vital bit of the financial system plumbing.

Swap rates largely determine mortgage rates, as well as much else that’s numerical and curvy in the financial world.

By keeping an eye on swap rates, you can better understand why you’re offered a particular mortgage rate.

True, you probably won’t bag a huge bargain on the back of it. Your mortgage offer will mostly depend on your income and deposit.

But at least understanding swap rates can help you judge why a given mortgage may be slightly more attractive than another, say, compared to if you didn’t know how they were priced at all.

Let’s dig in.

What are swaps?In finance, a swap is an agreement between two parties to exchange – or ‘swap’ – the cash flows from one asset for another, for a certain period of time.

Typically one stream of cash flows is fixed and the other variable.

Swaps are derivative contracts and the market is vast and deep. Estimates vary, but think hundreds of trillions of (notional) dollars, globally.1

There are various kinds of swaps, differing by whether the variable cash flow is tied to an interest rate, a currency exchange rate, or some kind of price level.

For example you may recall the Credit Default Swaps (CDS) made infamous by the financial crisis and The Big Short. CDS enable investors to swap or offset credit risk on fixed income assets.

The swaps we’re interested in today are called interest rate swaps.

Interested in interest ratesIn an interest rate swap, the cash flows exchanged are interest rate payments.

Most commonly, the swap exchanges a stream of fixed-rate payments for floating-rate payments.

Investment banks arrange swaps for a fee. The investment bank later offloads the risk via brokers to other investors, who want exposure for their own reasons. (Hedging or speculation, say).

Commercial and investment banks, big corporations, and very large traders typically make up the two sides (counterparties) of swap contracts.

What is the swap rate?The swap rate is the fixed rate demanded by one party in the swap for the uncertainty of having to pay the variable (floating) rates that the other party wants to exchange, over some period of time.

Here’s what’s going on:

The receiver demands a particular fixed interest rate – or ‘swap rate’ – from the payer. In exchange, the receiver agrees to meet the payer’s (uncertain) floating rate payments over time.

The swap rate reflects the expected value of those future floating rate cash flows, as predicted by the money markets when the deal is struck.2

At the time the swap is agreed, the two cash flows net out to zero and neither side stands to profit:

Source: PIMCO

In practice, variable rates are called variable for a reason. As the floating variable rate rises or falls, the contract will become profitable for one of the parties.

Note though that this doesn’t necessarily make the deal a bad one for the ‘loser’.

Think about when you take out a fixed-rate mortgage. The right reason to go for a fixed rate is to lock-in a regular and known cost for your future payments. It’s not to punt on interest rates.

Similarly, one party in a swap wants rid of the uncertainty caused by floating interest rates. If it loses a little money over time, that’s the cost of insurance.

Price moves everything around meThis all probably sounds very complicated, and on a deep level it is.

However, just as you don’t need to do a fundamental company analysis to buy Apple shares at the prevailing stock price, so participants in the swaps market basically follow the prevailing swap rate, which fluctuates with supply and demand.

Here’s one data provider of current swap rates.

How do swap rates affect mortgage rates?Swap rates are what determine mortgage rates (but see below for a bit on bank margins).

Of course you might ask “what determines the swap rate?” but this article would go on forever. The short answer is interest rates, and expectations and uncertainty in the market.

But back to mainstream lenders and mortgage rates.

Let’s say a mortgage bank is in the mood for lending.

Many of us believe High Street banks lend out the cash deposited by savers as mortgages, but this isn’t exactly how it works.3

A bank can create new money for loans via fractional reserve banking.

Alternatively it can tootle off to the money markets. There it might secure a couple of hundred million pounds worth of wholesale funding from other market participants.

It pays variable (/floating) rates on this money. However the lender wants to offer its customers fixed-rate mortgages, on which it will receive set monthly repayments. So there’s a mismatch here.

Even if the bank creates new money to make the mortgages, it’s in the business of providing retail customers with savings and loans, not in gambling on future interest rates. Also many of its liabilities will be related to floating rates, such as the interest it pays to savers.

So again, it will want to get rid of the risk inherent in offering a fixed-rate mortgage.

Enter the bankers’ bankersIn order to offer fixed-rate mortgages in a prudent and mostly risk-free fashion, our lender heads over to an investment bank.

These guys are only too keen to temple their fingers, smile menacingly, and arrange an interest rate swap that exchanges a variable cash flow for a fixed-rate cashflow.

Hey presto! The mortgage lender now has say £200m of money on which it will pay, for example, 4% for the next five years, thanks to the swap.

The investment bank is stuck with the risk of meeting the floating rate payments – but that’s its problem. (Which as I said earlier it will probably soon offload itself. But they are not the hero of this story, so we’ll leave them there).

The mortgage lender can now proceed to offer its customers £200m worth of fixed-rate mortgages at 4%. (Or a little more than 4%, because it wants to make a profit).

Crucially, the mortgage bank doesn’t have to worry about the variable rate going up to say 6%, and these fixed-rate mortgages becoming unprofitable.

It got rid of that interest rate risk, via the swap.

Bank competition also affects mortgage ratesIf swap rates and mortgage rates were one and the same, then we’d have no need of comparison sites or shopping around. All banks would offer the same rates. At least for the same terms.

But in practice mortgage rates vary across lenders.

As I write, the average five-year fixed-rate mortgage is charging 5.27%, according to data provider Moneyfacts. But home buyers with a 25% deposit can bag a five-year fixed rate from Yorkshire Building Society costing just 4.18%.

This chunky gap between the best rate and average rate – more than a full percentage point, or 109 basis points in City lingo – reflects the difference in margin the banks aim to make from their mortgages, and how keen they are to win business.4

It’s not rocket science to see that a lower mortgage rate will attract more borrowers, all else equal.

But charging a lower mortgage rate will earn the bank less money – margin – too, reducing the profit per customer.

A lower margin also means there’s less ‘buffer’ in the cash coming in to meet the bank’s other obligations. This will especially matter if mortgage delinquencies rise (and it subsequently receives less of those expected fixed-rate cash flows).

Hence cheaper rates also reflects a bank’s willingness to take on more risk.

Banks juggle all this according to their strategy – market niche, confidence in their mortgage underwriting, and their balance sheet – as well as their usual herd behaviour.

(Bankers like to do what everyone else is doing!)

Remember when the Mini Budget blew up the market?You can now see why mortgages got so expensive in the midst of the 2022 Mini Budget dysfunction.

Swap rates skyrocketed, partly because interest rate expectations spiked on the prospect of additional unexpected and unfunded government borrowing, but also because of a huge rise in uncertainty.

Spot the Liz Truss moment in this graph of two-year interest rate swaps:

Source: Investing.com

The spike in swap rates immediately impacted the future pricing for mortgages.

But the tumult also had a secondary affect, which was that mortgage lenders got the willies. They pulled thousands of their mortgage products in order to buy time to wait and see, and to price their products properly.

Thankfully, even this generation of Tories realized that the Liz Truss spectacular was a step too far in their post-Referendum battle against Britain’s prosperity.

So Truss got the chop and more sober politicians came in.

And we can see this clearly in the chart. Two-year swap rates are now back to where they were before the whole debacle.

Note that’s despite more interest rate rises from the Bank of England since. The market had already priced in those rises, prior to the possibility of additional ones due to ‘Trussonomics’.

Where does this leave the mortgage market?The money markets have hugely calmed down since Liz Truss and Kwazi Kwarteng were ousted in favour of the comparatively trustworthy Rishi Sunak and Jeremy Hunt.

Whatever their pros (they’re not Tory ultras) and cons (they still spout fantasies about economic ‘Brexit benefits’), the pair have promised fiscal sobriety, no funny business, and to show their workings.

Foreign and domestic capital has taken them at their word. The bond vigilantes have stood down. The so-called moron premium in UK rates has mostly dissipated. And swap rates have declined from the distressed levels we saw during The Muppet Show of September 2022.

As you’d expect, that has brought mortgage rates down. Although sadly not quite to pre-Mini Budget levels.

For example:

The average new two-year fixed rate mortgage was 4.74% just before the Mini Budget.
The average rate for the same mortgage is 5.5% at the time of writing.

Why the 75 basis point gap?

It’s true the Bank of England has continued to hike interest rates. However the forward curves implied this even before the Mini Budget.

Sure, nailed-on rate rises are more convincing then ‘almost certainly’. But only unexpected increases in the rate or duration of higher interest rates should lift swap rates.

More probable I think is the outlook for the UK economy – and its housing market – has worsened since early September 2022.

That could imply the Bank of England won’t raise rates so aggressively.

Indeed the current swap rate curve implies the Bank of England will be cutting Bank Rate from the today’s 3.5% within a couple of years:

Source: Bank of England

However the Bank of England’s focus is currently on bringing inflation down to target. And progress here is still only modest. Visible, but modest.

What’s more, there’s clearly a ton of economic strife going on, with workers everywhere demanding double-digit pay increases. Big wage hikes are certainly inflationary.

Given all this, I wonder whether most of the banks have simply been looking at the fatter margins on their mortgage products versus last year, and not feeling any great rush to trim them?

In other words, the mortgage lenders remain more skittish than before the Mini Budget.

On the other hand, mortgage experts always said it would take a while for mortgages to re-price following the September ructions.

And mortgage rates are still inching down each week. The best fixed-rate mortgages are much cheaper than the average, if you can get them. Maybe the spread over swap rates will continue to close.

What does it mean for a would-be borrower today?So should you look to get a variable or tracker-rate mortgage, at least for a while, and wait for lenders to bring fixed-rate mortgages down further?

Mortgage rates will probably continue to decline, but this isn’t a certainty. If the last year’s Russian war, energy price ructions, and political turmoil taught us anything, it’s that things happen.

On the other hand, while a variable rate mortgage will probably be more expensive to start with, it might be a price worth paying if you can switch to a sub-4% five-year fix in a few months time.

That’s not a prediction – but others are making it.

From FTAdvisor:

Brokers have shared their latest predictions on when fixed mortgage rates will fall below 4 per cent, with some saying they are likely to come down “by March” while others are “doubtful” rates will fall that low for at least the next six months.

As I noted earlier, one lender is already offering a 4.18% five-year fix. Others should follow.

However, as always, fixed-rate mortgages are chiefly about the certainty of forward payments, not interest rate speculation.

If you can truly afford (a) higher standard variable rate payments today and (b) the risk of having to eventually lock into a more expensive fix because ‘something happens’ tomorrow, then there may be a case for waiting a few months.

But what’s most important is to buy (or remortgage) at a rate that you can comfortably budget to and manage.

I’m keen to hear from other readers who’ve recently had to negotiate these mortgage markets. Anyone else watching swap rates? Or unfortunate enough to have remortgaged under Truss?

The majority of these contracts net off against each other. The actual cash flows involved are much more modest.
In the UK that future is predicted by the forward SONIA (Sterling Over Night Index Average) curve. SONIA is the more transparent successor benchmark to LIBOR, which was rigged by banks during the financial crisis. SONIA is administered by the Bank of England.
Savings aren’t irrelevant. But they are mostly cheap funding that bolsters the bank’s balance sheet, helping to enable its various other activities.
It may also represent how much funding the bank has previously secured via swap rates. Once this tranche is used up, its rates will change with the cost of new funding.

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Better known as a global investment giant, Vanguard is currently paying a highly competitive interest rate on cash parked in its ISA, SIPP, and general trading account products. Vanguard doesn’t publicise it but you can currently earn a Vanguard cash interest rate of 3.0935% to 3.1% on money you leave uninvested in its platform.

This ‘hidden’ Vanguard interest rate compares very favourably against leading easy-access savings accounts and cash ISAs topping the ‘best buy’ tables at the time of writing.

Vanguard cash interest: how it’s calculatedVanguard’s interest rate is calculated on your cash balance like this:

The Bank Of England base rate (currently 3.5%)

minus

0.25% Vanguard’s deduction from the base rate

minus

0.15% Vanguard’s account fee

minus

Up to 0.2% Vanguard charge on interest received

Note: the 0.2% is deducted from the interest you earn. It’s not a 0.2% fee applied to your total cash balance. That makes this charge much smaller than it appears at first glance, as we’ll see below.

Tot those numbers up and you’ll earn a minimum 3.0935% Vanguard cash interest on uninvested cash lying idle in a stocks and shares ISA, Junior ISA, SIPP, or general trading account.

Vanguard interest rate: an exampleVanguard doesn’t publish its cash interest rate. It’s like a secret menu item at KFC.

Moreover, the clues to its existence are confusing, so let’s work through an example to see just how good the interest payments are.

Imagine you’ve stashed £10,000 in your Vanguard account.

£10,000 x 3.25% Vanguard cash interest rate = £325 interest earned

£10,000 x 0.15% account fee = £15 deducted

£325 x 0.2% Vanguard admin charge on interest = £0.65 deducted

£325 – £15 – £0.65 = £309.35 net interest earned

(£309.35 / £10,000) x 100 = 3.0935% Vanguard interest rate

Or: 3.5 – 0.25 – 0.15 – (3.25*0.002) = 3.0935% interest paid on cash.

Right now, that’s a generous rate!

Are there any wrinkles?Quite a few! Both positive and negative things to be aware of.

Monevator reader WCTL Flashheart first tipped us off about Vanguard’s interest rates. WCTL Flashheart said the cash payments they received increased with every hike from the Bank Of England.

In other words, Vanguard is quick to pass on the benefit of interest rate rises. Quite unlike some other financial institutions we could mention!

About that confusing interest chargeVanguard’s cash interest rate is poorly advertised, to say the least. The fullest explanation is in the Vanguard Client Terms document. (Access the latest version from its terms and conditions page).

This document says (emphasis is mine):

Interest charge

We do not charge a service fee for holding your cash. Instead we currently keep up to 0.20% of the interest rate we receive on cash held in your account, to cover our costs of administering it. This rate is determined by reference to the interest we receive and the cost to us of managing the cash within your Account.

In the event that we are not able to sufficiently recover our costs from the interest we receive we reserve the right to levy an additional service fee of up to 0.20% by written notice in accordance with clause 10.

If Vanguard decides not to levy the full 0.2% on interest received, then you’ll earn a slightly better rate: up to 3.1%.

Reader WCTL Flashheart calculates they are earning 3.1% in their SIPP, for example.

Meanwhile Vanguard customer service didn’t mention the 0.2% charge to me and say the interest rate is the same for all accounts.

However, as you can see in the clause above, Vanguard may charge up to 0.4% on interest received.

Thankfully that won’t do much damage. A charge of 0.4% on 3.25% reduces your Vanguard cash interest rate to 3.087%.

What about this account fee and service fee business? Vanguard’s website says: “We do not charge a service fee for holding your cash.”

Many people might innocently assume that means Vanguard doesn’t charge its 0.15% account fee on cash holdings.

But Vanguard customer service has confirmed that the 0.15% charge does count against cash.

So while it’s lovely that Vanguard doesn’t charge a service fee, it does charge an account fee. Because those two things are, um, completely different, obvs.

There is an account fee capOnce the value of all your accounts (investments and cash) passes the £250,000 mark then your account fee tops out at £375.

So if you’re stuffing away cash at Vanguard beyond that threshold, you’ll earn a 0.15% bonus rate.

Admittedly while simultaneously throwing away cash – because there are rival brokers who’ll charge you a much cheaper flat fee for holdings way below the £250,000 level.

(See the flat fee brokers section of our broker comparison table for a better deal.)

When is interest paid and are there any other catches? Interest is accrued daily, but you don’t earn a bean on cash awaiting withdrawal or cash that’s paid into a regular savings plan.

According to the client terms document:

If you set up a Regular Savings Plan to make regular Payments or Contributions we will not pay interest on your Payment or Contribution before it is invested.

Is the cash ‘easy access’?Cash parked in your Vanguard SIPP can’t leave until you hit the minimum pension age. That’s age 55 at best, so perhaps this route is for retirees only.

Junior can’t withdraw from a Junior ISA until age 18. (Probably a good thing on balance…)

However you can withdraw anytime from a Vanguard stocks and shares ISA, or a general account.

Vanguard’s ISA is flexible so you can withdraw money and not lose that year’s ISA allowance if you pay back the cash inside the same tax year. Hit that last link for a refresher on the flexible ISA rules.

Vanguard’s withdrawal terms are also pretty easy going:

There is no minimum withdrawal amount and no requirement to maintain a minimum account balance.

Obviously though it’s not like moving cash in a flash on a banking app. It could take a good few days for your cash to actually land in your bank account.

Please let us know in the comments if you have firsthand experience of how long it takes Vanguard to stump up after a withdrawal request.

FSCS compensation protectionFamously, cash and investments are protected up to £85,000 by the FSCS compensation scheme.

Vanguard deposits your cash with HSBC bank. So if Vanguard went down and your cash was stored with HSBC at the time then all is well – provided the bank remains standing.

If HSBC defaulted then your Vanguard cash would be a risk. In that scenario, your ultimate backstop is the FSCS cash compensation limit of £85,000. But that claim would be set against your cash at HSBC, not Vanguard.

Moreover, your £85,000 worth of protection is measured versus all the cash you’ve lodged at HSBC.

So if you have a HSBC savings account worth £85,000, plus a Vanguard cash balance of £85,000, you’re still only covered by the FSCS for £85,000. Not £170,000.

This rule applies across the board with the FSCS. The protection limit applies:

Per authorised firm – including their sub brands
Per person – so joint accounts are covered up to £170,000
Per claim category – i.e. cash is one category and investments another. That means all your investment funds held with one institution are only covered up to £85,000

So to avoid breaching the FSCS ceiling you must only keep £85,000 total in cash at all HSBC related accounts, including Vanguard, First Direct, and any other brokers who deposit with HSBC.

Obviously Vanguard could change its partner bank. But it says it’ll let account holders know in that event.

Some brokers divide client money between multiple banks to diversify the risk of a default.

AJ Bell claims:

If we held 20%, or one fifth, of your cash with a bank that failed, up to £425,000 would be fully protected by the FSCS (i.e. 5 x £85,000).

Vanguard only mentions HSBC, though.

Will Vanguard’s cash interest rate remain competitive?Vanguard’s business is investing not banking. If it is flooded with cash from UK money mavens then I suspect we’ll find it dropping down the ‘savings account’ league table pretty quickly.

But for now Vanguard’s cash interest rate is a welcome point of difference that’s much higher than rivals such as Interactive Investor, Fidelity and AJ Bell.

Enjoy it while it lasts.

Take it steady,

The Accumulator

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What caught my eye this week.

A fortnight ago I posted a couple of reader polls, asking you how often – and how – you checked up on your investment portfolio.

More than 2,600 of you voted! Thanks to everyone who did their click for ~~England~~ Monevator.

I promised to share the results. They might be especially interesting to those who check their portfolios less frequently.

(Because presumably you aren’t the sort to go back to the original article after a week to see how everyone else voted…)

How often is normalThe first big takeaway is that over half of Monevator readers (yes, who voted in this poll, statistic sticklers) check their portfolio at least once a week:

Indeed slightly more than 80% of us check our portfolios at least monthly!

This is a pretty incredible statistic. I’m hoping my co-blogger The Accumulator doesn’t read it, given how often he’s cautioned against fanatical portfolio monitoring.

Of course it’s reasonable to assume that regular Monevator readers are more engaged with their portfolios than most private investors. And also perhaps that the sort who will vote in a poll that’s of interest to investing nerds like us are also, well, investing nerds who are more likely to want to see how their portfolios are doing.

There’s no distinguishing between passive and naughty active investors here, either. Despite some friction at times, we do try to be a broad church.

Maybe most of Team Accumulator just smiled serenely on seeing the polls then glided down to the latest Guardian fancy house roundup in the weekly links?

Certainly my friends who invest completely passively (and where I’ve had something to do with it, which is how I know) typically have no idea what their portfolio is worth.

At least a couple have called me over the years to make sense of their platform’s online navigation. Up until then they’d mostly done everything by post!

Who does that now? To some extent the accessibility of our portfolios via the devices that surround us makes checking them regularly almost inevitable.

Check mateIf you had to phone up a person to ask for a snapshot – let alone wait for a reply in the mail – I doubt anyone would be checking anything very often.

But then again, I would never have invested so much and so young if it hadn’t been a hands-on experience. And I’m obviously an (over) engaged investor as a result who has achieved a measure of financial security pretty young as a result.

I’m sure I’ve invested more (and more often) because I check my portfolio at least daily. Indeed far more often at times, with it being so easily accessible via various sheets on my Google Drive net worth spreadsheet.

However I also do believe this has caused me more stress and hurt than even active investing had to. Particularly in a dire year like 2022 (dire at least for a naughty small cap / growth stock-leaning active investor like me.)

Tools of the trade(rs)I am almost more surprised that so few of you use an automatically updated spreadsheet like I do. Our second poll suggests nearly 40% of you are trudging around the broker screens, which seems a faff to me:

One thing is clear – paper is indeed a dying medium for investors.

Meanwhile I’m impressed that 350 or so of you don’t track your portfolio at all. Is that because it’s size is so surplus to requirements or because you’re just getting started, I wonder?

It feels like one definition of being really rich: if you have to ask the price you’re not rich. Maybe it’s the same for sufficiently (eight-figure?) funded stashes.

I’ll let you know if I ever get there…

Portfolio monitoring pros and consIt’s been a truism for as long as I’ve been blogging about personal finance that a largely hands-off approach to your portfolio will work best for most investors.

