The contrast effect: Post-FIRE life vs old life

This is about a day in my post-FIRE1 life and how achieving financial independence changed everything.

So it begins

Pre-FIRE
The summer holidays are over. It’s nose to the grindstone now from late August until late October. Day in, day out.

Post-FIRE
A friend wonders if I’m around for a bike ride next week? I can do that!

Just another day

Pre-FIRE
I internally rage at the injustice of a September day drenched in sunshine when I’m stuck in the office. Too many of my August days off were just drenched.

Post-FIRE
We’re not tied to a schedule, so we pick the best day of the week for the ride. This is how to play the British weather lottery…

My favourite waste of time

Pre-FIRE
I’m stuck in the meeting time forgot. Theoretically it’s about strategy. In reality, a higher-up is chucking time on a bonfire, talking about things that will never happen, because they want to feel in control.

Post-FIRE
I’m cycling through a sunny country lane with a good friend, gassing about nothing. Occasionally we’re stunned into silence by the views.

This is a crisis!

Pre-FIRE
A client sends cryptic feedback. Our work isn’t impactful enough. Can we make it pop? They want something more viral. (I’ll give them something more viral.) The day is derailed. I’ll be dealing with this long into the evening.

Post-FIRE
We’ve dragged our bikes halfway up a muddy hill when some cows want their cowpath back. Fair dos, they’re bigger than us. But the embankments are choked with man-eating nettles. We curse, slide, and laugh our way back down.

Mothers shepherd their newly minted calves past us. The babies are cute as buttons! One little nipper springs by – full of beans on slippery stones. You go girl. Another’s very cautious and needs a nudge from mum. Aw.

Losing it

Pre-FIRE
A member of the team has lost their confidence. Another has lost their password. Still another their laptop. I’m losing my mind.

Post-FIRE
I spot some tasty-looking blackberries. Sweet! What’s this? A wee calf abiding in the undergrowth. Oh, hang on. She’s separated from the herd we met earlier. Where’s her mum? The calf is still, silent, and breathing very fast. Does that mean she’s stressed?

We wander about and find some people: “Do you know anyone from the farm? There’s a lost calf.”

They call the farmer. The calf is only two-days-old and not in a good place. The farmer arrives on a quad bike rescue mission. Cheers all round.

Refuelling

Pre-FIRE
I bung some batch cooking into the office microwave. Ding!

Sit down at desk.
Triage emails.
Shovel in food.

So fast, I don’t even taste it.

Post-FIRE
We find a cafe. Coffee and cake you say? Okay, I reckon we’ve earned it. The weather is perfect. One of those warm, late summer days you could sit in forever.

We share some banter with the people at the next table. They’re cyclists, too. Lovely couple, we swap stories and spin yarns. I’d never have met them in my old life.

One last push

Pre-FIRE
It’s late afternoon. There’s still an email mountain to climb plus the work I was actually meant to do today. The deadline is as immovable as those cows will be in my future.

I text Mrs Accumulator to say I’ll be back after she’s gone to bed. I’m not sure I can keep going like this.

Post-FIRE
My friend says: “I’m not sure I can keep going.” The gradient hurts like a chemical burn.

I can see on the GPS that flat land is just around the bend:

“Not far now…” [Gasp]
“Keep going…” [Wheeze]
“You can do it…” [Kill me now]

My companion takes the lead. God, if he’s going to do this then so am I.

We made it! We’re cackling like eejits.

Who cares that we got to the top? Only us. We’re not setting any land speed records but we didn’t give up.

What a day: pre-FIRE vs post-FIRE

Pre-FIRE
I’m back home in the dark. The gauge on my spiritual oxygen tank hovers in the red zone.

My mind has been sand-blasted to sterility. I don’t want to talk. Which is lucky because Mrs Accumulator is trying to sleep.

What kind of life is this? I suppose I’m fortunate to have a job.

Post-FIRE
I’m back home in the sunshine with loads of energy still in the tank. My mind is buzzing and my spirits soar like a gospel choir.

I tell Mrs Accumulator about the cows. And I tell myself to remember.

I have the good fortune to live in a beautiful part of the world and have friends and family to share it with. What more do I need?

Take it steady,

The Accumulator

Financial Independence Retire Early.

The post The contrast effect: Post-FIRE life vs old life appeared first on Monevator.

The investor’s lifecycle

The following article on the investor’s lifecycle is an extract from Invest Your Way To Financial Freedom – the new book by popular bloggers and friends of Monevator, Ben Carlson and Robin Powell. Invest Your Way to Financial Freedom is out on 28 September, but you can pre-order your copy at Amazon today.

As we write this book, Ben is feeling very sensitive about an imminent landmark birthday. Robin, meanwhile, would love to be 40 again so isn’t as sympathetic as he might be.

One thing we can agree on, though, is how quickly the years go by the older you become, so be sure to make the