Choose a sound asset allocation, automate your saving and investing, and avoid checking things too often.

There was even that famous study that apparently showed that dead investors – who were unable to log into their dormant accounts to meddle – achieved the highest returns of all.

Interestingly, in reading around the subject I’ve found new research implying that being engaged leads to superior outcomes. Although of course it depends on what that engagement entails.

Trading penny stocks based on candlestick charts every morning is almost certainly not going to be a winning strategy, however engaged you are.

On the other hand, caring enough to log into your company’s pension portal to swap high-charging active funds for low-cost index trackers is a one-shot decision that will likely reap rewards for decades.

On balance, I still feel less is probably more. However bad I am at taking such advice myself.

That’s because staying strategically disengaged from your portfolio’s value most of the time has two big benefits.

Firstly you’ll be less tempted to fiddle with your plan or panic.

Secondly, every portfolio except Bernie Madoff’s spends most of its time below its latest high-water mark. Seeing you’re down (even if only on yesterday) makes you feel bad.

The science says the times you notice you’re up won’t balance it out, either. The pain of losses exceeds the joy of gains.

But you probably know that already. And I must admit that as a passionate investor who follows the markets like others football – not to mention a blog owner who hopes you’ll keep returning or better yet subscribe to read more of our articles – I’m glad so many of you are so fresh with your investments.

Just don’t tell the other guy!

Have a great weekend.

From MonevatorAre you lost in Neverland? Fear of investing is a familiar and costly story – Monevator

From the archive-ator: When to buy insurance – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK inflation dropped slightly to 10.5% in December… – Investment Week

…and energy bills are forecast to fall further later this year – City AM

Employers confronted over missing pension contributions [Search result] – FT

Only two weeks to go until 31 January self-assessment tax deadline – LITRG

Lloyds and Halifax to close 40 more bank branches in England and Wales – Guardian

Changes to state pension top-ups come into force from April – Which

Amazon is shutting down its AmazonSmile charity initiative – Amazon

Super passive goes ballistic; active is atrocious [Search result] – FT

Products and servicesHargreaves Lansdown launches electronic voting system – Investment Week

Could your savings earn a higher interest rate without you switching bank? – This Is Money

UK inflation: how everyday goods and services have shot up in price – Guardian

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

How to earn rewards and freebies from your current account – Be Clever With Your Cash

The psychology of scams: how fraudsters trick their victims – Which

Cost of a basic funeral dips below £4,000 – This Is Money

Homes with storage to cut clutter, in pictures – Guardian

Comment and opinion$1 trillion and counting: Jack Bogle’s legacy to investors – The Evidence-based Investor

Elevate – Banker on FIRE

Financial planning in your 20s is about setting up good habits – Oblivious Investor

FOMO: the worst financial trait – Morgan Housel

Five lessons from an awful year for the financial markets – A Wealth of Common Sense

Don’t bet the bank – Humble Dollar

The role of [US] real estate in an investment portfolio – Morningstar

Don’t buy a football club – The Motley Fool

Who pays for your credit card rewards? [US but relevant] – Vox

Long-term investing maths mini-specialThe most important equation (or why Bitcoin has to average 30% a year to break even with the S&P 500) – Klement on Investing

The long-term wins – A Wealth of Common Sense

Naughty corner: Active anticsThe periodic table of commodity returns: 2013-2022 [Infographic] – Visual Capitalist

Time to buy UK small-caps? [Search result] – FT

Why hedge funds prefer higher interest rates – Institutional Investor

Should we listen to outperforming fund managers? – Behavioural Investment

Warren’s Way – Humble Dollar

Questioning the illiquidity premium – Fiduciary Wealth Partners [h/t Abnormal Returns]

Kindle book bargainsWhat Should I Do With My Life? by Po Bronson – £0.99 on Kindle

The Investment Trusts Handbook 2023 by Jonathan Davis et al – Free on Kindle

Stuffocation: Living More With Less by James Wallman – £0.99 on Kindle

Factfulness: Ten Reasons…Why Things Are Better Than You Think by Hans Rosling – £0.99 on Kindle

Environmental factorsIt’s getting too hot to make snow – Wired

Invest in technology that removes CO2, says UN report – BBC

EVs: mini power plants on wheels – Wired

‘Super-tipping points’ could trigger cascade of climate progress – Guardian

Off our beatWhat it’s like to be @Josh on Instagram – Slate

Why the US and UK can’t stop fighting the metric system – The Verge

“The more we pulled back the carpet, the more we saw” – Guardian

Job interviews are a nightmare, and only getting worse – Vox

And finally…“The impression was gaining ground with me that it was a good thing to let the money be my slave and not make myself a slave to money..”
– John D. Rockefeller, Titan: The Life of John D. Rockefeller, Sr.

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Titan: The Life of John D. Rockefeller, Sr.

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Like being too scared to date or too shy to visit a gym, the fear of investing is a hangup that costs you nothing in the short-term but can cripple your long-term future.

I’ve seen it many times over the decades. More so as my family and friends have come to think of me as the person they know who is into investing. They approach me with their hopes and fears.

Many people grow up with no role models who invest. It can all seem foreign and frightening.

My own working-class parents relied on a defined benefit pension – and their home – for their old age. They didn’t think about shares once.

My dad said I was gambling. Only after he died did my mum start a modest portfolio.

Other people get burned early by a self-inflicted loss. This used to happen because they unfortunately discovered the market via a friend or workmate who day trades. Today first contact probably happens more on social media.

Half a dozen lost shirts later, some look for a better way. For them, punting on blue sky stocks turns out to be an on-ramp to a global tracker and a simpler life.

But others eventually conclude, again, it’s all gambling. They might swear off investing for a decade. Our lives are too short for that much forsaken compounding not to hurt.

I saw this nervous sentiment after the Dotcom bubble burst. Even those who did keep investing snatched at cheap shares and wanted to sell before they were caught out. Faith in the future was in short supply.

That trepidation must also be widespread in the wreckage of the meme stock boom of 2021.

Doing better by knowing nothingLet’s think about the future by remembering the past – and previous market corrections.

By late 2009 the global stock market had bounced far off its admittedly somewhat scary lows hit during the financial crisis.

One could certainly quibble about valuation then, or the pace of the economic recovery.

Many of us also fretted, wrongly, about what quantitative easing – as we misunderstood it – would do to inflation or proper market functioning. (A dozen years too early, perhaps?)

However I did believe it was pretty clear all the shoes had dropped, as our US cousins say. The global economy had gone to breaking point and back. It had buckled, but it had not been busted.

The way ahead from the dark depths – however bumpy – was going to be up.

And after two years of writing about a relentless bear market on Monevator – from 2007 to 2009 – I was personally looking forward to some good times!

Yet online people called me naive or reckless for my optimistic take. The pain of loss was still fresh.

Worse, in real-life I learned of friends who had invested nothing for years – too scared by all the bad news.

Luckily those who’d set up Legal and General ISAs stuffed with the in-house tracker funds I used to suggest in those faraway days had mostly kept up their modest but meaningful contributions.

And buying equities cheap for several years eventually boosted their returns, as you’d expect.

One ex-girlfriend was even sweet enough to phone me around 2015 to thank me for getting her started with what eventually became her London house deposit. (I tutted and said it was all her own hard work. While secretly realizing yet again she’d been a keeper!)

However those I knew who tended to talk about “doing something clever” with their money or even “playing the markets” had often not acted so well.

Fear of investing when shares are cheapYou might run away from a bear or scream at a spider. But fear of investing is typically manifested in doing nothing.

In late 2009 a good friend admitted to me that’d he still not started with the regular index-tracking ISA investment plan we’d by then been informally discussing for – oh – five or six years.

He told me this ruefully after seeing the FTSE 100 index break through the 5,000 level again, in the summer rally of that year.

In an article on Monevator in July 2009 I wrote:

Normally you have to hold your nose when you buy because of equity valuations.

For the past six months, you’ve instead had to close your eyes and ears to bad news headlines.

But unfortunately my friend had neither held his nose nor closed his eyes.

He’d kept on doing nothing.

“I knew I should have invested when the FTSE was below 4,000,” my friend bewailed. “But everyone told me it was going to fall further.”

Ahem. “Everyone?” I thought to myself. (I was more diplomatic in those days).

All summer, he continued, he’d been waiting for a correction.

Then he’d swoop!

However in my view, anyone who fancied themselves as a tactical investor who didn’t buy something in March 2009 is never going to be a swooper.

Most people aren’t constitutionally built for making repeated active decisions. Even fewer – nearly all of us – aren’t any good at the timing, anyway.

There’s no shame in it. We just need a different plan. Probably one that automates the decisions we made in the cold light of a Sunday morning.

But this friend of mine struggles. He seems to have an unshakeable image of himself as a wheeling and dealing active investor, but he rarely acts.

Perhaps it’s because he’s an (excellent) entrepreneur. Action is his forte.

Whatever it is I can’t get through to him. He’s still much the same over a decade later. Begrudgingly and inevitably he’s finally made some investments over the years. But there’s still no coherent plan.

Lost in NeverlandSuch people are stranded in an investing Neverland. For years they avoid committing. Instead they wait for a perfect tomorrow that never comes.

Or, almost worse, they eventually do buy into a market – but only when their fear of investing fades and it feels super-safe to do so. When everyone is loudly buying again, and the market has been rising for years.

They think they’re taking less of a risk buying in the good times. The opposite is true.

I had another acquaintance who was unlucky enough to make vast profits punting on tech IPOs during the Dotcom boom. From memory he made at least ten times his salary in a couple of years. Possibly more.

He lost virtually the whole lot in the subsequent crash. (Fortunately for his subsequent lifestyle, his wife cashed out her share of ‘the pot’ at the turn of a century, months before the fall, to invest in a lifestyle business in the Med. They went on happily to run it).

This fellow’s ups and downs cemented for him an unfortunate idea about investing. He talked about company insiders, daring bets, nose-tapping tips, and doing vastly better than the market – as well as taking vast amounts of risk.

And that was actually a workable strategy in the crazy late 1990s.

Right up until it wasn’t.

Similar would be the meme stock and crypto traders of a couple of years ago who had laughed at those of us who didn’t double our money in an afternoon.

What speculators do in these rare periods of euphoria works brilliantly, for a while. But they don’t realize they’re essentially exotic creatures in a very unique ecosystem with a short lifespan.

Sooner or later a meteor hits the rarefied climes, and everything changes.

Exaggerated threatsBut isn’t fear of investing rational, then? If a generation can go metaphorically extinct like that?

I don’t think so.

What it misses – especially for someone like my entrepreneurial friend, for whom investing is a must-do not a passion – is that questions of when or what to buy today or sell tomorrow are really irrelevant to what investing should be doing in their lives.

They are not fund managers, nor even DIY investor hobbyists.

Their fear of investing is an emotion that arises mostly from their faulty investing worldview.

In reality, investing is just a means to an end for most. We work hard, save, and have spare capital to put to work productively for the future. We need our money to at least stay ahead of inflation over longer periods. We’d ideally like it to do better.

That’s it.

Going back to my friend, his surplus capital should be invested for the long-term. Money he might need in the short-term should stay in cash or short-duration bonds. History has shown this is a winning strategy.

Follow it and what is there to fear?

Here’s what is likeliest to happen to a balanced portfolio after a bad year like 2022:

Source: Vanguard

My friend should focus on the yellow dotted line – while accepting that now and then some people will find themselves in the unlucky 1%. And he should invest accordingly.

Then he should get back to doing what he’s great at when it comes to making money, and doing what he actually likes doing with the rest of his time.

Everything else is noise for someone like him.

With friends like these…I am not making my friend up. (I appreciate he sounds like a composite created for a blog post.)

But I don’t believe he’s that unusual.

My friend is no idiot. He’s a clever and capable businessman. He just hasn’t been able to get past the fairy tales spun by the finance industry to extract from us all the cash they can.

My friend is also unfortunate enough to have old university friends in the City – let’s call them the Lost Boys – who were mired in gloom in Spring 2009. They were convinced the stock market would plunge further.

They expressed this view loudly to my friend, who listened. Talking to them flattered his fear of investing – making it look instead like a sound strategic decision.

His Lost Boys were getting wealthy in the financial services industry. So they must have known what they were talking about, right?

Not so fast.

The sophisticated face of fearWhile City folk can obviously give extremely valuable information in specific areas, in my experience they used to be terrible sources of general investing insight for ordinary investors because:

Your goals and their goals are probably very different.
They flock together, and most tend to think much the same thing at any point in time.
Many base their mood on what they’ve been paid recently.
Career risk (good and bad) influences their investing outlook.
Some don’t seem to understand reversion to mean. Seriously.
They are often somewhat-to-very rich, which gives them different profiles to most of us. (One very wealthy banker acquaintance of mine used to keep the bulk of his millions in bonds, and intended to until he stopped working. He didn’t need risk, he said. It was rational in its way.)
Nearly all of them got rich on other people’s money. They didn’t compound a nest egg out of their savings. They took earned 1% of hundreds of thousands of other people’s nest eggs

The younger City types I meet these days are admittedly a different breed. They have grown up in an era where it’s at last widely understood that passive investing usually delivers the best results.

But back in 2009, surrounded by his oldest pals and with a head full of ideas such as doubling his money in banks on the brink, it was difficult to persuade my friend that he should invest regularly and automatically into an index tracker, and to turn volatility over 30 or more years to his benefit.

Passive investing sounded to him more like a tax. Not like high-rollin’ share tradin’!

So he sat on the sidelines and did neither. Watching the market soar.

Fear of heightsIndeed when you’re not invested – or even when you are – rising markets can also encourage a different kind of fear of investing.

Now you’re not scared because markets are falling.

You’re worried because they’ve already gone up.

The Accumulator addressed this one in 2016, after the market had risen for what in hindsight seems just a scant few years.

Yet some readers were already nervous that another bear market must be imminent.

A crash is always a possibility. But the bigger danger is that trying to anticipate such corrections again turns you into a share trading punter. And not a very happy one at that.

As The Accumulator noted:

It’s easy to drift away from a simple and iron-rigid strategy into a messy, complex, ad hoc one where you’re constantly pulling all kinds of shapes in order to outguess the market.

Most of us should stick to a simple, automated, passive investing strategy and only get involved with some light rebalancing once a year, or when the markets have swung wildly.

But this stuff is only very easy in retrospect.

Looking back now it seems almost comic that anyone would have worried about the market getting carried away in 2016.1 Think of all we’ve seen since!

But that’s not to mock those who were. We considered it worth writing about, too, after all.

Number crunching side noteA good antidote to such nervousness after a modest 20% rally is to read old investing histories. You will hear them talk about index levels that seem to be missing several decimal places.

For example, here’s the Federal Reserve recalling the crash of the early 1930s:

The slide continued through the summer of 1932, when the Dow closed at 41.22, its lowest value of the twentieth century, 89% below its peak.

The Dow did not return to its pre-crash heights until November 1954.

True – a smidgeon over 44 was the low in the 1930s depression.

It’s also true that the Dow is breached 36,000 in 2021!

Yes, I understand you haven’t got 90 years to wait for a bounce back. You won’t need so long (absent a disaster like a communist revolution) but even that is not the point.

I’m simply arguing for perspective.

You wouldn’t panic that you hadn’t yet reached Glasgow just 30 minutes after pulling out of your drive in Bristol.

Set your investing horizons appropriately long-term, and you have more time to be less afraid.

Peter PanicAs I said, it’s untrue that nobody suggested my friend put money into the market back in spring 2009.

For my sins, I did. (I stopped giving advice like this years ago, unless my friends really push me).

I also recorded my views on Monevator, writing almost to the day of the low in March 2009:

The global stock markets have suffered their worse declines for several generations.

Ultimately, if you’re not trickling money into the markets at these levels then I think you might as well forget stock market investing altogether.

While I am proud of that piece, I admit I was lucky with the timing. And quite rightly the article was fully of caveats.

Still, in 2022 I could send my friend a link to that old article, note its date, and pretend I’m brilliant at calling markets like his City chums might have. (They’d have launched a fund on the back of it!)

Actually, I’d probably go up a notch in his eyes!

But doing so would be to do my friend a huge disservice. It would teach entirely the wrong lesson.

I’d simply become another Lost Boy in his Neverland gang. Whereas what he really needs to do is to finally take a mature and disciplined approach to long-term investing.

So I keep it to myself, and nowadays just nod as he bemoans his years of ill-fortune in the markets.

Epilogue: fear of investing in the property marketI’m sounding a bit too smug in this article for someone who saw pretty big market-lagging losses in 2022 and felt rotten about it.

So I’ll conclude with a reminder about how I’ve been shell-shocked myself.

Not with equities, but property.

Specifically, how the fear of investing in an expensive-looking London home cost me a fortune.

Long-time readers may remember it took me 20-odd years to buy my own place to live in. This despite my huge interest in the property market throughout.

Years before Monevator – in my 20s and early 30s – I was arguably even obsessed. The tail-end of this period crept onto this blog. I used to compute my own affordability ratios and the like, and swap anecdotes on the madness of the market on forums where we’d try to call down a property crash like some ritual cargo cult.

We didn’t think we were doing that, of course. We thought we were the sane ones.

And perhaps in another reality – where the financial system wasn’t bailed out in 2008 by near-free money and so there was subsequently a second Great Depression – we were. In that universe we could tell everyone in the line for the soup kitchen how we had seen it all coming.

But I’m glad I was wrong and we got the reality we did.

If nothing else, being optimistic is a nicer way to live!

I say that as someone who once calculated that not buying a two-bed flat in an up-and-coming area of London like my father urged me to – at the very bottom of the market in the mid-1990s – had cost me roughly three-quarters of a million quid.

You literally live and learn. But it’s better – and cheaper – if you can do so from someone else’s mistakes.

Invest sensibly and appropriately. Diversify. Never go all-in on anything.

And with that lose your fear of investing.

The bond market maybe, given last year’s historic crash back to 2010 levels.

The post Are you lost in Neverland? Fear of investing is a familiar and costly story appeared first on Monevator.

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What caught my eye this week.

Things are looking up for investors. Not because the markets have got off to a strong start in 2023 – the gains logged so far could reverse in a day – but because the pain of 2022 has set the stage for higher future returns.

This is often overlooked during a bear market, probably because those paying the most attention have already invested a decent sum of money. It hurts to see it hammered.

In contrast, those 20- and even 30-somethings who most benefit from the falls have often yet to realize they need to invest for the future. And they aren’t paying attention!

Or, if they are putting money into a workplace pension or similar, for many the sums at stake won’t seem life-altering or worth the headspace.

But those of us who understand compound interest know better.

Let’s say a 30-year old has amassed £50,000 in global equity tracker funds across their tax-efficient pensions and ISAs.

Assuming the future looks like the past in terms of returns, say 8% annualized, their pot might compound to around half a million pounds after 30 years – with no further contributions.

Perhaps if you told them that their future self had a future half a million quid on the line, gyrating with the markets whims during 2022, they’d have been more interested?

Probably best you didn’t.

I get knocked down, but I get up againBack to 2022, and recall that those who can save meaningful money typically do so throughout their lives.

Let’s assume for the sake of simplicity that our young-ish saver adds another £5,000 every year to their initial £50,000 pot from age 30.

At the same rate of return, adding £5,000 a year, they should end up a millionaire by 60.

(Yes, a million will be worth a lot less in 2052, due to inflation. Trust me you’d still rather have it.)

In this case they’d already saved £50,000 by age 30. But over the next 30 years they’ll save and invest another £150,000 in our simplified illustration.1 Most of their earnings and savings are ahead of them.

For anyone in this position, market falls are good news. They lower the price of new purchases. Which in turn improves the odds of higher future returns.

Let’s assume the 30 years of £5,000-a-year saving came after a 20% bear market that took their initial pot down to £40,000 – but that future returns would afterwards be 1% higher. In this case they would end up around 14% better off than if the bear market had never happened.

Again, all very over-simplified. Some mathematically inclined readers are cross I’m using arithmetic returns and a compound interest calculator, others that I’m not belabouring sequence of returns risk, that I’m suggesting that a mere 20% correction would juice returns for three decades, or that I’ve talking about nominal rather than real returns.

Yes yes. This is a friendly illustration you can enjoy with a cup of coffee on a Saturday morning, not a dissertation. Besides, even if I wrote 5,000 words it wouldn’t change the point.

Which is that falling prices are good when you’re putting more new money to work – whether you’re buying a house, a hamburger, or another dollop of your fav index tracker.

Vanguard expected returnsSo what kind of future returns can we expect from here?

Nobody knows in the short-term, but industrial-strength modelling can give credible ranges of probability over longer time frames.

Which is exactly what fund behemoth Vanguard has done for equities:

And also for bonds:

Sorry about all the small print clutter but it seemed best to include it – you know what giant corporations are like.

Remember too that these are expected returns, within ranges of probability. Note the outliers. Nothing is certain.

With all that said, these expected returns are much higher than what Vanguard was forecasting a year or two ago. Especially for fixed income.

TubthumpingI doubt that after a terrible couple of years for bonds, the average investor would think that UK gilts are likely to deliver 4.3% a year over the next decade?

No, but as I wrote last November, bonds actually got more attractive – not less – thanks to the sell-off.

Again, these are all nominal returns. For sure if you believe inflation is going to stay above 10% for the next few years then you shouldn’t touch bonds with a barge pole.

However me and more importantly most economists think we’ll be back down around the Bank of England’s 2% target in a couple of years, if not before.

Enjoy that thought, the other links below – and the weekend!

p.s. Want more expected returns? GMO did a good job calling the 2021 exuberance. Here’s its new forecasts [PDF]. Note these are real returns this time.

From MonevatorAsset allocation quilt: winners and losers of the past ten years – Monevator

FIRE-side chat: retiring early to travel the world in a motorhome – Monevator

From the archive-ator: How would you spend and save if you knew exactly when you were going to die? – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Rents rising at the fastest pace for seven years – BBC

Cost of a ‘basic’ lifestyle soars almost 20% as inflation hits poorer pensioners – This Is Money

Student maintenance loans to rise by just 2.8% next year – Guardian

HMRC to clamp down on tax refund firms with shady practices – Which

BOE made £3.5bn profit on its emergency bond-buying programme – Professional Pensions

Baillie Gifford admits ‘humbling year’ after $14bn loss on Tesla and Shopify [Search result] – FT

Smart products are abandoned by big brands after as little as two years – Which

JPMorgan shutters website it paid $175 million for, accuses founder of inventing accounts – CNBC

The desire of EU citizens to quit the bloc has shrunk since Brexit – Guardian

Products and servicesGet back into the savings switching habit as interest rates surpass 4% – Guardian

The bank of mum and dad mortgages – Yahoo Finance

Special offer Attention stockpickers! The Motley Fool is offering £50-off a year’s subscription to its Share Advisor service, with a 30-day subscription refund guarantee. Terms apply – The Motley Fool

Switching can slash mobile, broadband, and pay TV bills by £250 – Which

AirBnB urges lenders to allow mortgage holders to officially rent out rooms – This Is Money

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Homes for sale in UK financial districts, in pictures – Guardian

Comment and opinionHard-learned lessons – Humble Dollar

You won’t detect the next fraud – Ted Seides

The art and science of spending money – Morgan Housel

The CGT regime needs root and branch reform [Search result] – FT

How do [US] stocks, bonds, and the 60/40 perform after big down years? – AWOCS

Tim Harford: what economists get wrong about personal finance [Search result] – FT

Are falling interest rates responsible for stock market growth? – Of Dollars and Data

Too trusting – Humble Dollar

Who do so many investors believe they’re above average? – The Evidence-based Investor

A brief history of London’s Big Bang [Podcast] – A Long Time In Finance

Crypt o’ cryptoThe complicated battle for control of the massive Grayscale Bitcoin Trust – Blockworks

Bitcoin back above $19,000 on cooling inflation – CNBC

Naughty corner: Active anticsFinding value amid the discounted investment trusts [PDF] – Numis via RIT Capital

Do active funds need a new fee model? – Behavioural Investment

Terry Smith’s annual letter to Fundsmith investors [PDF] – Fundsmith

How to get the most out of an annual report [Search result] – FT

Beating the UK stock market indices in ten hours a year – Lewis Robinson

Cliff Asness on FTX, hedge funds, and the value spread [Podcast] – Infinite Loops

Tesla: a stock for our times – Morningstar

Cathie Wood: what the market overlooked in 2022 – Ark Invest

Is the golden age of biotech stocks over? – Stat

Kindle book bargainsWhat Should I Do With My Life? by Po Bronson – £0.99 on Kindle

The Investment Trusts Handbook 2023 by Jonathan Davis et al – Free on Kindle

Stuffocation: Living More With Less by James Wallman – £0.99 on Kindle

Factfulness: Ten Reasons…Why Things Are Better Than You Think by Hans Rosling – £0.99 on Kindle

Environmental factorsDigital traders want to go fish – Wired

US government approves world’s first vaccine for honeybees – Guardian

An Australian park brings back rats – Hakai

Ozone layer slowly mending, will be healed by 2066 – NBC News

Off our beatKey insights from the longest-running study on happiness [Podcast] – Art of Manliness

The last thing Britain needs right now is Rees-Mogg’s ‘Brexit Freedoms’ Bill – Prospect

“Truly a renaissance of social media hot takes”: how US state agencies got funny – Guardian

Global cities ranked by number of millionaires [Infographic] – Visual Capitalist

Are our brains wired to ‘quiet quit’? – Harvard Business Review

AI and the big five tech companies – Stratechery

The truth behind ten of the biggest health beliefs – Guardian

Why do kids hate music lessons? – The Walrus

And finally…“To build wealth it didn’t matter when you bought U.S. stocks, just that you bought them and kept buying them. It didn’t matter if valuations were high or low. It didn’t matter if you were in a bull market or a bear market. All that mattered was that you kept buying.”
– Nick Maggiulli, Just Keep Buying

In practice the amount they save would usually rise at least with inflation, and often far more with raises.

The post Weekend reading: these Vanguard expected returns remind us it’s darkest before the dawn appeared first on Monevator.

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Today we’re kicking off our monthly interviews with Monevator readers who’ve achieved financial independence and/or early retirement (aka FIRE). In this debut episode, Mark Greene explains how a pretty conventional work-life and a lot of saving and investing unlocked an early and unusual retirement for himself and his wife. We hope it inspires you.

Also, I want to give a quick shout out to ESI Money, whose interviews with US millionaires inspired this series. Do check them out!

Okay, let’s get this show on the road – appropriately enough, as you’ll see…

A place by the FIREHello Mark, thanks for sharing your life story with Monevator. To start with the basics, how old are you and yours?

I’m 51 and my wife is 57. We’ve been married for 28 years.

Do you have any dependents?

We never had children, and each have one surviving parent – mid-70s and mid-90s. Both are living independently at present and are not hugely reliant on us. Long may that last!

Whereabouts do you live and what’s it like there?

Since early 2020 we’ve been traveling. Most of the time we have been in our own motorhome. At present I am near the beach in the south of France, and it is very pleasant!

Did you have any second thoughts about FIRE – or traveling – given a global pandemic kicked off right at the same time?

If we had known the pandemic – and particularly the travel restrictions – were coming, it’s probable we would have delayed stopping work. That said, it suited both of us to have missed the ‘pivot the way you work’ that everyone else went through in the spring of 2020.

I’ve never had second thoughts about not working, but retiring early to travel was the main motivator for stopping work for my wife. She found the first few months under lockdown hard.

Now though, no regrets on either side!

When do you consider you achieved Financial Independence?

We retired in early 2020. I was 48 and my wife was 55. So I guess that was when we consider we reached financial independence. Whether our pot could have been considered ‘enough’ before there could be a point for discussion, but we worked to a particular date, rather than a particular amount – which we hope is more than enough.

My wife has done some very limited freelance work since, mainly to stimulate the brain than for the money.

I haven’t worked since. We have been filling our time with traveling, when allowed to do so through the pandemic.

Assets: only a little bit racyWhat is your net worth?

We currently have about £1.1 million in investments, plus our house which is valued at about £600,000.

What are the assets that make up your net worth? Any mortgages or other debts?

In general terms, our main assets are:

One SIPP (invested in a range of stock and bond funds) £330,000
Three ISAs (invested in funds and many individual stocks) £635,000
Peer-to-peer lending (Funding Circle, Crowdstacker) £30,000
Property Investment Vehicle (Propertypartner) £55,000
Premium Bonds/cash £40,000
House £600,000
Total £1,690,000

One of us also has a small government pension due at 60. It’s worth a few thousand a year.

We have no mortgage or debts, other than current month credit card bills. These are paid off every month.

What was thinking behind the peer-to-peer investing?

Peer-to-peer was a way to diversify my asset allocation, chase a bit of a higher return, and to experiment with something new.

Tell me more…

Initially it was Funding Circle, which I was a big fan of until about three or four years ago. They diversified the loans automatically to spread risk, it was automated, and it provided good returns.

Funding Circle has switched off retail investors though, and now I’m just running down the balances as loans get repaid.

Crowdstacker was less liquid and very hard to diversify. A couple of loans defaulted and whilst supposedly asset-backed, the platform has had some real struggles realising value from the assets. Credit to Crowdstacker, I think they have managed it brilliantly, but I don’t expect to see much of those loans back.

My other loans with Crowdstacker have performed perfectly well though. I achieved rates of about 7% when the banks’ rates were under 1%.

Property Partner is another innovative finance platform. My investments are made into numerous companies that hold property and take capital gains and rental income, distributing dividends along the way. I really like the platform, and it affords me exposure to property (other than our former home) in a diversified way.

The property market has suffered through the pandemic. But again I’m very happy with how the management of the platform have handled it.

So much for digital property holdings – what about your main bricks-and-mortar residence?

Our former home is an Edwardian three-bed semi in a somewhat rural location in the Home Counties, near a commuter rail station. We own it and it is currently rented to a tenant while we travel.

Do you consider your home an asset, an investment, or something else?

While we are not living in it, we consider it an asset as the rent provides some of our income. Once we return to living in it, I would consider it part asset – as it has value – and part liability – because it costs money to live in.

Earning: doing it the traditional wayTell us more about your old job…

I was in business consultancy and my wife was in training – of adults for professional exams.

Before this we both worked in local government jobs for a few years. That said, we had both done our last jobs for around 20 years when we retired.

…and your annual income?

Mine varied according to the success of my consultancy – I was self-employed – but probably averaged to about £60,000 of annual salary if it were a normal job. My wife was on a salary, which was about £80,000 at the end.

We have no formal income now. We live off our assets!

How did your career and salary progress over the years – and to what extent was pursuing financial independence (FI) part of your career plans?

We both switched careers and then progressed in earnings terms, though neither of our jobs had a traditional career ladder involving promotions and so on. For a few years my wife reduced her working hours slightly – and sacrificed salary – for a better work-life balance.

Other than seeking to maximise earnings in order to grow our assets, pursuing financial independence didn’t directly influence our plans.

Did you learn anything about building your career and growing income that you wished you’d known earlier?

We realised part way along the journey that it was better to work and earn less but stay sane, rather than go all out for a big income and suffer stress and other effects.

We delayed our FI date by a few years so that we could temper our workload – and spend a bit more on holidays – on the way.

Did you have any sources of income besides your main job?

No, we didn’t. We’ve had no significant sources of money other than our work – no side hustles and no inheritances.

Did pursuing FIRE get in the way of your career?

No, never. In fact the mental discipline required to plan for financial independence, and then execute on the plan every month, proved beneficial when applied to our professional careers too.

Saving: starting with an awesome budgetWhat is your annual spending? How has this changed over time?

Our baseline budget is just under £40,000. This goes up if we are on a major travel trip, but it’s all planned for in our mother-of-all-spreadsheets.

Do you stick to a budget or otherwise structure your spending?

Since we met 34 years ago, my wife has operated an awe-inspiring level of structure in our spending, so we have always budgeted and have always stuck to it. We allocate so much a month to various buckets of spending – food, drink, going out, bills, and so on – which smooth out big bills over the years and has allowed us to ensure we don’t spend on things we don’t really need, whilst still enjoying life.

What percentage of your gross income did you save over the years?

I have to say, I don’t know. It was lower when we started out as we earnt less and had a mortgage, but we never recorded what it was.

This was way before the days of the FIRE movement and an understanding of such numbers. We just saved as much as possible after we had funded the basic budget mentioned earlier. This meant any bonus, pay rise or a bumper year for my consultancy went into the FI pot – not on vanity purchases.

What’s the secret to saving more money?

My first ever financial advisor told us to find a level of life we were comfortable at, and then stick to that budget even if we earnt more, and to save the rest. That was arguably the best advice I have ever been given. In life and business we strove to spend less than we earned and to use the rest to grow an asset base.

I have also tracked our net worth for well over 20 years. Seeing it gradually increase as we paid down the mortgage and grew our investments was a good motivator to keep going.

Do you have any hints about spending less?

The game changed for us when we decoupled from the materialistic societal norms we are all surrounded by. The less we watched TV, read weekend newspapers or monthly magazines, the less we were exposed to ads telling us we would be happier if we only spent on X, Y, or Z.

Whilst all our peers were buying bigger houses, more cars or funding expensive hobbies, we were focusing on what we valued, which didn’t cost money – time together, simple hobbies, and so on.

Oh, and don’t have kids! That turned out to be a significant factor in our story.

Do you have any passions, hobbies, or vices that eat up your income?

Retiring early to travel in a motorhome like this was a big motivation.Our one guilty pleasure has been travel, which we have spent a lot on over the years. That said, we tend to travel cheaply – not backpacking, but definitely not five-star hotels and big meals out – so we can have a lot of experiences for what we spend.

We have banked some unbelievable memories from that spending.

Investing: starting outside a pension for early access laterWhat kind of investor are you?

My financial education started with the original Motley Fool in the mid-1990s, and then was influenced by Warren Buffet. So I have been primarily a buy-and-hold investor.

I started with managed funds, then moved into trackers as they became available and online trading became a thing.

For many years I did choose my own stocks. I’d buy in chunks of about £2,000 and try to build a diverse portfolio – although all were in the UK. Some were stars, and many were dogs…

Over the last ten years, as I learnt more and as the products developed, I have sought to consolidate into passive tracker funds. I’m a big fan now of Vanguard’s LifeStrategy funds.

What was your best investment?

In terms of headline percentage return from specific buys, Games Workshop, Novo Nordisk, and Unite Group have been big winners. But the actual return has hardly been life-changing.

Arguably my best investment decision was made firstly at 22 when I decided not to have a pension and invest in funds instead – so that I could access it early – and then a few years later deciding to manage it myself rather than through an adviser. That has made a huge difference in terms of that compounded percentage return over two decades of investing.

Can you tell us more about that decision not to invest in a pension?

When my decision not to have a pension was made in the mid-90s, SIPPs were never raised – even though they existed – and I’m not sure I knew enough to manage it all then. They were also not accessible at 55 at that time. And I knew I wanted the option to retire early, because of the age difference with my wife.

Once I had embarked on the ISA path, I just stuck with it for me – even when we were putting a lot into my wife’s SIPP.

Did you make any big mistakes on your investing journey?

If I had my time again, I would buy tracker funds from the off, not individual stocks. It was interesting to do, and made it partly a hobby. But for every tenfold grower like Games Workshop, there’s a total wipeout like Carillion or Laura Ashley.

As I mentioned earlier I also made some peer-to-peer loans that were in theory asset-backed, but were not immune to alleged illegal practice by company directors. I’ve mentally written off the loan, but court proceedings are continuing.

That bit where they say “you may not get your capital back” is there for a reason!

What has been your overall return?

My best guess would be an annual return of 4%, though I think it is probably a bit more. This includes keeping a reasonable amount in cash – over 20% of the portfolio – when interest rates were almost negligible, because we were approaching retirement. We wanted the security of knowing we were safe from sequence-of-returns risk in the first few years. It was also kind of handy when Covid broke the month we retired and the markets dropped 20%!

Listening to my own answer it strikes me that 4% doesn’t sound too great… But I have another rough calculation that suggests we more than doubled what we put in, partly through pension tax relief but mostly through compounding, because we’ve been doing this for over 20 years.

How much did you fill of your ISA and pension allowances?

Until we retired we filled our ISA contributions every year for most of the years. That – and compounding – is how we have amassed over £600,000 in ISAs.

I don’t have a pension at all so I never benefited from pension allowances. My wife has a SIPP. In the last few years of her working we maximized the contributions (including backdating) using cash we had accumulated.

That immediate uplift as a higher-rate tax payer is the best return we have ever had!

To what extent did tax incentives and shelters influence your strategy?

The tax rebate on the SIPP definitely influenced our decision to pour money in there in the last few years of working. Although the SIPP is just a wrapper, and the money would have been invested in the same thing in an ISA or in the pension.

How often do you check or tweak your portfolio or other investments?

Overall, I do a full evaluation every month, and have done for 30 years. This enables me to report our position to my wife, and to ensure I have an eye on the performance of individual investments.

In addition, I have a reasonable amount of our portfolio that I use to day trade on the ups and downs of the FTSE 100. This is my non-passive guilty secret!

Because of this part of the strategy, I am prone to checking the FTSE more than once a day. But I only ever do this around what we are already doing for the day.

Sometimes we will be off-grid and I don’t check for a week or more.

Wealth management: making it lastWe know how you made your money, but what about keeping it?

The meeting of the two systems used by my wife and I enabled us to keep it.

My long-term spreadsheet and the plan to grow from nothing to our nominal £1 million retirement pot, coupled with her monthly budget and accessing only money available for planned spending meant we overcame the temptation to splurge or to fritter it away.

I was passionate about becoming financially independent and retiring early. That drove our behaviour every month, every week, and every day.

Which is more important, saving or investing?

Well, that depends what you mean by both terms. I see saving as money in the bank, investing as more risky options like funds or stocks. Saving is the essential first discipline, but bank interest rates will not grow enough to retire early. You need to take more risk and therefore invest.

When did you think you’d achieve financial freedom – and was it a goal with a timeline?

I thought it would be in my 50s. But then as the plan developed it became clear that with a fair wind it would be possible before that. The main driver was my wife’s age (she’s older), but I am proud to have got there in my 40s.

For the last ten years or so – once it was a clear goal with a very clear timeline – I told a LOT of people about. We really committed ourselves to it.

Did anything unexpected get in your way?

I’ve invested through three big recessions and crashes, though arguably that was expected – if unwanted – over a 25-year period.

Our life wasn’t without challenges, but from an investing sense nothing really got in the way.

Are you still growing your pot?

As we don’t have kids, our spreadsheet allows us to de-accumulate. But that could stretch out over a 50-year time frame or longer, so I am currently trying to maintain the pot.

With our spending heavily front-loaded so that we can make the most of retiring early – and with the tough market conditions since 2020 – that hasn’t always been easy. But we’re not too far off plan!

Do you have any further financial goals?

Ensuring the pot lasts long enough to pay the funeral bills, and not a moment longer. Who knows how far in the future that will be, so in the meantime I seek to do as well as I can with the assets we have accumulated. The targets are in my spreadsheet!

What would you say to Monevator readers pursuing financial freedom?

I genuinely wish Monevator had existed when I was in my 20s. There is so much more information available now, and it is so much easier to do with online platforms. My investing journey started before the internet.

A danger is though that one can spend too much time reading and learning, and not getting started.

Compounding is our greatest friend so, however small, start straight away and keep learning. Read and absorb and improve your strategy as you go.

Learning: starting young, headed to 100When did you first start thinking seriously about money and investing?

At 22, when I took my first job and had to decide whether to have the company pension or not.

Did any particular individuals inspire you to become financially free?

My father was terrible with money and I didn’t want to be like him. I wanted the security of knowing I need never work again and I could live. That has always been my driver – because life is too short to waste working, even if you enjoy it.

Can you recommend your favourite resources for anyone chasing the FIRE dream?

Genuinely, Monevator! I think it is excellent and strikes exactly the right tone

If your only source of information – other than detailed personal tax and pension advice – was Monevator, you’d probably do well.

I am also now a massive fan of the Vanguard Life Strategy funds – inexpensive, easy to manage, and they take away the risk of paralysis by analysis. Rather than wasting hours optimizing the perfect asset allocation, trust Vanguard and spend the time earning more, learning more, or just enjoying your family.

Based on my own experience, I would work with a quality business or life coach to understand and plan what you really want from life and how you want to make it happen. The clarity that coaching gave me, on many occasions, changed my life.

What is your attitude towards charity and inheritance?

Being charitable is not just financial. I am intensely aware of our good fortune, and we have a budget (of course!) to make donations that help others.

We also now have the luxury of giving our time – either to support people we know, or to help organisations that have a broader impact. My life plan includes some form of major charitable service after we’ve finished traveling too.

Like everyone should we have also written our wills and they provide for charitable donations and inheritances for people we know who would benefit. We don’t have kids, so I guess we have less societal conditioning about who we leave our wealth to.

What will your finances ideally look like towards the end of your life?

Our plan allows for the money to last past our 100th birthdays. But the one thing I know for sure is that life never perfectly follows your plan.

We intend to enjoy the next 20 or 30 years as much as possible, and then anticipate a slowdown, but with enough funds to still enjoy life. If we go early and our beneficiaries gain, then so be it.

My dislike of the fees charged within the financial sector means we will probably avoid any managed products like annuities – but never say never. I enjoy learning about money and managing our finances, and I hope I have the acuity to do so for a very long time.

I guess the dream remains to have a wonderful life (which we do) without diminishing the pot.

So there you have it readers! FI by 50 and retiring early to travel and enjoy life on the road with his wife while they’re both young enough to make the best of it. Questions and reflections – on the concept of these FIRE-side interviews generally or on Mark’s journey specifically – are welcome below. But please do remember Mark is not a hardened Internet warrior like me and he is just sharing his story to inspire others, not to feed the trolls. Of course you can disagree constructively, but please keep that in mind. Thanks!

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After a bruising 2022, it’s time once again to take refuge under our asset allocation quilt. This colourful data duvet ranks the main asset classes (and sub-asset classes) by annual return over the last decade. The resulting patchwork of changing fortunes is a wonderfully intuitive way of illustrating how difficult it is to predict investing’s winners and losers in advance.

The merest glance at the crazy clash of pixels reveals that any asset’s claim on the top spot is about as durable as the average K-pop star’s career.

But despite the explosion-in-a-Lego-factory vibe, the asset allocation quilt does have something to tell us about real diversification and its limits.

Let’s pull back the covers!

Asset allocation quilt 2022Our updated asset allocation quilt is shown below. It ranks the main equity, bond, and commodity sub-asset classes for each year from 2013 to 2022 from the perspective of a UK investor:

We’ve sourced annual returns from publicly available ETFs that represent each sub-asset class.
The data is courtesy of justETF – an excellent ETF finder, screener, and portfolio building service.
Returns are nominal1. To obtain real returns, subtract 3.2% – the average UK inflation rate 2013-2022 – from the nominal figures quoted in this article.
Returns take into account the Ongoing Charge Figure (OCF), dividends or interest earned, and are reported in pounds.

Changes from last year’s 2021 asset allocation quiltWe’ve added two bond sub-asset classes this year:

Intermediate maturity US Treasuries
Long maturity UK gilts

It may seem odd to include more bond types after a disastrous year for debt. But I’d argue that a time of scorn is precisely when we need a deeper understanding of our antagonist.

I’ve put US Treasuries in because they may offer superior diversification for UK investors in an era when the dollar is a safe-haven currency, and gilts are losing their lustre. (Political risk, anyone?)

That’s the theory, anyway.

The strategy depends on sterling dropping against the dollar whenever there’s a big dust-up on the global stage. Should that happen on cue, then a UK investor in US Treasuries can add currency gains on top of the government bond bounce we’d always hope for when equities wilt.

However – if the pound rose instead, then currency losses could undermine US Treasury returns at the very moment you want them to prop up your portfolio.

So holding un-hedged foreign bonds is not without risk. And indeed the unwelcome potential for an additional dollop of pain from such currency moves is precisely why traditionally we’ve always been advised to hold bonds in domestic or currency-hedged flavours.

What’s the evidence supporting US Treasuries? Intermediate US Treasuries have outperformed intermediate UK gilts from a UK investor’s perspective during nearly every equity market correction or bear going back to the dotcom bust – the one exception being the 2011 August downturn.

However, Treasuries made a bad situation worse during the 1994, 1990, and 1987 market slumps.

In the case of 1987’s Black Monday Crash, US Treasuries would have heaped a double-digit loss on top of the stock market pain.

In contrast gilts were a +18% oasis of calm that year.

So switching to Treasuries is a gamble. A currency bet that paid off again in 2022 mind you, as sterling’s woes meant US Treasuries only lost -4.5%, versus intermediate gilts’ -24% swan dive.

The longer-term situation isn’t so clear cut. US Treasuries beat gilts over the last ten years. But UK government bonds have outpaced US govies over different timeframes.

Still, the notion that Treasuries could be a super-diversifier is intriguing. Hence we’re patching them onto the asset allocation quilt.

As we often say about such things, you could do, say, half-and-half – as opposed to going all-in on swapping your gilts for US Treasuries.

Stitch this Long-dated gilts also get an invite to the asset allocation block party because they offer something different.

Okay, so this year’s -40% loss is the kind of different you can live without, I hear you cry.

But let me explain.

The long duration characteristics of long-dated gilts make them extremely sensitive to changes in interest rates.

That property can make long bonds the best diversifier in your portfolio during a recession, when equities and interest rates both go into retreat.

But we saw the dark side of the bargain in 2022. Rapidly rising bond yields rendered long bonds radioactive and nobody wanted to touch them.

Ironically, current bond yields – which have come about precisely because of the 2022 slump in prices – have recharged the asset’s ability to deflect the next stock market implosion.

We’ll keep an eye on them in the quilt from here.

The final change we’ve made is to drop European equities to make room for these bonds.

One more row of violent checks felt unpalettable, so they’re gone. Sorry. Not sorry.

A chequered past It’s hard not to notice on eyeballing the quilt that broad commodities and gold were the only asset classes you should really have wanted under your Christmas tree in December 2021.

For broad commodities, maintaining decent exposure is problematic, however.

A broad commodities fund uses futures contracts to track a diversified basket of raw materials – oil, livestock, cash crops, industrial metals, that sort of thing.

And I’d bet hardly any passive investors held those commodity future funds last year, because as the quilt shows they inflicted hideous losses on investors from 2011 to 2020.

Notice how their orange blocks mostly prop up the bottom of the table – barring a brief Whac-A-Mole leap out of their hole in 2016.

Most investors would have thrown in the quilt. I mean the towel!

However commodities did finally do their diehard fans proud in 2021 and 2022, with two big performances that almost make them look like worthwhile portfolio additions.

Almost… but not quite. Their 10-year annualised return is still negative after inflation.

2022’s commodities performance is akin to an expensive striker who’s essentially useless – but he came off the bench once, scored an absolute screamer, and won a famous victory.

So you keep them on in the hope they’ll do it again. But mostly they just suck your soul.

In investment terms, that translates as commodities delivering bond-like returns but with equity-style volatility over the long-term.

Or, to put it crudely: occasionally they’re brilliant but typically they’re terrible.

And the maths of that doesn’t compound into great returns over the long years.

Golden brownGold is potentially a more palatable alternative. Its position on the asset allocation checkerboard looks like the proverbial game of two halves.

Gold is either vying for Champions League places, or flirting with relegation.

Like its broad commodity cousin, then, gold is a diversification wild card.

It exhibits near zero correlation with equities and bonds (i.e. anything could happen), it has poor long-term expected returns, but – as in the 1970s and in 2008 – in 2022 gold provided portfolio relief when other asset classes could not.

Shady business Another bamboozler from the weird world of asset allocation is that inflation-linked bonds were a disaster just when you’d expect them to shine.

Sadly, the inflation-linked bond funds that many people hold had quite high durations going into 2022. That left them vulnerable to interest rate rises. (We raised the alarm in 2016, but not loudly enough in hindsight.)

The pace of interest rate rises in 2022 hit these funds with capital losses that overwhelmed their inflation defences like a storm surge deluging a sea wall.

So while investors should benefit from increased yields in the aftermath, the enduring lesson of 2022 is that protection is best sought via carefully-selected individual index-linked gilts, or short duration inflation-linked bonds.

Sadly, other useful inflation hedges are in short supply.

King of the swingersPerhaps the swingiest asset on our disco dancefloor are the FTSE 250 equities.

The UK’s mid cap stocks have been up and down like the Assyrian Empire as Eric Idle would say.

A year of table-topping glory is invariably followed by 12-months of mediocre-to-dismal performance.

What’s going on at the UK’s medium-sized firms? Does the workforce do one year on, one year off?

My deeply boring rational brain is droning on about it [nerd voice] “simply being an artefact of the timeframe and valuation multiples de-rating, actually…”

…whereas the superstitious, pattern-spotting side of my nature is already banking on 2023’s double-digit rebound. What could possibly go wrong?

Intriguingly, property is similarly whipsaw-y.

It’d be interesting to see if a rebalancing bonus could be achieved by selling out of either asset after an exceptional year and buying in following a poor year.

Passive investing luminary William Bernstein has previously advocated such a strategy with super-volatile gold mining stocks.

But that’s enough naughty speculation for one year!

Full spectrum responseTake notice of how the multi-coloured mayhem settles into a more familiar array when viewed via the rightmost ten-year annualised returns.

Bonds, gold, and commodities are at the bottom of the heap, just as we’d expect.
Equities sit atop the ten-year column as prime slabs of capital really should.

But the divergent outcomes among the different equity sub-categories shows why we need all sorts of assets in our mix.

Long-term investing is a game of sliding blocks. The S&P 500 could easily trade places with the Emerging Markets or the FTSE 100 in the next decade.

Perhaps that’s why the asset class that makes the most sense is global equities. It hasn’t once reached No.1, but it’s still showing an amazing 10-year return.

For sure, global trackers lag the US for now. But there have been many decades when the S&P 500 has been surpassed by the rest of the world.

US equities just notched their lowest position yet on our ten-year asset allocation quilt, so perhaps they are finally coming off the boil.

Still, the common thread here is expected asset class behaviour.

Over time equities of all stripes should do relatively well but we don’t know how the sub asset-classes will stack up. Meanwhile, the other asset classes are there to patch up the holes when bad years for equities leave our portfolios needing stitches.

Best to have a bit of (nearly) everything.

Maybe we should call such a portfolio an asset allocation pick-and-mix?

Take it steady,

The Accumulator

That is to say they are not adjusted for inflation.

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What caught my eye this week.

How often do you check your portfolio, or even calculate your net worth? And how do you do it? Inquiring minds want to know. By which I mean your fellow Monevator readers!

The topic came up in a recent comment thread about end-of-year reviews. We decided a reader poll might be of interest.

Of course in theory I agree with my blogging buddy Nick Magguilli, who warned this week that most people’s time is better spent working for an income rather than fiddling with their investments:

Assume someone with $10,000 invested spends 10 hours a week doing stock research looking for the best investments. Let’s also assume that their research is good and they are able to beat the market by 10% a year as a result.

While this is impressive, unfortunately, their 520 hours of work (10 hours per week * 52 weeks per year) only netted them an additional $1,000 (10% alpha * $10,000). This means that our star analyst was doing stock research for under $2 an hour ($1,000/520 hours).

If the analyst’s ultimate goal was to build wealth, you can see how they would’ve been far better off by picking up a part-time job instead of analyzing 10-Ks.

Even if we were to increase the analyst’s portfolio size to $100,000, their 10% alpha (i.e. $10,000) is roughly equivalent to what they could have made driving for Uber in the same amount of time.

Guilty as charged Nick, at least for the past nine years.

Also, I suspect ten hours spent on investing matters a week is a big underestimate for active investors. It certainly is in my case.

On the other hand it’s good to have a hobby – even a passion.

For my part, my interest was what made saving and investing as much as 50% of my income more like an exciting prospect than a sacrifice. I was simply buying more firepower to do what I loved – the way somebody else might buy new golf clubs.

On the other hand, I don’t really any career to speak of. And given my passion, it might well have been better to get a job as a junior analyst while I still could and then to work my way into running money. (But… wearing a tie. The horror!)

Anyway, I can see both sides.

The poll taxHopefully my musings haven’t queered the pitch too badly. Please answer the polls based on what you do – not what you think you should do!

Below you’ll find two questions. Select the answer that’s closest to your own habits.

Yes, I understand some responses aren’t mutually exclusive, or that the poll does not reflect your unique and special experience.

Mine neither. That’s the nature of broad brush polls! We’re just after a sense of how Monevator readers mind what’s theirs, in aggregate.

For instance, I check my portfolio more-than daily via a real-time spreadsheet, but I also do occasional reviews in a text document. Clearly the first best describes how I keep tabs on my portfolio, right?

Two questions, no wrong answersFirstly, let’s hear how often you check in on your portfolio.

I don’t mean attending to administrative matters (say an email from the platform) or adding money (automatic or manually) but rather keeping tabs on the (hopefully) growing value of your stash.

How often do you tend to check your portfolio's value?* Hourly * Daily * Weekly * Monthly * Every three months * A couple of time's a year * Annually * I don't check its value at all VoteSecondly, readers and I were curious how you do it.

Again – there’ll be crossover. For example I run a massive real-time spreadsheet, but of course I sometimes see elements of my portfolio on a platform’s web page. Who doesn’t? So the spreadsheet answer I’d give here.

What best describes how you mostly track your portfolio?* Eyeballing broker's / platform's portfolio screens * I manually input values into a custom spreadsheet (such as Excel) * I use a custom spreadsheet that's at least partly updated automatically (such as Google Drive) * I use a dedicated investing tool (for example Sharepad or Stockopedia) * I keep notes in some form of investing journal or log, jotting down values manually * I read paper or digital statements when sent to my by my broker * Something else (really? note my comments about best fit before selecting this) * I don't track my portfolio at all VoteThanks in advance! The poll will run until Friday and I’ll either recap the final results next weekend or riff them into a future article.

Have a great weekend.

p.s. The new Netflix documentary Madoff: The Monster of Wall Street is worth getting in the supermarket popcorn for. The first episode in particular offers a potted history of 20th Century Wall Street. As for the story, it’s completely unbelievable. Which is crazy, considering it’s true.

From MonevatorThe Slow & Steady Passive Portfolio update: Q4 2022 – Monevator

Unlocking a cheaper mortgage rate by tweaking your loan-to-value ratio – Monevator

From the archive-ator: How to stick to your savings goals – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

The inventor of the US yield curve recession signal reckons its wrong this time – Bloomberg via YF

Blackrock and M&G defer [i.e. effectively block] withdrawals from UK property funds – Reuters

UK house prices fall by more than £4,100 in a month as cost-of-living tightens… – Yahoo Finance

…while mortgage approvals are at their lowest level since June 2020 [Search result] – FT

Thousands of Britons expelled from EU since Brexit transition ended – Guardian

3,275 people filed their tax return on Christmas Day – GOV.UK

Historically, 60/40 portfolios have soared after terrible years [US but relevant] – Humble Dollar

Products and servicesTop instance-access savings rate vanishes before customers can grab it – Which

TSB and Nationwide latest lenders to slash mortgage rates… [Search result] – FT

…while average five-year fix rate across the market now down to 5.62% – This Is Money

Hargreaves Lansdown is offering £100 to £1,500 cashback if you transfer your pension to its SIPP. Terms apply – Hargreaves Lansdown

Royal Mail urges people to use or swap non-barcoded stamps before deadline – Guardian

Savers look to pension annuities as rates soar [Search result] – FT

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

English homes for hybrid working, in pictures – Guardian

Comment and opinionWhy investing is hard – Young Money

Costs matter – The Financial Bodyguard

The 16 best countries for retirement abroad – Think Advisor

How will investors behave in 2022? – Behavioural Investment

Five reasons you’ll blow up your retirement plan – Kiplinger

Five ideas to improve your finances in 2023 – Jason Butler

Achieve – Indeedably

Money and happiness, with William Green [Podcast] – The Investor’s Podcast

Eight tips for finding a suitable financial advisor – The Evidence-based Investor

Venture capital’s reckoning looms closer [Search result] – FT

Old age and money mini-specialA Mexican wrestler gets a taste of retirement at 50 – Humble Dollar

Talking to adult kids about money and inheritances – Kindness Financial Planning

Larry Swedroe: The elderly keep accumulating assets – Advisor Perspectives

Looking back over an ‘interesting’ year – Simple Living in Somerset

Naughty corner: Active anticsEnd of the sub-zero bond yield era [Search result] – FT

Best of The Long View investing podcast of 2022 [Podcast] – Morningstar

Great news! US consumer sentiment is awful! – Alhambra Investments

New Year bargains – Fire V London

Hedge funds have their ‘hedge’ back – Validea

The inflation outlook in five charts – Morningstar

Dylan Grice: building resilient portfolios with alternatives [Podcast] – Allocators

UK stock picker portfolio reviewsA 2022 portfolio review from a veteran UK small cap stockpicker… – Maynard Paton

…and the same from a long-time UK dividend share investor – John Kingham

An annual review of a portfolio of UK closed-ended funds – IT Investor

How to survive a bad year in the stock market – Richard Beddard

Kindle book bargainsThe Investment Trusts Handbook 2023 by Jonathan Davis et al – Free on Kindle

Stuffocation: Living More With Less by James Wallman – £0.99 on Kindle

Factfulness: Ten Reasons…Why Things Are Better Than You Think by Hans Rosling – £0.99 on Kindle

Money: The True Story of a Made-Up Thing by Jacob Goldstein – £1.19 on Kindle

Dead in the Water: Murder and Fraud in the World’s Most Secretive Industry by Matthew Campbell and Kit Chellel – £1.29 on Kindle

Environmental factorsWhere have all the A-rated fridges and freezers gone? – Which

The dolphins dying in the Ukraine war – BBC

UK’s record hot 2022 made 160 times more likely by climate crisis – Guardian

Flying boats and other technology for cleaner shipping – BBC

The doomsday glacier – Hakai

Off our beat[US] inequality might have peaked – Noahopion

The company purging meetings from its calendars – Guardian

How David Beckham made $500m in MLS – Huddle Up [h/t Abnormal Returns]

Freudenschaude – Barry Ritholtz

The world as it is – Seth’s Blog

And finally…“In the abstract, life is a mixture of chance and choice. Chance can be thought of as the cards you are dealt in life. Choice is how you play them.”
– Edward Thorpe, A Man for All Markets

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Do you have a mortgage? Do you know what your loan-to-value ratio is – and what interest rate band that puts you into with your bank?

Oh, I see… You have other hobbies.

Look, I appreciate there’s nothing more boring than a mortgage deal. Especially when half of you already know what I’m talking about, and will nod off in about 150 words’ time.

But if you don’t, please keep reading. You might save yourself a lot of money.

Just ask Richard, a first-time buyer.

Richard was stretching to buy his first flat. And because I’m the sort of person who has blogged about money for 17 years, I asked him what his loan-to-value was.

“Huh?” said he.

Long story short: by releasing an extra £2,000 from an ISA he’d mentally segregated for something else, Richard could reduce his total mortgage repayments over the next five years by over £8,000.

That’s a 300% return on the extra £2,000 he put down!

What is the loan-to-value ratio for a mortgage?I’ll say upfront: this is a particularly extreme example. Richard is arty, clueless with money, and rarely reads a menu let alone the financial small print.

What’s more Richard was set to borrow at his bank’s steepest rate for first-time buyers, before he found that extra money down the back of the metaphorical sofa. The savings will rarely be so big.

Nevertheless the principle holds for all mortgages.

And personally I’d rather have any extra money, however tiny, if the alternative is it goes to a bank.

So what’s going on here?

Well, it starts with the loan-to-value (LTV) ratio of your mortgage.

The LTV ratio is simply the ratio of what you’re borrowing from the bank – the mortgage – compared to the purchase price of the property.

For instance, say you’re buying a home that costs £400,000 and you’ve got a £100,000 deposit. You’ll need a £300,000 mortgage to complete the purchase.

That is a LTV ratio of £300,000/£400,000, which works out at 75%.

Or say you have a mortgage of £270,000 on a £336,000 property.

The LTV ratio is £270,000/£336,000 = 80.35%

As we’ll see in a moment, those pedantic two decimal places are the whole point of this article.

But first a quick detour into why banks care about LTV ratios.

Loan-to-value ratio and riskinessAlthough it remains hard for those of us who lived through the financial crisis to believe it, banks are in the business of managing risk and return.

And mortgages are the least risky debt – for both banks and borrowers.

That’s because mortgages are secured loans.

The property being bought is put up as collateral by the borrower. If you don’t meet your mortgage payments, then your bank can seize and sell your property to cover the mortgage and recoup what it lent you.

This clearly makes a mortgage a safer form of debt for the bank, because it is asset-backed.

But it’s also safer for you as a borrower. The rate charged on an asset-backed mortgage will be much lower than that on a credit card or a personal loan.

Less risky does not mean risk-free. A mortgage is still a big liability, and you can lose a lot of money if things go against you. All debt has downsides.

Of course, banks aren’t desperate to seize and sell their customers’ assets to get their money back. Partly because it makes for bad publicity, particularly when they’re all at it. But also it’s costly and time-consuming.

And most importantly – bad news tends to cluster.

The very time when a bank’s borrowers are defaulting en masse on their mortgages will invariably be a terrible time for the economy more widely – and probably for house prices, too.

Banks could be seizing and selling properties into a falling market (as they did in the early 1990s).

Which means that in a steep house price crash, the bank could fail to recoup the money it had lent out against the mortgage when it sells. Especially once all the various costs are factored in.

And again, despite how it looked in 2008, banks don’t really want to be losing money on one of their main lines of business.

The loan-to-value ratio and interest ratesObviously this unhappy loss-making outcome is more likely when the mortgage made up most of the money used to buy the property.

In other words – when the purchase was at a very high loan-to-value ratio.

In that case, the equity in the property – the difference between the house price and the mortgage – is very small. There’s not much safetly buffer, from the bank’s perspective. So little in fact that after a house price crash it could be wiped out and even go negative. (Hence the term ‘negative equity’.)

To reflect this risk of losing money on small deposit house purchases, banks charge greater interest rates on their higher LTV mortgages.

At the very highest LTV levels – where the borrower puts down just a 5% deposit or maybe nothing at all – rates will be far higher than for borrowers with a chunkier deposit who borrow from the same bank.

Banks typically obfuscate all this with their mortgage filters and other tools. But a few do make it admirably plain via downloadable lists of all their products.

Here’s an example of what we’re talking about:

Source: Virgin Money

Here the mortgage rate falls by 0.24% for buyers who put down an extra 20% deposit, meaning their LTV ratio is 65% compared to 85%.

On a £300,000 mortgage, that’d be a difference of £42 a month, or £2,520 over five years. Not enormous, but certainly worth having.

But the LTV bands in this example are very wide. You’ll find them stepping down in 5% increments with some lenders.

In my initial example, for instance, Richard was originally borrowing on a LTV ratio of 95%. His bank was looking to charge him 5.75% over five years.

By putting in a little more cash, Richard dropped to an LTV ratio of 90%. The interest rate in that band was a far cheaper 5.04%. Which was what made for the vast savings we saw over five years.

Mind the cliff edgeYou might say this isn’t rocket science – and I agree, it’s not – and that if you had an extra 20% of the purchase price to casually reduce the size of your mortgage, you’d do it already.

Fair enough – but that’s not what I’m talking about.

The point is these LTV bands are arbitrary and typically pretty rigid.

Again, Richard he didn’t have to put down an extra 5% deposit to drop into the much cheaper mortgage bracket.

His deposit was already big enough such that his LTV ratio was only slightly above 90%. Putting in just £2,000 to get the LTV ratio below 90% is what unlocked a cheaper rate and saved a fortune.

The return on those marginal pounds was enormous, as I showed above.

Now, many of the sort of people who read Monevator will find this obvious. Which reminds me of my former housemate, Nat, who I used to compete with while watching Who Wants To Be A Millionaire?

Nat was never very self-aware about this – even when I pointed it out to her – but there were only two categories of questions in this quiz as far as she was concerned.

“Too easy, everyone knows that!” (when she knew the answer) or “Impossible, that is so obscure!” (when she didn’t).

Similarly, all this may be obvious to some, but others aren’t used to thinking about money this way.

In my experience people often have, say, a pot of cash for the house deposit, and another pot set aside for furnishing the property or for buying a car or simply labeled as nebulous ‘savings’.

Depending on how close to the LTV ‘cliff edge’ they are, it could make much more sense to add that money to the deposit, unlock a cheaper mortgage, and to then use say a 0% credit card to furnish the new home. (Provided they can trust themselves to pay it off, of course!)

Alternatively, they might employ removal boxes as furniture like I did when I bought, and gradually furnish their new home out of the cashflow freed up by the resultant cheaper mortgage!

A few final pointers about loan-to-value ratiosWith so much financial business done online nowadays, I suspect a lot of people simply click through a mortgage comparison site with little idea about the loan-to-value ratios driving the rates their offered – let alone how much they might save by putting down a little bit more as a deposit.

So a few concluding thoughts about tweaking mortgage bands via the LTV ratio:

Can’t increase your deposit? Maybe you can get into a lower band by driving a slightly harder bargain when you buy your home. Remember it’s the ratio that matters.
Your loan-to-value ratio will have changed by the time you remortgage. A repayment mortgage reduces the size of the mortgage balance over time. If house prices rise your loan-to-value will fall further.
Also look out for any opportunity to nudge yourself into a more favourable band when you remortgage by making over-payments.

While we’re on the subject, these sort of cliff edges pop-up elsewhere in personal finance. So stay alert.

You’re looking for marginal edge cases, where a small additional amount of money or some other tweak to your financial posture generates outsized returns.

For instance, increasing your pension contributions can enable you to retain your child benefit if it reduces your income below the critical threshold – a win-win.

Paid to playIt’s pretty dopey these arbitrary bands with critical thresholds still exist for mortgages. Not to mention other areas like stamp duty – and arguably even income tax.

Simple bands made sense when everything was worked out with a slide rule. But what’s the justification now? It’s all done by computer.

Ideally each of us would be offered a bespoke mortgage rate. This would reflect every facet of our unique financial situation. Such individualized underwriting would be fairer on borrowers – and perhaps safer for the banks as well.

Maybe lenders worry that bespoke deals – or even just narrower loan-to-value bands, with say 1% increments – could confuse us? Or even lay them open to mis-selling claims?

Whatever the reason, for now it pays to pay attention to the small print.

Got a favourite example where some marginal additional pounds unlock outsized benefits? Please share all in the comments below!

The post Unlocking a cheaper interest rate by tweaking your mortgage loan-to-value ratio appeared first on Monevator.

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This past year has not been pretty for investors. Indeed it’s the worst on record for our Slow and Steady passive portfolio – even after a slight bounce back from last quarter.

We’ve taken a -13% loss during benighted 2022. Our previous all-time bruising was a mere -3% knuckle-scrape from 2018.

In fact we’ve only had three down years since the portfolio began in 2011. Six years ended with double-digit gains!

So while most of us understand that all good runs come to an end, I do worry we could still be mentally unprepared for a sustained spell of negativity.

Mental as anything How many of us got used to glancing at our portfolio for a quick ego boost during the good times?

Gains dancing before our eyes and seemingly rearranging themselves into the words: “You’re doing brilliantly, old chum. Keep it up!”

How will we now fare when incessantly poor numbers decrypt into the sub-text: “You’re going nowhere, ya loser!”

We know all the powerful mantras to recite to ward off devilry:

“Investing is a long-term game.”
“Buy low, sell high.”
Be greedy when others are fearful.”

And anyone who’s read their financial history appreciates a key test is keeping your head when the markets play rough.

But can we keep the faith?

Down but never outWhile we sit on our hands and wait for the good times to return, here’s the latest numbers from the Slow and Steady portfolio in 8K Drama-O-Vision:

The investing Razzie for 2022 has to go to UK government bonds. Our gilt fund lost 38% after inflation1, comfortably surpassing the previous historic low of -33% in 1916.2

We’re truly on the horns of a dilemma with bonds.

If inflation isn’t suppressed and bond yields climb vertically then even worse could follow. UK gilts suffered real-terms losses of -68.5% from 1915 to 1920.

But before you reach for the ‘bond eject’ button, know that gilt disaster was followed by a spectacular 480% rebound from 1921 to 1934.

Sack off bonds after a bad year and you can miss some big rallies:

1920: -19.7%
1921: 27.4%
1974: -27.2%
1975: 10.9%
1981: -1.6%
1982: 42%
1994: -12.2%
1995: 14.5%
2013: -8.5%
2014: 13.9%

Inflation-adjusted real returns. Data for UK gilt nominal returns from the JST Macrohistory database.3

Bonds spook many investors because they’re esoteric. But the fact is – like equities – bonds have bouncebackability.4

Dump your bonds now for cash and you may crystallise a loss that currently only exists on paper…

…or you may save yourself more pain, if it turns out we’re in for a rerun of the 1970s.

Given the uncertainty, I wouldn’t blame you for reducing bond exposure. But I respectfully suggest you avoid ‘all or nothing’ reactions such as swearing off bonds for life.

The long view After a year like 2022, it’s probably better to count our blessings over a longer timeframe.

Stepping back we can see the portfolio has made a nominal annualised return of:

1.6% over 3 years. (Miserable!)
3.3% over 5 years. (Pants!)
6.3% over 12 years. (Actually, I’ll take it!)

That’s around 3.3% annualised in real returns. Historically we might expect an average 4% annualised from a 60/40 portfolio.

So while we’re currently sub-average, it’ll have to do for now.

One year ago that same number was a rollicking 9.8%. Things can change quickly.

Building back better?Our property fund’s -25% real-terms annual loss was peak awful on the equity side of the Passive Portfolio’s scorecard.

Curse you rising interest rates!

And how do corporates deal with bad news? They rebrand it.

Coincidentally, iShares decided it was high time our dilapidated old global property tracker got a new lick of green, eco-conscious paint.

On 24 November, the fund changed its name from this:

iShares Global Property Securities Equity Index Fund

To this:

iShares Environment & Low Carbon Tilt Real Estate Index Fund

Despite some confusion on iShares’ website, it’s also changing the fund’s index from this:

FTSE EPRA/NAREIT Developed Index

To this:

FTSE EPRA/NAREIT Developed Green Low Carbon Target Index

The gist is that the vanilla property tracker now has an Environmental, Social, and Governance (ESG) twist.

The new index apparently screens out companies that deal in weaponry, tobacco, and fossil fuels.

It also excludes – or at least takes a dim view of – anyone into human rights abuses, child labour, slavery, organised crime… that sort of thing.

Finally, it up-weights those constituents whose property holdings are deemed sustainable. That means they have to make an effort to be energy efficient and to obtain ‘green building certification’.

It all sounds excellent in principle – I doubt many of us want to prop up the share prices of slum landlords running slave gangs.

But just how radical a change is this in practice?

I must admit I’m not over familiar with the micro-details of the FTSE EPRA/NAREIT Developed Index.

Still, I’ve found one commentary about the switch from a firm of financial advisors called Old Mill, which says:

An initial look at the proposals suggest there will be little change in the underlying investments of the fund, with 23 of the approximately 340 investable companies being excluded.

And my own eyeballing of the respective index factsheets reveals:

A reshuffle of the Top 10 holdings into slightly different percentage weights.
Rejigged sub-sectors.
Industrial, retail, and healthcare REITs are down 1-2% in the green index.
Office and residential REITS are up 1-2%.

Call me Graham Thunberg but this doesn’t smack of saving the planet.

Meanwhile, the five year annualised returns (the longest available) published for the two indices reveal:

0.5% a year for the green index
1.5% a year for the standard index

While I admire people who want to invest in line with their values (assuming they’re not massive fans of cluster bombs and extortion) I’m personally dubious about the ESG label.

The potential for greenwashing is enormous. And I despair about my chances of verifying the ethical claims given:

The finance industry is adept at misdirection
We’ve been gaslighted about climate change for more than 30 years

There’s also a danger of individuals ticking the ESG boxes and then forgetting about taking direct action like:

Cutting back on planes and meat
Trading in a gas-guzzler for an electric car
Turning down the thermostat
Voting for the political party with the best green policies

Still, as a card-carrying passive investor I’m inclined to keep our holding as is.

What say thee?The one reason I’d consider switching to a new property fund is because the Slow and Steady portfolio is meant to be demonstrative for our readers.

Hence our property allocation is supposed to test the benefit – or otherwise – of diversifying into global real estate.

All this ESG gilding muddies the picture. I’d rather create an ESG version of the portfolio to illustrate the trials and tribulations of socially responsible investing.

That’s my opinion – but I’d really like to know what you think.

Should passive fund managers switch their index trackers to green indices?

Should I swap this fund for one focused purely on commercial property as an asset class?

Would you like us to come up with an ESG passive portfolio? That way we can contrast the fortunes of saint and sinner stocks alike.

Please let me know in the comments below.

Annual rebalancing timeI’ll run quickly through the annual portfolio maintenance because this post is already loooong.

We previously committed to an asset allocation shift of 2% per year from conventional gilts to index-linked bonds until we have a 50-50 split between them.

That means:

The Vanguard UK Government Bond index fund decreases to a 27% target allocation
The Royal London Short Duration Global Index Linked (GBP hedged) fund increases to a 13% target allocation

Our overall allocation to equities and bonds remains static at 60/40.

We also annually rebalance our positions back to their preset asset allocations at this point in the year. After 2022 that means selling off a portion of our badly performing equities and buying into battered bonds.

It’s a counterintuitive move (as discussed above). But over the long-term rising bond yields mean gilts are now better value than they were.

Inflation adjustmentsTo maintain our purchasing power, we must also increase our regular investment contributions every year by inflation.

We use the RPI rate. It has ballooned 14% this year according to the Office for National Statistics. (CPI was 10.7%).

So we’ll invest £1,200 per quarter in 2023. That’s up from £1,055 in 2022 and a titchy £750 back when we started in 2011.

New transactionsOur £1,200 contribution is split between our seven funds according to our predetermined asset allocation. The trades play out like this:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.06%

Fund identifier: GB00B3X7QG63

Rebalancing sale: £457.14

Sell 1.951 units @ £234.35

Target allocation: 5%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.14%

Fund identifier: GB00B59G4Q73

Rebalancing sale: £984.72

Sell 1.958 units @ £502.91

Target allocation: 37%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.29%

Fund identifier: IE00B3X1NT05

Rebalancing sale: £124.68

Sell 0.334 units @ £372.79

Target allocation: 5%

Emerging market equities

iShares Emerging Markets Equity Index Fund D – OCF 0.2%

Fund identifier: GB00B84DY642

Rebalancing sale: £280.10

Sell 156.435 units @ £1.79

Target allocation: 8%

Global property

iShares Environment & Low Carbon Tilt Real Estate Index Fund – OCF 0.17%

Fund identifier: GB00B5BFJG71

New purchase: £134.76

Buy 60.596 units @ £2.22

Target allocation: 5%

UK gilts

Vanguard UK Government Bond Index – OCF 0.12%

Fund identifier: IE00B1S75374

New purchase: £1957.69

Buy 14.781 units @ £132.45

Target allocation: 27%

Global inflation-linked bonds

Royal London Short Duration Global Index-Linked Fund – OCF 0.27%

Fund identifier: GB00BD050F05

New purchase: £954.18

Buy 921.911 units @ £1.04

Dividends reinvested: £203.38 (Buy another 196.502 units)

Target allocation: 13%

New investment contribution = £1,200

Trading cost = £0

Average portfolio OCF = 0.16%

If it all seems too complicated check out our best multi-asset fund picks. These include all-in-one diversified portfolios such as the Vanguard LifeStrategy funds.

Interested in tracking your own portfolio or using the Slow & Steady investment tracking spreadsheet? Our piece on portfolio tracking shows you how.

Finally, find out why we think most people are better off choosing passive vs active investing.

Take it steady,

The Accumulator

-27% in nominal terms with CPI inflation at 10.7%.
See the JST Macrohistory database, which documents UK gilt returns since 1871.
Òscar Jordà, Katharina Knoll, Dmitry Kuvshinov, Moritz Schularick, and Alan M. Taylor. 2019. “The Rate of Return on Everything, 1870–2015.” Quarterly Journal of Economics, 134(3), 1225-1298.
The riskier, longer maturities do anyway. Short-term bonds more closely resemble cash.

The post The Slow and Steady passive portfolio update: Q4 2022 appeared first on Monevator.

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What caught my eye this week.

I love this time of year. No, of course not the short, dark, dreary days. I spent a lot of my childhood in sunnier climes and the Seasonally Affected Depression is real.

But rather the sense of nothing pressing to do.

Granted this is a privilege, albeit the result of my choices.

I deliberately don’t have kids dragging me all over the place. I’ve literally made it my business not to have a stressful work life. I’m very grateful for my wider family life, but once Christmas is over it’s a week of limbo and I relish it.

There are pros and cons to this rather ascetic way of living, certainly. I can see for some it might appear a bit barren.

But it suits my unusual temperament, and importantly it isn’t hurting anyone.

Winter wonderlandThat said, I have developed some seasonal routines.

For example I tend to do a bit of midwinter purging of junk and clutter. And while I don’t commit to strict New Year resolutions, I do try to think a little more about what I might do better next year.

Currently I’m minded to eat meat only twice a week, work harder to see farther-flung friends, and hunt for more ultra long-term holds for my portfolio.

We’ll see.

On the purging of junk front, I also love resetting my massive investing spreadsheet.

My sheet starts with ‘my number’ at the top of the top sheet. That’s driven by various sub-sheets that calculate the shifting value of my portfolio in real-time. These also remind me ~~where all the skeletons are hidden~~ what is on which platform, and throws out interesting statistics about my shifting exposures and returns.

Zeroing it all ready for a new year is for me a special kind of slightly Rain man-y pleasure.

I see some of you are scoffing at the back?

Yes of course a year is an arbitrary orbit of the sun. Indeed, neither the world nor the markets are magically transformed on 1 January. (Although in retrospect 2022 sure looks that way.) I agree it’s all mental accounting and biases.

But hey, I’m a (mental) human and I am biased. And I can’t wait to delete the negative numbers and reset the counters.

Beans, beans, they’re good for your heartMany years ago I met the best-selling author Robbie Burns of Naked Trader fame. We talked about investing.

Robbie was dismayed about my Buffett-y habit of averaging down on my losers:

“Why would you want to stare at your failed trades all day? It’s depressing. I get rid of them.”

I thought Burns’ advice was ridiculous at the time. But now I think it’s more wise than not.

Sometimes you have to learn a lot of complexity to realize some simple truths.

In 2023 I’ll feel happier about my active investing – and I suspect I’ll do better accordingly – because I (hopefully) won’t have to keep seeing (and reacting to) how I’m lagging the market year-to-date over an arbitrary time period in a portfolio that can’t sensibly be said to be winning or losing over anything less than at least five years, at least not without luck looming large.

Agreed: this is intensely stupid. But it’s hard won self-awareness too.

I’ll be working on that flaw in 2023, as I cook my beans instead of a pork chop and try yet again to tie down some much busier friend for a weekend away.

Maybe you’re a sensible passive investor and you already have more time to devote to the most important things in your life?

Regardless: what will you be doing more or less of, investing or otherwise?

Let us know in the comments below. And happy new year!

Ten of the best from Monevator in 2022A semi-random selection of some of my favourite posts of the past year, with a bias towards the older and more likely to be forgotten ones…

How do zero commission brokers make money? – Monevator

Paying for care in the UK [Six parts, links at top] – Monevator

How to spend money – Monevator

The rising cost of living: how to maintain your quality of life – Monevator

Passive investing: what is it and how does it work? – Monevator

Quantitative tightening and you – Monevator

FIRE update: one-year anniversary – Monevator

Mortgage risk: a checklist – Monevator

Fixing your financial posture – Monevator

Don’t currency hedge your equity portfolio – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Stock and bond markets shed more than $30tn in ‘brutal’ 2022 [Search result] – FT

UK houses prices down for fourth month in a row; longest run since 2008 – Guardian

New Year’s Eve parties hit by strikes and cost of living – BBC

MBE for Gymshark founder who launched £1.25bn empire in parent’s garage – Guardian

Workers over 50 encouraged to end early retirement – BBC

Government extends Mortgage Guarantee Scheme to end of December 2023 – GOV.UK

Liz Truss regime’s ‘moron premium’ still looms over UK economy [Search result] – FT

Products and servicesBarclays: two Best Buy cash ISAs paying 4.1% (two year) and 4% (one year) – This Is Money

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

UK banks to ease pressure on mortgage holders as late payments set to surge [Search result] – FT

How to save money in the sales – Which

Hate that jumper? Here’s what to do with unwanted Christmas presents – Guardian

What are your rights if your flight is cancelled? – Which

Andy’s money-saving Deals of the Week – Be Clever With Your Cash

The best dream homes for sale, in pictures – Guardian

Comment and opinionNeeds, wants, and why we always feel unfulfilled – Pragmatic Capitalism

Taking it personally – Humble Dollar

At 90, Burton Malkiel of Random Walk… fame still sings the same tune – Think Advisor

Contrast – Indeedably

What is horizon risk, and why does it matter to you? – Rock Wealth

Same old same old – Humble Dollar

Build a buffer into your retirement plan – Random Roger

Investing basics: a balanced portfolio – Vanguard UK

Money lessons from The White Lotus – A Wealth of Common Sense

(Sane) 2023 forecasting mini-special2023 predictions – Fortunes and Frictions

Take your 2022 losses while you can – Of Dollars and Data

Naughty corner: Active anticsA deep dive into Fundsmith [Podcast] – Maynard Paton

Notes from Nick Sleep on short-term vs long-term thinking [PDF] – IGY Foundation

Workers rush to offload start-up shares as valuations plummet [Told you; search result] – FT

High returns from Turkey ETFs remind us to look at what’s been hammered [Podcast] – ETF Trends

How a CFO preps for an earnings call – The Secret CFO via Twitter

Kindle book bargainsMoney: The True Story of a Made-Up Thing by Jacob Goldstein – £1.19 on Kindle

Dead in the Water: Murder and Fraud in the World’s Most Secretive Industry by Matthew Campbell and Kit Chellel – £1.29 on Kindle

Environmental factorsThe Senegal man on a mission to plant five million trees – BBC

Why Alaska’s Beluga whale populations are dwindling – Hakai

Army of islanders to protect gecko the size of a paperclip – BBC

Off our beatThinking tools to improve your life – Neckar’s Minds and Markets

Three years on, what most surprised experts about the Covid pandemic – Stat

Let’s agree and accept that life and success is not fair – Freddie deBoer

Ukraine unplugged – The Atlantic via MSN

ChatGPT robs you of the benefit of thinking – Young Money

The surprisingly profound power of Thank You notes – The Atlantic via MSN

Scientists are arguing about publishing alternatives to peer review – Experimental History

All success is a lagging indicator – Ryan Holiday

And finally…“A cheap index fund is basically investing in its purest form. There’s no fat or indulgence. This is why it will likely never go out of style.”
– Eric Balchunas, The Bogle Effect

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What caught my eye this week.

Well, it looks like we are gonna make it. No, not in the sense of the crypto mania catchphase (wagmi), which already feels about as relevant as a minstrel who verily does doth his bonnet to such tomfoolery.

But rather, it’s nearly Christmas and a lousy year for investors is coming to an end.

Actually, I’ve kind of lost track of how Monevator readers feel about their portfolios in 2022.

When I was bemoaning my active strategy having blown up in the first-half of the year, sensible world tracker owners and LifeStrategy players largely shrugged their shoulders.

British passive investors and even many UK-focused stock pickers were doing fine – the former helped by currency gains, the latter by tech stocks being as rare on the London market as a Brexit benefit.

However it feels like value destruction has now reached into even those doughty portfolios.

In particular the bond blow-up has caused more emotional distress than I can remember equities ever doling out. (To reiterate, today’s pain with high-quality government bonds is literally tomorrow’s gain. Okay, or maybe the day after.)

Indeed by September Bloomberg was estimating the carnage of the combined crash in equities and bonds had wiped out $36 trillion in wealth. That’s worse than 2008.

Still, a few readers with very unusual portfolios occasionally chime in that they’re doing fine.

Genuinely: good for them!

But remember, most if not all portfolios that were unusually successful in 2022 won’t have delivered the returns you chalked up last year. Or in most previous years, for that matter.

That’s not a criticism. Portfolios are personal things, and higher returns aren’t everything. Some people prefer lower volatility, say, or maybe more income now for lower future gains. But it is a reality check.

Regardless, I’d have loved a slab of what they’ve been eating this year, and unlike my co-blogger I’m violently agnostic about how people go about investing.

Last ChristmasInvesting is a long-term game, with results best measured over many years.

That’s as true when meme stock traders are making us feel like losers in a bullish year as when someone with, for example, a permanent 25% allocation to gold is beating a bear market.

For my part, my ten-year dalliance with growth stocks (I began life more as an opportunistic value seeking curmudgeon) finally caught up with me.

Despite suspecting the sell-off in highly-rated US stocks in late 2021 was an early portent, I began buying those fallen darlings. Funded mostly by selling cheap UK equities that I’d previously in-part reallocated into.

It’s hard to imagine a worse move, except to compound it by not cutting bait sooner as the market continued to go against me. Instead I dribbled out of my positions, my portfolio bleeding.

The result is that even after shifting a huge chunk of my portfolio to ‘lower volatility’ assets fairly early in 2022 (as a response to my upcoming remortgaging uncertainty) and the growth rout finally stabilizing, I’m well behind my benchmarks this year. And it’s not like they’re looking very healthy, either.

Of course it didn’t help, again, that the lower volatility assets I’d finally acquired – especially UK government bonds – proceeded to swan dive, then turned to full-on synchronised ~~swimming~~ drowning in the wake of Liz Truss’ Mini Budget.

That’s been the story of my 2022 in a nutshell. Get your tiny violins out!

Monevator was noting inflation was a potential threat as far back as December 2021. Expectations then were still for interest rates to go to about 1% by the end of 2022.

Yet I (re)allocated far too much to rate sensitive ‘long duration’ stocks regardless.

And even though we were early in warning readers to stress test your mortgages, there was nothing much I could do with mine (reminder: unusual circumstances1) until my remortgaging window opened.

Which it finally did… post-Truss. My monthly payments are set to near-triple in the new year.

Fairytale Of New YorkIf you live by the sword, you die by the sword. Active investing has been good to me overall, but in 2022 I screwed up.

Nothing even half-fatal, but also not something I can blame on the flapping of Black Swans, with the possible exception of the war in Ukraine.

The signs were there, and my game for years has been to act on them. But this year I’ve been more Harry the Hoofer than Lionel Messi. My only consolation is almost all the stockpickers I know or follow are also in the relegation zone.

It’s rarely a good idea to do a deep rethink strategy in the middle of a funk, but I am wondering if it’s finally time to end my longstanding ultra-active investing experiment – I trade something most days – to go back to the sleepier buy-and-hold style where I made my bones.

Keen readers might find out in our upcoming membership service in 2023. And the rest of you will be spared too much more self-indulgent bewailing.

(I’m mostly sharing to show we’re all in the same boat, grumpy pants, but feel free to snicker.)

Rockin’ Around The Christmas TreeI guess there have been a couple of reasons to be cheerful in 2022, if you squint a bit.

Covid as a threat to life has mostly retreated for most of us, as best we can tell.

And UK politics currently looks more stable, albeit that’s a bit like an 18th Century surgeon reassuring a patient that the gangrene has been arrested now their leg has been chopped off.

But otherwise: is it hyperbole to say it’s been another bummer of a year?

I know – it feels like every year has been a duff one recently. But war in Europe, an inflation surge, widespread strikes, rising energy bills, a stock market crash and bond market implosion, political chaos, the economic consequences of Brexit finally coming home…

…it could certainly be worse, but it’s not just me, is it?

As ever reading has been a comfort. Both for its practical insights and on the grounds that when you see what others have gone through, you take everything less personally.

Here are a few from this year that would make great last-minute presents.

Richer, Wiser, Happier by William Green

Ostensibly a recap of various investors who found ways to best the market – including Vanguard founder Jack Bogle, who saw an investor could do better than most by simply making peace with it – William Green’s book also has a lot of wisdom on living tucked into its pages.

How to Fund the Life You Want by Powell and Hollow

My co-blogger The Accumulator raved in his recent review: “If I was starting from scratch, this is the UK personal finance book I’d want to read first”. He’s not an ebullient chap at the best of times, so I’d be inclined to believe him.

The Power Law by Sebastian Mallaby

After More Money Than God, his previous work on hedge funds, I knew the Mallaby treatment applied to venture capital was just what my doctor ordered. A deep dive into an opaque industry, Mallaby should be working on a new edition given how things turned south for the sector in 2022.

The Psychology of Money by Morgan Housel

Okay, this was a re-read. But Morgan Housel’s two-year old treatise on the ways money acts on our thinking and in our lives has sold two million copies for a reason. Brain food for anyone in your life.

The Man from the Future by Ananyo Bhattacharya

I think this also came out in 2021. Never mind, I’ve been in awe of von Neumann since I came across his work as a student and this book reminded me why. One of a genius generation of Hungarians who US colleagues dubbed The Martians, so brilliant was ‘Johnny’ that even the Martians thought he must be a time traveler.

All I Want For Christmas Is YouAnd that’ll do it for Monevator in 2022.

Actually, not quite – checking the calendar I see the next Weekend Reading I plan to send out will be on Saturday 31 December.

But that strange period between Christmas and New Year’s Day always feels out of time to me. It’s perhaps my favourite week of the year.

It’s been an odd year for the site, too, incidentally, and you can expect some changes in 2023.

Far more people now read new Monevator articles on email than on the web (subscribe if you haven’t) and we were hit by some kind of Google algorithm change about 18 months ago that has further flattened website traffic.

One result is we’ll probably de-cloak and highlight our identities soon, to try to convince our Google overlords that we’re not nefarious swindlers.

Do please curb your enthusiasm.

We’re also finally going to roll out some sort of membership/paywall offering.

Internet display advertising continues to dwindle. And despite what people keep telling us, affiliate sales don’t do much around here either – probably because we’ve trained or cultivated an audience of proud skinflints, but also because I refuse to run most stuff that would make more money (despite what the house troll complains).

Fear not! Monevator will mostly remain a free site and newsletter; we’ll just be hiving off a few morsels for those who are willing to chuck us a few quid.

At times this blog cost me money to keep going this year, which after 17 years and a lot of kind reviews is a bit ridiculous. Moreover it badly needs a redesign, which needs more funding. 2008 chic can only last for so long.

Finally – whisper it – but I think we’re going to get the Monevator book out at last in 2023. It’s written. It’s down to me to buckle down to the faff of publishing.

With a schedule of investing-related treats like that to come, who needs a stock market rally, eh?

Thanks for sticking with our long and deep posts in an ever more bite-sized and TikTok-ified world. We honestly try.

Merry Christmas, and a happy new year to you all.

p.s. Bumper list of links this week to get you through the holidays. Enjoy!

From MonevatorHow to Fund the Life You Want review – Monevator

Investment trusts discounts and premiums – Monevator

From the archive-ator: What are growth investors looking for? – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

Bank of England raises rate to 3.5%: what does it mean for you? – Moneyfacts

Property sales volumes to fall 21% next year as mortgage arrears rise… – FT Advisor

…while Halifax is predicting an 8% fall in house prices – Guardian

Microsoft to buy 4% of London Stock Exchange on cloud deal – Bloomberg via Yahoo Finance

Monevator ranked UK’s top personal finance blog for the second year running – Vuelio

ONS figures show the rise of ‘unretirement’ – This Is Money

Nuclear fusion breakthrough: what is it and how does it work? – BBC

SpaceX tender offer is said to value company at $140bn – Bloomberg via Yahoo Finance

Games Workshop signs deal with Amazon for Warhammer films – Hollywood Reporter

Alt strategies haven’t done much for diversified portfolios this century… – Finominal

…though KKR says these ones can usefully diversify a 60/40 portfolio right now – II

Products and servicesWise has a new wrapped-gilt product it calls ‘Interest’ – Wise

N&SI has upped its rates, including the prize fund for Premium Bonds – NS&I

Transfer your pension to an ii Self-Invested Personal Pension (SIPP) before 31 December 2022 and claim up to £1,000 cashback. Terms apply – Interactive Investor

Jeremy Hunt floats ‘stretchy mortgages’ to lower monthly bills and curb repossessions – This Is Money

Zopa, Chase, and Chip apps are all paying more following the BOE rate rise – This Is Money

How much power do your gadgets use? – Guardian

Britain’s forgotten benefit: thousands missing out on bereavement support – Which

Morningstar CEO says direct indexing can make investing fun again – Investment News

Homes for sale in historic villages, in pictures – Guardian

Comment and opinionThe California effect – Mr Money Mustache

Riding out the storm – Humble Dollar

Should retail investors buy gold? [Search result] – FT

Inflation’s final destination – Bond Vigilantes

Rich friends and the wealth game [Inspired by our post, podcast] – Stacking Benjamins

Defining ‘enough’ – Young Money

Take calculated risks – Collaborative Fund

Tremors felt in the UK housing market – The Motley Fool

Overpaying your mortgage? Perhaps you shouldn’t [Search result] – FT

How often is the [US] stock and bond market down in consecutive years? – AWOCS

Why isn’t it more expensive? – Fortunes & Frictions

A nation deep in debt: part two [Podcast] – A Long Time In Finance

Saxo Bank’s outrageous predictions for 2023: the war economy – Saxo Bank

FTX collapse has lessons for everyone mini-specialA key ingredient of the FTX fraud – Demystifying markets

The FTX lesson that all investors should learn – Portfolio Charts

Crypt o’ cryptoBinance outflows hit $6bn as Mazars halts ‘proof of reserves’ work [Search result] – FT

No one is happier about Sam Bankman-Fried’s downfall than the Bitcoin people – Slate

How CoinDesk’s crypto FTX scoop left a hole in its corporate overlord – The Verge

The fall of FTX shocked everybody. Except this guy – The Atlantic

Naughty corner: Active anticsUK equities: mispriced opportunities abound – Schroders

Sea change – Howard Marks

End of ‘fantasy’ stock market brings relief and pressure for short sellers [Search result] – FT

The importance of the FAANG stocks is fading – Bloomberg via Yahoo Finance

Monetary policy may have a longer lag than we thought – Klement on Investing

Investing in the African future – The Motley Fool

Valuing private companies is hard, and the pros are conflicted – Institutional Investor

Should your portfolio protection act fast or slow? [Research, PDF download] – AQR

Did a CPI leak spark a 60-seconds-too-early rally? – Bloomberg via Yahoo Finance

Covid cornerKindle book bargainsI Am Zlatan Ibrahimovic by Zlatan Ibrahimovic [Holiday read!] – £0.99 on Kindle

Surrounded by Bad Bosses and Lazy Employees by Thomas Erikson – £0.99 on Kindle

The Business Book by DK Publishing – £1.99 on Kindle

Quiet Leadership: Winning Hearts, Minds, and Matches by Carlo Ancelotti – £0.99 on Kindle

Environmental factorsThe rampaging avian influenza is entering unknown territory – Hakai

The ESG backlash is partly driven by (some of) the right’s climate change denial… – Vox

…but Vanguard’s recent net zero backtracking is more about index fund reality – P&I

Should we build wind turbines from wood? [A couple of weeks old] – New Scientist

Health-y debate mini-specialRethinking the causes of Alzheimer’s disease – Quanta

Scientists finally know why people get more colds and flu in winter – CNN

New obesity breakthrough drugs – Ground Truths

The NHS cafes that save lives – Prospect

Hearing aids slow cognitive decline, but we’re not sure why – New Atlas [h/t Abnormal Returns]

A dangerous stew of air is choking the United States – Nature

Off our beatAnd what if you can’t tell? – Seth Godin

How Putin’s technocrats saved the economy to fight a war they opposed [Search result] – FT

This psychologist spent five years studying penalty shootouts – Wall Street Journal via Mint

Why competitive advantages die – Morgan Housel

The middle class is dead. Long live the long tail class – Dror Poleg

TSMC: semiconductors and the borders of light – The Generalist

How to keep going when life gets hard – Darius Foroux

52 Snippets from 2022 – Snippet

And finally…“Like Warren Buffett and Charlie Munger, Mohnish Pabrai spends most of the day reading…”
– William Green, Richer, Wiser, Happier

Effectively it means I can’t go elsewhere, though knowing now how my bank’s remortgaging works it turns out I could have paid a charge and remortgaged early.

The post Weekend reading: Wrapping up 2022 appeared first on Monevator.

Richer, Wiser, Happier: How the World's Greatest Investors Win in Markets and Life

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Many investors are unnerved by investment trust discounts and premiums. But the concepts involved are quite simple. And assuming you’re not – sensibly enough – a pure index fund investor1 – discounts and premiums shouldn’t put you off these interesting shares.

Equally, not understanding the difference between discounts and premiums can cost you money. It’s all too easy to be confused, as comments over the years on Monevator have revealed.

My previous articles on investment trusts should give you primer on the basics if you need it.

Today I’ll focus on discounts and premiums.

Investment trusts on saleFor active investors – or even ‘passive’ investors in the old-fashioned sense of buying and tucking away funds for the long-term – now could be a propitious time to look into these investment vehicles.

Recent data from the Association of Investment Companies (AIC) has 37 out of the 38 investment trust sectors trading at a discount:

“Since the beginning of the year the discount of the average investment company has widened more than 10 percentage points – from 3.6% on 31 December 2021 to 14.3% on 18 November 2022.

With almost all investment company sectors on a discount, the Association has published a list of average discounts across all equity and alternative sectors.

Out of 38 sectors, only the Hedge Funds sector trades at a premium, of 3.8%. The sector is one of this year’s best-performing, with several of its constituents delivering for investors in turbulent times, the AIC said.

The most deeply discounted equity sector is North America, on a 26.5% discount, followed by India on a 14.9% discount and Global Emerging Markets on 12.4%.

Among equity sectors, AIC figures show the biggest discount changes in 2022 have been in the Biotechnology & Healthcare and Technology & Media sectors, where discounts have widened by 9.2 and 8.5 percentage points respectively.”

As a naughty active investor (in contrast to my passive investing co-blogger) I love rummaging around in the investment trust bargain basement.

And as a long-time plunger in such markets, now feels like as good a time as any to get more than you paid for when you buy an investment trust.

But what exactly is a discount, and why should you pay attention?

Let’s start at the beginning.

What does your investment trust own?We all (now) know that an investment trust is a company that purchases assets to hold or trade.

Such assets could include equities, property, bonds, or even exotic fare like farmland or art. The specific assets held will depend on the trust’s stated investment objective. (Or mandate, in the jargon.)

When we buy shares in a particular investment trust, we become part-owners in the trust. Effectively we then have part-ownership of those underlying assets.

Our slice of the pie depends on the percentage of the trust’s total shares outstanding that we own.

Most of us will only ever own a few thousand shares in an investment trust. But it’s the same principle, whether you hold 0.001% or 10% of the trust’s shares.

For example, equity income investment trusts own shares in large blue chip companies that pay healthy dividend yields.

As a shareholder in such a trust, you’ll typically be paid your proportion of the dividend income generated by those blue chip equities – minus the trust’s fees, hidden costs, and any income it retains for future use.

Equity income trusts appeal to active investors who want a diversified income. But as a shareholder, you’ll also benefit (or suffer) from the rise and fall in the value of the shares your trust owns.

Similarly, you might buy an investment trust that owns property or miners or bonds – or pretty much anything else you can think of.

You might even buy an investment trust because you ~~hope~~ think the manager is an especially skilled one.

They may be fishing from the same general pool of shares you could buy for yourself – or that you could invest in via a tracker fund – but you may believe the trust’s manager is more skillful at picking winners. And so you hope their trust will beat the market.

Net assetsIn any case, the trust will own a lot of stuff, which are called its assets.

The trust may also have debt (also known as gearing). These borrowings would need to be repaid out of assets if the trust were ever to be wound up, before its owners (the trust’s shareholders) could divide whatever was left.

Therefore:

Net asset value (NAV) = Total trust assets minus any debt

How to calculate the net asset value per shareWhile they amount to the same thing, it’s often easier to think about what portion of the trust’s net assets each individual share is theoretically entitled to, rather to work off the whole trust’s market value.

Let’s consider an example.

Imagine the world’s simplest investment trust, Monevator Investments PLC.

This recklessly mismanaged operation owns shares in just two companies, TI Corp and TA Inc. (Hey, it’s good to hedge your bets!)

Let’s say shares in TI Corp are trading at £10 and TA Inc is at £12, and that the trust owns 100,000 shares of TI Corp, and 50,000 shares of TA Inc.

The trust’s TI Corp holding is worth £10 x 100,000 = £1 million

Its TA Inc holding is worth £12 x 50,000 = £600,000

The Monevator trust has zero debts.

Therefore, the net assets of Monevator Investments PLC is £1.6 million.

Now, let’s say this trust has one million shares in issue.

Net assets per share = £1.6 million / 1 million = 160p per share.

Each share is effectively a claim on 160p worth of assets owned by Monevator Investments.

So far so simple!

Investment trust share price versus NAVAny share is worth whatever someone will pay for it. There’s no right or wrong value for any particular share that you can calculate with a formula – in the sense that whatever value you come up with, it’s irrelevant if nobody will pay that for it today.

This is why share prices are so volatile. The market is constantly trying to agree upon the correct value of every company.

Consider a giant drug maker like GlaxoSmithKline. Calculating its ‘correct’ valuation is likely impossible. There are many brands, new ventures, potential disasters and expired patients patents that can impact its profits from quarter-to-quarter.

Fluctuating sentiment also continually alters the multiple (the P/E ratio) that investors are prepared to pay for a claim on Glaxo’s profits.

Over the long-term our valuation estimate might prove to be approximately right. But in the short-term it’ll be precisely wrong – except by luck.

In contrast we can immediately see what a Glaxo share is worth right now by pulling up its share price on the Internet.

You might believe GlaxoSmithKline is worth £20 a share. But as I type this the market says it’s worth £14.55. That’s what someone will pay for its shares right now.

If you’re confident you’re right, you might buy Glaxo shares as they’re trading for less than your valuation and wait for the market to come around to your thinking. (That, in a nutshell, is stockpicking. But that’s for another day…)

Investment trust valuation is a little differentWith an investment trust like Monevator Investments PLC, it’s usually very easy to work out its value. You simply look at its assets and debts, calculate the NAV like we did above, and hey presto – you’ve got its value.

This is true of any investment trust that holds a basket of liquid and quoted securities, where you can just call up the latest price of each investment. (I’m ignoring for now more complicated trusts that invest in unquoted or illiquid assets).

You don’t even have to calculate the NAV per share, unless you want to double-check something. Resources like the AIC’s website collates the stats for you. Trusts also regularly publish their NAVs via the London Stock Exchange’s RNS service.

Now before anyone objects, it’s true that the listed securities owned by the trust might be worth more or less than what the market is pricing them at today, and hence what’s reflected in the NAV.

That takes us back to the Glaxo discussion we just had.

But the point is a trust could in theory dump all its Glaxo shares at today’s market price.2 And that by doing so for all its holdings and then paying off the debt, it would (after costs) be left with that NAV in cash.

In other words, for mainstream investment trusts the NAV is not subjective or an opinion. It’s a fact.

Discounts, premiums, and NAVsDespite this certainty, it’s often the case that the share price of an investment trust trades at less than its NAV per share.

And this may be an opportunity. Price is what you pay but value is what you get, to quote Warren Buffett.

For instance, Monevator Investments may trade for £1.20 a share, despite anyone with a calculator being able to see its NAV per share is £1.60.

So in this case, a buyer is getting £1.60 of underlying assets for just £1.20.

Bargain! The share is trading at a discount to NAV:

The discount is (£1.60-£1.20)/£1.60 = 25%

The general idea is that you get more for your money when you invest at a discount. Hopefully in time the discount will narrow, pulling the share price up towards the NAV and amplifying your returns.

Note there’s no guarantee this will happen though. (If there was, discounts probably wouldn’t exist.)

Sometimes trusts can languish on discounts indefinitely. Trusts may even be wound-up as a consequence. Doing so almost always closes the discount, but it typically comes after a period where whatever caused the discount (lousy returns, say) have already done a bit of damage.

Discounts can also be great for income investors who buy and hold, since the money you spend on your shares buys you more of the trust’s income generating assets.

For example, suppose a trust trading at £1 per share – the same as its NAV of 100p – owns a portfolio of blue chips that generates a 3% yield. If the share price falls to 90p to create a 10% discount to an unchanged NAV, then new buyers will enjoy a higher 3.33% yield from the trust. (That is, 100/90*3).

Premium pricingLess often you’ll find a trust priced greater than its NAV. This is more common in bull markets, or for a popular new launch.

For instance let’s say Monevator Investments is trading at £1.80. Net assets are still £1.60 per share.

Then the premium is (£1.80-£1.60)/£1.60 = 12.5%

Now you’re paying 12.5% above what the shares would be worth if everything was sold tomorrow.

Probably not such a good deal!

Also, what I said above about discounts boosting your income is countered with premiums. They reduce the yield from the trust’s underlying investments.

Paying premiums can be costlyFor one very illuminating example, when I wrote the first version of this article in 2014 Fundsmith’s then-new emerging market trust traded at a premium to NAV. This was despite its initial assets being merely cash.

You were paying, say, £1.05 to buy £1.

People wanted to own the shares as a bet that fund manager Terry Smith’s stock picking prowess would extend to emerging markets. However that didn’t really pan out, the shares slipped to a discount, and in 2022 the trust was wound up.

So beware hype and premiums kids!

For another example, popular fund manager Nick Train’s Lindsell Train investment trust was trading at a premium of nearly 100% a few years ago.

In that instance investors were betting that the NAV was misstated. This line of thinking was possible because Lindsell Train’s largest asset is a holding in Train’s own investment company, also called Lindsell Train.

With unlisted investments like that, the pricing certainty I talked about doesn’t hold. (This is most commonly seen with private and venture capital trusts.) Hence you can’t be sure of the NAV.

To his credit, Train repeatedly warned investors they were probably paying too much for the trust’s shares. And for the record the share price has halved since those days. Indeed last month you could even buy the shares at a discount.

Sometimes a small premium is the price of entry to a very popular trust, particularly one that has some kind of discount control mechanism allied to its strong appeal.

For instance, Capital Gearing Trust is usually priced just over NAV.

More egregiously, infrastructure trusts have tended to trade at double-digit premiums, although this year these have finally collapsed as bond yields have risen, reducing their relative attractiveness.

Personally I’d never pay more than a couple of percent as a premium. And then only very rarely.

A few final tips on discounts and premiumsHere’s a few things you may be wondering about – or that maybe you should be wondering about if you’re not:

Fund factsheets and data suppliers usually give the discount or premium as a percentage figure.
Typically a negative number – for example -5% or (5%) – indicates the level of discount to NAV.
In contrast a positive percentage indicates a premium to NAV.
As mentioned, investment trusts must release regular RNS press releases to the stock market. You can find these on various websites. I always check these for the latest NAV per share, and I do the discount/premium calculations for myself. Sometimes the online data sources and factsheets are out of date.
Another reason to check is that different data suppliers often treat debt and accrued income differently in their calculations. (For example, one may count debt on the balance sheet at its face value, while another calculates its impact on NAV based on what it would cost to pay off the debt today).
Why do investment trusts trade at discounts? And why on Earth would anyone pay more for a trust than its assets are worth? Great questions, that I’ve previously attempted to answer.

Opportunity knocksThe whole discounts and premiums malarkey was often pinned by old-school Independent Financial Advisers as the reason they put their customers’ money into unit trusts rather than investment trusts.

Clients were too easily confused, they said. (“Honest guv, nothing to do with the commission that unit trusts kicked back, but investment trusts could not…“)

Yet confusion, panic, and mispricing can be your friend if you’re involved in the quixotic (and generally ill-advised) game of active investing.

To that end, I think investment trusts and their mercurial discounts offer a dedicated active investor an interesting halfway house between open-ended funds and ETFs and the outright stockpicking of single company shares.

And after a long sell-off in shares that have hit investment trusts pretty hard, discounts abound.

If you’re an active investor for your sins, happy hunting!

Investment trusts are companies that invest in other companies, so in effect they are actively managed funds. Passive index fund investors prefer the warm comfort of low fees and getting the market return to the potential (but in practice rare) upside from active management. They’d therefore choose trackers and ETFs over investment trusts.
In practice this might move the share price if it owned a lot relative to the company’s outstanding share count. Again: details!

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Want to get a grip on your finances? Need a UK Money Management 101? Then you’ll find How To Fund The Life You Want an excellent starting point.

I could imagine this book being the essential companion to an online course that all Britons took in their late twenties. Just imagine! An investment in everyone’s financial future and education.

Alas in our dreary reality – wandering in the political spectrum between the Wild West and the Nanny State – the UK prefers to muddle through.

We’re left to work things out for ourselves.

The trick is to wake up before it’s too late – and to know where to look for help.

Pointing you in the right directionHow To Fund The Life You Want is a great place to begin because:

Its guidance is sensible, easily digested, up-to-date, and presented so that anyone can tailor it to suit.
It’s a straightforward read that skates lightly in and around financial industry jargon. Prior expertise is not required.
The authors have structured the book to provide a route map of the way ahead, with recommendations on additional field trips you might take. For example, exploring the back roads of the tax system, or the cul-de-sacs in your own investing psychology.
Taking control of your entire financial future is daunting but these guys show it’s achievable.

How To Fund The Life You Want: who it’s forThe book’s authors – Robin Powell and Jonathan Hollow – state upfront:

“We have written this book for people in the UK who feel they don’t know enough about pensions and investing to plan for their retirement.”

Indeed the overall thrust of the book is very much about helping you to retire at a time and income level of your choosing.

However I think the authors’ holistic approach gives the book wider application, as they gently encourage readers to think about their money values (and taboos), and what it’s all actually for – a key part of a full personal finance awakening.

Powell and Hollow introduce the character of our future self as a person worth investing in – versus our overweening current self – in order to break down our natural inclination to under-save and prevaricate about the future.

They also lay out an elegant money management system that could help anyone ensure their income flows first to meet bills and debts, with the remainder channelled to fulfil the needs of both your current and future selves.

And as with the rest of the book, the money management section is written with empathy for the needs of people who are not natural finance ninjas.

This chapter particularly benefits from Hollow’s experience working on the superb Money Helper consumer finance site1, and his own struggle to tame budget-o-phobia with apps and behavioural hacks.

By the final page, the authors have nudged us into considering how to identify scammers and financial sharks, when it makes sense to engage a financial advisor, and how to reconcile your personal need for a result with your ethical values using ESG2 investing.

Good foundationsLong-time Monevator readers will recognise the book’s investing guidance is founded on solid bedrock:

First grab your day-to-day finances by the scruff.
Invest in passive investing products and keep your costs low.
Understand financial markets are a rollercoaster.
Understand risk is a multi-headed beast.
Develop the wisdom to accept what you can control and what you cannot.
Gain a feel for the numbers that can help you fund the life you want.

It’s sound advice that should be mainstream in the UK – yet it isn’t.

The authors aren’t radical FIRE-brands or passive investing zealots. They’ve written this prescription because the evidence leads them to believe it’s the best way for most people to achieve their financial goals.

But they’re careful to remind us that this stuff isn’t set-and-forget. New evidence, products, or regulation may emerge that changes the game.

So stay engaged!

How To Fund The Life You Want: why it’s goodHow To Fund The Life You Want is the best entry-level book I’ve read for UK residents who want to take charge of their financial future.

It’s written for those who don’t yet know what path they might take:

DIY investor?
Default into some combination of Nest workplace pension and robo-advice solutions?
May yet decide to engage a financial advisor?

Or perhaps you’ll devise a hybrid plan? One that mix and matches all of the above?

The authors sketch out your many options.

And that leads me to my one note of criticism. Actually more of an observation about the book’s role – and an acknowledgement of the messy reality of the UK’s consumer financial market.

How To Fund The Life You Want covers so much ground that inevitably it covers it lightly.

True, for some people this will be as much detail as they can take. But others may think it skims over important points.

Personally I’m a details man. But even I can see this book is a masterclass of streamlining.

It’s incredibly hard to make the complex seem simple. But Powell and Hollow have clearly thought deeply about when to hold your hand, when to prod you to do your own research, and when to invite you to disentangle your feelings on a money issue. (You can use even their accompanying workbook as a prompt if you’re so inclined).

They also refer the reader to a useful collection of online calculators and other resources they believe can help.

A pillar for your investing bookshelfThe fact is that the scope of UK personal finance is too big for any one book. And no one in their right mind reads a single article, or even an entire book, and believes that’s the last word.

So for me, How To Fund The Life You Want is the ‘big picture’ book for newbie UK investors.

It provides essential onboarding and orientation material if you haven’t invested before – or if you haven’t gotten the memo yet about avoiding market-timing or punting on currencies and crypto.

My recommendation is to read this book if you’re at that stage of your journey. (Or gift it to anyone you know who is!)

I’d suggest you then pair it with a dedicated UK investing book such as Lars Kroijer’s Investing Demystified.

Finally, keep up-to-date through Powell’s own website The Evidence-Based Investor and – though we hate to toot our own horn3 – Monevator’s own passive investing resources.

I enjoyed How To Fund The Life You Want anyway, despite being about as wizened as a UK passive investor can be.

But if I was starting from scratch, this is the UK personal finance book I’d want to read first.

Take it steady,

The Accumulator

The Money Advice Service, as was.
Environmental, Social and Governance.
We don’t – The Investor.

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Investing Demystified: How to create the best investment portfolio whatever your risk level (Financial Times Series)

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What caught my eye this week.

This week, the world of investing is buzzing about ChatGPT, a revolutionary new development in the field of artificial intelligence and natural language processing.

ChatGPT, or ‘Chat Generative Pretrained Transformer,’ is a large language model trained by OpenAI. It has the ability to generate human-like text based on a given prompt, making it a powerful tool for a variety of applications.

One of the most exciting possibilities for ChatGPT is its potential to disrupt the world of online communication. With its ability to generate realistic-sounding text, ChatGPT has the potential to revolutionize the way companies communicate with their audiences.

For investors, the emergence of ChatGPT and other AI technologies raises some important questions. How will these technologies impact the companies in which we invest? And how should we adjust our investment strategies in response?

One potential consequence of the rise of AI is that it could lead to increased automation in various industries. This could reduce the demand for human labor, leading to job losses and potentially impacting the bottom line of companies that rely heavily on human workers.

At the same time, however, the development of AI technologies could also create new opportunities for growth. Companies that are able to effectively utilize AI and natural language processing could see increased efficiency and productivity, leading to improved financial performance.

However, there are also some potential downsides to the widespread use of AI for content creation. With large amounts of automatically-generated content being produced without human oversight, there is a risk of unreliable or even fraudulent information being disseminated. This could have negative consequences for both companies and investors.

Furthermore, the use of AI-generated content could also make it easier for companies to disseminate convincing-sounding but ultimately flawed financial advice. The average person may not have the knowledge or expertise to spot the difference between reliable information and fake news generated by AI. This could put them at a disadvantage when making investment decisions.

In order to navigate these potential shifts in the market, it’s important for investors to stay informed about the latest developments in AI and natural language processing. By keeping a close eye on the companies that are leading the way in these areas, investors can position themselves to capitalize on the opportunities presented by these technologies while also minimizing the risks.

One way to do this is through the use of index funds. By investing in index funds, investors can own a piece of the companies that are driving the development of new technologies like ChatGPT. This means that no matter what changes the future brings, investors can be confident that they will own a share of the companies that are at the forefront of the latest technological developments.

In conclusion, everyone is excited about ChatGPT this week, and for good reason. It’s a revolutionary development that has the potential to disrupt the way companies communicate.

‘More human than human’ is our mottoWhat do you reckon to that, eh?

Bit flat? Lacking the puns, schoolboy humour, and anti-Brexit tirades you’ve come to expect on a Saturday from Monevator?

Yes, you guessed it – you just read the output from ChatGPT itself.

Here’s the prompt I gave it:

I suppose one bit of good news for scribble-smiths like me is that it can’t hit a word count. I asked for 700 words, and it’s delivered 479 of them.

Otherwise: cor blimey.

Observant readers may have noticed me slipping stories about machine learning into Weekend Reading for the past few years. I am both fascinated and paranoid about where this is going.

One of my few certain talents is I can extrapolate better than many people. As such I was (a) not shocked by the proficiency of this latest model and (b) am less relieved by its clear limitations.

It’s a giddy time for advancements in machine learning and AI. Personally, I think those closest to it can be complacent. I feel they don’t appreciate the rate of advance and they dwell overly on the near-term shortcomings. Sort of like you can’t tell how your own kid is growing tall and talented until a distant relative visits and is surprised.

Sure, we don’t know exactly what is growing capable with these machine learning models.

But it’s doing so quickly!

I’m afraid. I’m afraid, DaveThere’s so much to be said about this, even within the narrow terms of investing. If you want another hit then check out this beautifully written post by Indeedably:

The promise of what this technology will offer in the future in equal part excites and terrifies me. Much like the early internet I encountered during that hungover tutorial, that future promise far exceeds the realities of the current implementation.

Much like that early internet, I can already start to see just how transformative it has the potential to become. The white-collar world has long been a safe harbour for well-remunerated workers to finance a comfortable lifestyle endlessly moving data, producing slide decks, torturing spreadsheets, and writing code.

Those workers are about to experience first-hand what their agrarian, mining, and production line working forebears felt like a generation or three ago. It will be fascinating to watch the evolution.

No chatbot is going to match Indeedably’s copy anytime soon. Nor, I hope, ours.

But at the same time I’m sure that right now thousands of people trying to figure out how to spin-up vast AI content farms to game Google and suck away Internet traffic for advertising pennies. (Even though in the long run, ChatGPT-style models will kill generic content silos. And maybe even Google search).

Some spammer’s traffic gain is every other web publisher’s loss.

Perhaps me and Indeedably need to worry even sooner than I thought.

You are terminatedMaybe ChatGPT has already killed the traditional student essay. Maybe in the future we’ll have to sign everything we create (via a blockchain) to prove it isn’t a deep fake. Or that something else is a fake, by the omission of such a signature.

Perhaps we’ll have to show our identity papers to write a comment on Reddit. Already user-generated sites like Stack Overflow have been afflicted.

Will a grey goo of cruddy auto-generated verbiage swamp the Internet as we know it? Or should we be more worried about the day when everything a bot writes is really good?

For now the moderators at Stack Overflow are worried about bad ChatGPT programming code being submitted.

But in the long-run that site’s readers should be ready for its good code disrupting their jobs.

Similarly even fiction writers – indeed the entire creative class – are now on notice. Machine learning will be a tool for a while, but it could conceivably become a threat by mastering the things that we thought made us most human.

What do you think? Are you worried a young and hungry AI is coming for your salary? Let us know in the comments.

Oh, and come on England!

From MonevatorBond terms jargon buster – Monevator

Greedy buy-to-let landlord or mortgage prisoner? – Monevator

From the archive-ator: The cost of active fund management – Monevator

NewsNote: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

UK banking rules in biggest shake-up in 30 years – BBC

House prices fall at their fastest rate in 14 years, says Halifax – Guardian

Would an England World Cup win boost British business? – This Is Money

Bank of England likely to raise interest rates to 3.5% next week – Yahoo Finance

BP agrees to install up to 900 EV charge points at 70 M&S retail outlets – This Is Money

‘Goblin mode’ chosen as OED’s word of the year – CNN

UK set to unleash an historic debt deluge [Search result] – FT

Products and servicesMortgage lenders cut rates by up to 1% ahead of base rate hike – FT Adviser

Financial advice: is it value for money? [Search result] – FT

Last chance to claim! Cashback offer expires 12 December Open an account with InvestEngine via our affiliate link and get £25 when you invest at least £100 (new customers only, T&Cs apply). Capital at risk – InvestEngine

Postcode checker: how has your High Street changed since 2020? – BBC

Does tin foil behind the radiator beat the cold? – Guardian

Taxpayers on the hook for billions from energy supplier failures [Podcast] – A Long Time In Finance

Hargreaves Lansdown is offering £50 to £1,000 cashback when you transfer your ISA and £100 to £1,500 cashback when you transfer your SIPP (terms apply to both offers)

Should you ever use or buy gift cards? – Be Clever With Your Cash

Mortgage brokers are training as mental health first-aiders to support vulnerable homeowners – This Is Money

“Thameslink fined me for sitting in the wrong seat even though I had a ticket” – Guardian

Homes for a cozy Christmas, in pictures – Guardian

Comment and opinionDebunking myths about 60/40 style portfolios – Vanguard

Nest’s target-date funds and the perils of dead wax – Henry Tapper

A history of the UK national debt [Podcast] – A Long Time In Finance

Bonds versus bond funds over the past year [US but relevant] – Morningstar

How to get rich by working for it – Darius Foroux

Don’t get lost in a down stock market – A Teachable Moment

What is fractional ownership? And is it the new buy-to-let? – Yahoo Finance

Do you think about money differently compared to a year ago? – Humble Dollar

Privilege doesn’t start with the super-rich [Search result] – FT

How to host huge family gatherings through the generations – Humble Dollar

Crypt o’ cryptoiPod creator Tony Fadell is trying to build the iPod of crypto for Ledger – Wired

Naughty corner: Active anticsUS small cap stocks look really cheap – Morningstar

An interview with UK small cap tipster Simon Thompson – Investor’s Chronicle

How a basket of ETFs mimicked the performance of top hedge funds – Institutional Investor

Elon Musk gambled big on Twitter. Tesla will pay the price – Insider

Covid cornerThe phase of the pandemic where we pretend it’s 2019 – The Atlantic

China’s health system isn’t ready for the end of ‘zero Covid’ – Vox

The country also needs better Covid vaccines – Slate

Even now, nobody wants to confront the awful truth about Britain’s lockdowns – Douglas Murray

Yes, immunity debt was worth it – Slate [and how this headline evolved – Unherd]

Kindle book bargainsBad Blood: Secrets and Lies in a Silicon Valley Startup by John Carreyrou – £0.99 on Kindle

Surrounded by Bad Bosses and Lazy Employees by Thomas Erikson – £0.99 on Kindle

The Business Book by DK Publishing – £1.99 on Kindle

Quiet Leadership: Winning Hearts, Minds, and Matches by Carlo Ancelotti – £0.99 on Kindle

Environmental factorsVanguard quits net zero alliance, citing need for independence – Reuters

Mumbai embraces its booming flamingo population – Hakai Magazine

Sperm counts are falling worldwide. Why? [Podcast] – The Ringer

ESG funds are rethinking the case for nuclear – Morningstar

Off our beatIdeas that changed my life – Morgan Housel

AirBnB is WeWork – Dror Poleg

Credit cards as a legacy system [Really fascinating read] – Bits About Money

Almost everyone in South Korea is about to become one or two years younger – Reuters

Our new love affair with the office is a step towards a better philosophy of work – Guardian

The Dad-ification of fashion – The Cut

Is America still on the path to authoritarianism? – Brian Klass

How to hold contradictory ideas in your head at once – Ryan Holiday

And finally…“He commuted to his Canadian office in a Ferrari, though sometimes snowy conditions forced him to use Bentley.”
– Sebastian Mallaby, More Money than God: Hedge Funds and the Making of the New Elite

The post Weekend reading: Never send a human to do a machine’s job appeared first on Monevator.

Bad Blood: Secrets and Lies in a Silicon Valley Startup

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Being a greedy buy-to-let landlord, I was super excited earlier this year to hear about soaring rents in London, tens of viewings for each property, and would-be tenants engaged in bidding wars.

Music to my ears, because my London buy-to-let was coming to the end of a three-year tenancy.

I was going to cash in big time!

Let’s see how it worked out.

The sitrepThe property in question is an ex-local-authority three-bed freehold house in Tower Hamlets. The tenancy that was coming to an end was paying me £1,900 per month. (Down from £2,000 in 2019).

I’ve now re-let it for £2,400 a month for three years. Good, but given those headlines not as good as I thought it might be:

It’s let to three migrant workers, who earn about £75,000 between them. (They are cleaners and waiting staff).
The £28,800 they’re paying in rent is nearly 40% of their gross pay. I’d argue they are paying the maximum they can afford. (Wages should be higher, but that’s another story)
It’s let and managed through an agent, who takes roughly 16% plus VAT plus a load of other sundry stuff. It totals a bit more than 20% of the rent.
Other annual costs add up to a bit more than 10%. (My estimate, based on my long actual costs over the years).
If we assume (optimistically, but it makes the maths easy) 30% all-in costs (excluding financing) then this property earns: £2,40012(100%-30%) = £20,160 net.
Zoopla thinks the house is worth £700,000. That is wildly optimistic IMHO; it’s clear their machine-learning algorithm hasn’t seen the place. Let’s call it £600,000.
The gross yield is £28,800 / £600,000 = 4.8%. That doesn’t seem so bad.
Costs bring that down to £20,160 / £600,000 = 3.36% net (before financing)

Now if that was all there was to it, these figures might seem reasonable and fairly dull. You’d not be biting my hand off to buy this asset, would you? But nor is it an obvious sell.

You could even argue I’m getting a greater than 3% inflation-linked return. Not terrible by any means.

Mortgages and taxesA few years ago a piece of stinging legislation – Section 24 of the 2015 Finance Act – changed the economics for greedy buy-to-let landlords like me.

In the post-Section 24 era, you have to pay tax on the rent (after all non financing costs) at your marginal rate.

You then you get a (lower) tax rebate for 20% of your financing costs. Which was a clever ruse. Because for many people, it pushes them into a higher tax band. Very often the 60% bracket between £100,000 and £125,000.

For this property I have a £300,000 (so 50% loan-to-value) fixed rate mortgage. The rate is around 2%. (This fix will last about four more years. Phew!)

The mortgage costs me 2%*£300,000 = £6,000 a year.

Let’s add all this up together:

I’ve also included the sums for a pre-Section 24 universe in the three rows at the end of this table as a comparison.

A few things stand out here:

The 60% tax rate is beyond ridiculous. It’s random and illogical.
Section 24 is also pretty ridiculous. (And no, I don’t care that regular homeowners can’t offset their mortgage interest against tax – touted as making Section 24 ‘fair’. Homeowners don’t have to pay income tax on their imputed rent either, do they?)
After tax, our greedy buy-to-let landlord is getting anything between £11,000 and £3,000, depending on their tax bracket.
Which one applies to me? The second from the right.

Earning 54bps on £600,000 is certainly nothing to write home about. But arguably what matters for our yield calculation is not the capital value of the property, but rather the ‘equity’ we have in it.

That is, how much ‘cash’ would we have if we sold it and paid off the mortgage?

On the face of it this appears to be:

£600,000 – £300,000 = £300,000 equity.

As you can see above, using the equity figure obviously makes the returns look a little better. Still I’d not exactly be thumping the table to get into this position.

Wait: it gets worseAll this maths is at the existing rate on my mortgage. But what if my fix was expiring today and I had to remortgage?

The lowest rate I could get is 5.3% (plus £2,000 in fees). I’ll explain how I can be so certain of this in a minute.

First let’s run the stress test:

Ugh, pass the sick bag.

A thought experiment. In this stress test scenario, how much would I have to increase the rent to break even on a post-tax cash flow basis, assuming I am a 60% taxpayer?

Well, because I only keep 40% of any increase, quite a lot. In fact it would require about a 50% increase to £3,600 per month. (Certain costs are somewhat fixed, others are not. That makes the estimate fuzzy).

Since my rival 20% taxpayers and corporate landlords would still be breaking even without such a hike, obviously I couldn’t do that. Plus it would equate to 58% of the tenants’ gross income.

Section 24 to me seems like just an excuse to charge higher earners yet more income tax.

But surely I could get a cheaper mortgage?This is where the real fun begins. No, actually, I couldn’t.

This house is in Tower Hamlets. This London borough has an Additional Licensing Scheme under which it essentially deems all houses that are rented and occupied by tenants that do not form a ‘family unit’ to be Houses in Multiple Occupation (HMOs).

A conventional HMO usually involves: rooms let individually, short tenancies, the landlord being responsible for ‘shared’ areas, and so forth.

My house is not that. It’s just a regular house that’s let jointly to three sharers under one normal assured shorthold tenancy agreement.

However Tower Hamlets arbitrarily designating it as an HMO has also sorts of repercussions:

I have to pay Tower Hamlets £569 every five years
I have to comply with sundry additional health-and-safety regulations. Most of which are completely sensible best practice anyway, like having a mains fire alarm and so forth.
Randomly we’ll have an inspection. Whereby:
- I’m responsible for the tidiness of ‘communal’ areas. Never mind that I’m also obligated to not interfere with my tenants’ peaceful enjoyment of the property.
- The tenants might have to swap all the furniture between the bedroom and the sitting room. Why? Because the bedroom is ‘too small’ according to the HMO rules. Never mind that there’s a large kitchen and enormous sitting room. And that it was Tower Hamlets that built this property in the first place. The compromise agreed to enable me to have three tenants is that they use the sitting room as a bedroom and the bedroom as a sitting room. And I’m sure this is what they do.
I can’t change the mortgage provider. HMO mortgages are much more expensive, but my existing lender has agreed to ‘grandfather’ me, because it recognizes that it’s not really an HMO. But regular lenders now won’t touch it.
My insurance is more expensive for the same reason.
Presumably the open-market value of the property is reduced. Because, given its circumstances, the only likely purchaser is another landlord who would face all these issues as well.

Note that, if, for example, I let to two siblings and a friend, and one of the siblings started a sexual relationship with the friend, then they’d be a family unit and I wouldn’t have to bother with all this. Even though nothing of any relevance has changed about the people or the building…

Ironically the situation has encouraged me to run the numbers on turning it into an ‘actual’ HMO. If I’ve got to adhere to all this stuff anyway, why not get a higher rental income?

(Is this really the incentive the council intended, I wonder?)

Fault linesIn any properly functioning country, we wouldn’t need these silly rules. People would simply move out of crap housing and live somewhere else.

We’d need empty houses for them to move into, of course. That would require we build more houses.

But it’s much easier to blame greedy landlords and too-many Johnny Foreigners than to actually let people build houses.

Looking at that graphic, I wonder what the problem could be?

Won’t capital growth make up for it?Will I make a killing if I sell my flat in years to come for megabucks?

Who knows. But my guess would be no. The easy money in London property was made long ago.

I’ve always let this property to immigrants (despite the government’s best efforts to make doing so more difficult) and the mood music there isn’t great.

Besides, I wouldn’t want to be running cash-flow negative in the hope of ‘making up for it’ with capital gains. Especially when such gains may yet be subject to ‘windfall’ taxes or whatever else politicians fancy inflicting.

Why not give up on the greedy buy-to-let landlord game?I could just sell the property, of course.

If I then took my £300,000 equity and put it in my ISA (over a few years) I would have no trouble earning, say 4% p.a. in risk assets. (Which is what property is too, incidentally).

That would earn me £12,000 a year in income.

I could put the money into a FTSE 100 tracker. This would pay a 4% long-term inflation linked yield. It would cost 7 bps in fees. (iShares ticker ISF.L).

That fee is 1.7% of the ETF income, as my buy-to-let letting agent might like to note. Also a FTSE tracker will never call me to complain about leaky taps.

However on top of it not being a great time to sell property:

I don’t really have £300,000 of equity.
I can’t be bothered.
There isn’t anything I want to do with the money. (I can afford to fill our ISAs already.)

Why don’t I really have £300,000 in equity?Let’s run the numbers. If I sold it, I’d have to pay off the mortgage and pay capital gains tax (CGT):

Anyone who’s still paying attention is going to immediately say: “Hold-on-a-minute, if you bought it for £100,000, why have you got a £300,000 mortgage on it?”

Yeah, you got me. Back in the heady noughties I increased the mortgage to release cash to use as a deposit on other BTL properties. I’ve long since sold them all.

In a sense I’ve already had my cake and eaten it on this one. I’ve essentially extracted all the profit.

So on the one hand, I’ve ‘made’ half-a-million quid in capital gains. Not to be sneezed at. But at the same time it wouldn’t take that steep a fall in house prices (about 20%) before I was in negative equity (after capital gains tax).

For the record, in reality I wouldn’t have to pay quite so much CGT. Holding growth stocks outside of tax shelters and dabbling in crypto means I have losses available to offset the gain.

Also, I can’t be botheredJust the added tax complexity of selling induces anxiety. I completed on the last property I sold shortly after the government introduced new rules that required the CGT on UK property to be filed and paid within 30 days of the sale. (It’s now 60 days).

Again, this system appears to exist out of spite rather than for any real reason. Something that becomes clear if you have any interaction with it:

It’s separate from the annual self-assessment process.
You have to file an on-line, one-off, intra-tax-year process, where you can elect to offset carried forward losses and the CGT allowance and so on.
You pay any tax due (in my case tens of thousands of pounds).
I had to do all this myself, because my accountant isn’t capable of doing anything within 30 days.
After the end of the tax year you file your self-assessment. In my case I’d realised other losses, so my CGT bill should be zero.
Naturally it’ll all come out in the wash of self-assessment, like offsetting your payments on account or whatever, right? Wrong.
The special ‘UK Property’ gains tax system is not ‘connected’ to the self-assessment system in HMRC. Guess who’s responsible for sorting the mess out?
Rather than net out the difference and send me a refund, I have to go and amend the original UK Property CGT filing and my self-assessment to ‘move’ some of the losses from the self assessment to the UK Property filing.
To be clear, HMRC didn’t tell me this. My accountant did. And I can see no way you’d know that this is what you needed to do otherwise.
I amend the original UK Property filing. Pretty much every page warns me that because I’m amending it after the 30 days deadline I’m likely to have to pay fines and penalties. Possibly jail time.
I amend the self-assessment as well.
Wait for the refund, right?
Of course not. HMRC writes to tell me that I’m owed a refund. But it doesn’t have any way of paying the refund. Could I please phone them?
Phone the number on the letter where, with dull inevitably, they know nothing about it. Spend the best part of a day going round different HMRC departments.
Finally I get to the right person.
HMRC will pay me my refund within 90 days. Yes, you read that right. I have to pay the tax within 30 days, but it gets 90 days to pay me the refund. (This is over a year since I paid the tax).

Now tell me that isn’t anything other than vindictive?

I suppose that in the politics-of-envy country we’ve become, anything that inconveniences greedy buy-to-let landlords is fair play, right?

There’s absolutely no motivation to sort it out. It doesn’t cost HMRC anything. And what am I going to do, pay my taxes elsewhere?

Chance would be a fine thing.

What’s the plan?The plan is to bury my head in the sand and hope that something turns up in the three to four year window that I’ve bought myself.

The mortgage is fixed for four more years, and I’ve just agreed to a new three-year tenancy. A lot can change in three years. Interest rates might fall, rents might rise, my tax circumstances might change, Tower Hamlets might drop its stupid HMO rules, Section 24 might be repealed. (Okay, I was joking about the last two).

In the meantime I carry the (net-of-mortgage and tax) value of the property on my personal balance sheet as ‘a doughnut’ and ignore the income.

But maybe it’s not a complete waste of time and effort, after all. Because where are the migrants I just let the place to from?

Ukraine.

That’s something positive, anyway.

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Bonds are a notoriously hard asset class to understand when you scratch beneath the surface. It doesn’t help that the bond world speaks in its own unfamiliar language – one festooned with special bond terms that are hard to learn if you’re an outsider.

Our remedy is this quick guide to the main bond jargon you need to know. We’ll add more over time, to make this jargon buster a companion to our bond articles.

Bond terms to knowBond market interest rates‘Interest rates’ in the context of bonds does not refer to the central bank interest rates we’re used to. Instead, we’re talking about the rates that prevail within the bond market.

Each and every bond is subject to a ‘market’ interest rate – which is the return investors demand for locking up their money in that particular bond at that time.

Investors express their demand through their decisions to buy and sell.

Market rates fluctuate in-line with economic data. Changes to inflation expectations, a bond’s credit rating, its maturity date, and yes, central bank interest rates – all this and more feeds into market interest rates.

PrincipalA bond’s principal is the original value of the loan made to the bond issuer. When the bond matures, the principal is paid back to whoever owns the bond on that date.

Principal is also called par value, nominal value, or face value. The standard face value of a UK gilt is £100.

Coupon rateThe fixed interest rate paid by a bond. For example, a bond with a 4% coupon pays £4 per year on its principal of £100.

Maturity date The day the bond debt is finally cleared. On that day the issuer pays the bondholder the face value of the bond. The parcel of debt it represents is cancelled out – the bond is redeemed.

Yield-to-maturityYield-to-maturity (YTM) is a bond’s expected annualised return if you hold it to maturity (ignoring costs). This yield takes into account the bond’s current price, and assumes all remaining coupon payments are reinvested at the same yield.

An individual bond’s yield-to-maturity continually adjusts to reflect market interest rates as investors trade.

The mechanism is:

When a bond’s market interest rate rises, its price falls. (Investors require a greater incentive to hold this bond – hence prices drop.)
When a bond’s market interest rate falls, its price rises. (Investors are more willing to hold this bond – hence they’ll pay more.)
When a bond’s price falls, its yield-to-maturity rises. (The price fall causes the yield to increase to match the higher market interest rate).
When a bond price rises, its yield-to-maturity falls. (The price rise causes the yield to decrease to match the lower market interest rate).

This piece helps explain what happens to bonds when interest rates rise and fall.

YTM is the go-to metric to use when comparing similar bonds (for example gilts) that vary by price, maturity date, and coupon.

There are many types of bond yield. But we’re usually talking about YTM when we use the term ‘yield’ in an article on Monevator.

Nominal / conventional bondThe standard type of bond that pays back a fixed coupon rate and a fixed face value. Nominal bonds contrast with index-linked bonds that make payments in line with inflation. Index-linked bonds are also called inflation-linked bonds, or ‘linkers’ if they’re gilts and TIPS if they’re the U.S. equivalent.

High-grade bond A bond with a credit rating of AA- and above (or Aa3 in Moody’s system). Typically the highest-quality bonds are government bonds.

Credit ratingThis is a guesstimate of the financial strength of the bond issuer. That means for example the UK and other governments for government bonds, or the issuing company for corporate bonds.

AAA is the top-notch rating. BBB- sets the floor for investment grade. Below that is termed ‘high-yield’ or less flatteringly ‘junk’.

The higher the credit quality rating, the better. It means there’s less chance the issuer will default on payments, according to the bond rating agencies.

Of course you’ll usually have to accept a lower yield for a (less risky) higher credit rating.

DurationModified duration is an approximate guide to how much a bond will gain or lose in response to a 1% change in its yield.

For example, if a bond or bond fund’s duration number is 8, then it:

Loses approximately 8% of its market value for every 1% rise in its yield
Gains approximately 8% for every 1% fall in its yield

Macaulay duration is the average time (in years) it takes to receive all of your bond’s cash flows (coupons and principal). It also tells you how long it takes to recoup a bond’s price.

Macaulay duration in particular is a complicated concept for non-financial wonks to wrap their heads around. But happily, you don’t really need to.

Duration as used to describe interest rate sensitivity is the more important of the bond terms here for everyday investors because it provides insight into how wildly your bond or fund’s price may change as rates fluctuate.

Macaulay duration becomes relevant if you practice duration matching – which we’ll cover in an upcoming two-parter.

Interest rate riskHere the risk is that an adverse move in bond interest rates causes losses. This risk decomposes into two elements:

Price risk
Reinvestment risk

Price riskPrice risk materialises when bond interest rates rise and cause your bond’s price to drop, inflicting a capital loss.

Reinvestment riskWhen bond interest rates rise, bond yields fall. Reinvested cashflows now earn a lower yield which erodes your annualised return over time.

Other bond terms that confound YOUTime for a bit of crowdsourcing! We know that many readers are confused by bonds, so is there any particular jargon you’d like to see included in this guide?

Let us know in the comments below and we’ll add it to the guide.

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Christmas party economics plus the rest of the week's good reads…

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The aftermath of the September Mini Budget was chaotic. But already almost all of the damage has been washed away.

The post Ten weeks on from the Mini Budget that (for a minute) broke Britain appeared first on Monevator.

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Everyone knows to put money aside in a cash savings just in case something goes wrong... don't they?

The post Emergency fund (UK) – how much to save, where to keep it, and when to use it appeared first on Monevator.

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What caught my eye this week. Just in case anyone was wondering why the price of Bitcoin bounced so sharply off the $15,600 level it hit on Tuesday, I have the answer. That was the day I sold my Bitcoin.1 Like all degenerate punters most humans, I couldn’t help taking the subsequent bounce a little […]

The post Weekend reading: I am short Bitcoin. One Bitcoin. appeared first on Monevator.

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Rising interest rates mean you need to think about paying tax on your bank account earnings…

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Why now is almost always the right time to invest.

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The bill comes due for six years of bad stuff, plus the rest of the week's good reads…

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So you think bonds are bad? That's a shame, because they haven't looked this good for a decade.

The post If 2022 taught you never to own bonds, you learned the wrong lesson appeared first on Monevator.

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Did you know that the shares you own are unlikely to be held in your own name? If not, then this piece tells you what you need to know.

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Like a kid cramming their homework, the markets raced this week. Plus the best reads from around the web…

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Having rich friends may make you richer. But as ever, don't count on that making you any happier.

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An introduction to our fantastic online broker comparison table.

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All the best money and investing reads from around the web…

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The Bank of England governor is going to raise interest rates and put millions out of work… but it's all in a good cause.

The post Worst job in the world: Bank of England governor appeared first on Monevator.

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How to think through choosing your bond funds.

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What caught my eye this week. War pioneer and on/off conqueror of Europe, Napoleon Bonaparte, supposedly said he’d pick a lucky general over a good one. Investors might take the same deal. Alas, there’s apparently no evidence that Napoleon stated the preference that’s famously ascribed to him. Which is a shame. Trying to invade Russia […]

The post Weekend reading: How I escaped losing nearly half the money I’d had in Amazon shares appeared first on Monevator.

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Disclosure: this article contains affiliate links to Plum. We may be paid a commission if you sign-up. This does not affect the price you pay. Also please note that the owner of Monevator is a shareholder in Plum. Every one of us walks around with a devil on our shoulder. A little demon prodding us […]

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How to use duration to assess the risk embedded in your bond funds

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Let's put aside politics to turn our minds to the prospects for the market…

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Transaction costs are the hidden fee 'berg that's tearing holes in your returns. Here's how to find them.

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Brexit gave us the Britain we're enduring today. What will reverse the slide? Plus the rest of the week's good reads…

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UK government bonds are down, which is terrible news. Except that it means future returns are up!

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Rising bond yields mean short-term pain but eventually long-term gain. Discover how it works.

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The UK's continuing fiscal kerfuffles, plus the rest of the week's good reads…

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Entertaining documentary about the GameStop saga or disturbing sign of how warped society is getting?

The post Eat The Rich or die trying (a review, of sorts) appeared first on Monevator.

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This is what a historic bond meltdown looks like

The post The Slow and Steady passive portfolio update: Q3 2022 appeared first on Monevator.

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Political chaos finally transmogrified into market chaos, plus all of the week's good reads…

The post Weekend reading: Shock and poor appeared first on Monevator.

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Don’t bother currency hedging your equity portfolio. Especially not if you live in the UK. It’s what old-timers call a Texas hedge: one that increases both risks and costs. Of course, with Sterling plunging in the past few days – for what, if I was being polite, I’d describe as idiosyncratic UK political reasons – […]

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Our new passive investing guide will tell you why you should use index funds, and how to build a portfolio with them.

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All the best money and investing reads from around the web...

The post Weekend reading: I wouldn’t start from here if I were you appeared first on Monevator.

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The Government is pulling in one direction, the Bank of England in the other…

The post Push me pull you with the 2022 Mini Budget appeared first on Monevator.

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Put on your scrubs as we surgically remove another cost with the cold-precision of a high-functioning sociopath.

The post The cheapest stocks and shares ISA on the market appeared first on Monevator.

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High inflation is causing pain, but at least it's paying off your mortgage. Plus the rest of the week's good reads…

The post Weekend reading: the upside of our high inflation appeared first on Monevator.

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How to use expected investment returns to build or sanity check your financial plans

The post Expected returns: Estimates for your investment planning appeared first on Monevator.

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Get healthy to make more time to make more money. Plus the rest of the week's good reads…

The post Weekend reading: how to get time on your side appeared first on Monevator.

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Just like your approach to your body, your financial posture can be lean, mean, bloated, or self-abusive. Choose wisely!

The post Fixing your financial posture appeared first on Monevator.

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Passive vs active investing? Passive wins by a landslide. Here's why.

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Are we about to see a GDP-boosting wave of innovation gains? Plus the rest of the week's good reads…

The post Weekend reading: Ideas to change the world appeared first on Monevator.

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Every year seems weird these days. Maybe it’s all down to the coming singularity. Certainly 2022’s quadruple whammy of war, drought, inflation, and plunging equity and bond prices has provided enough contrast to please even a late-stage Picasso. Crops wither while inflation runs wild! Energy prices soar while portfolios plummet! Or maybe it’s just the […]

The post The hosepipe ban approach to making big savings appeared first on Monevator.

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The SPIVA study provides critical evidence in the case against active management.

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What caught my eye this week. Are your staff still refusing to return to the office for daily time-saving stand-up meetings where you and your pet subordinate make everyone else wait through a 25-minute back-and-forth about who will make a sales call on Thursday? Would your employees rather start their day with a coffee in […]

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If you're an oligarch, a millionaire rockstar, a property tycoon or you just struck oil off the coast of Brazil - brother, I feel your pain.

The post Pros and cons of being wealthy appeared first on Monevator.

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Inflation is rampant and a convenient scapegoat is needed. I know, let's blame early retirees!

The post Early retirees: what would make you go back to work? appeared first on Monevator.

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Why we want you to tell us a story, plus the rest of the week's good reads…

The post Weekend reading: Tell us your FIRE-side stories appeared first on Monevator.

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You always need a tough constitution for angel investing and crowdfunding. But in 2022 private company funding and valuation is more painful than ever. As an investor in a portfolio of unlisted startups, you must hope you’ve backed a few big winners to make it worthwhile – because many of your other investments will sour. […]

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Building your own passive portfolio? Here's how to decide whether to use ETFs or index funds at every stage.

The post ETFs vs index funds: What are the key differences? appeared first on Monevator.

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The mercury is rising but is inflation cooling? Plus the week's good reads…

The post Weekend reading: Inflation starts to cool even as we feel the heat appeared first on Monevator.

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In my early 20s I was a debit card kind of guy. I’d save what I could, and frowned at the thought of borrowing money that I didn’t have on plastic, to pay for goods and services I didn’t need. I also (mistakenly) believed that applying for a credit card would be harmful to my […]

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Monevator: Recent Episodes

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1: Take the conventional approach on steroids. Live much more frugally, spend a lot less, save much more, invest riskier, work longer – and try to do it all smarter to further ratchet up your returns.

2: Do something different. Start a business, take a more active approach to getting rich, marry strategically, rob a bank, punt on crypto…

1: Hi Scylla, my name is Ian and I’m from Cambridge!

2: Hello? Hello is this thing on? Oh right. Yes… I’m Chris and I’m from, well, Halifax.

3: Oh I’ve got the lot Scylla! My name is Abel and I’m from London!

Newsnight audience member on voting leave: “I don’t regret it … it’s a generational thing ”.https://t.co/7kmessYy9v pic.twitter.com/LujZ4ab3hl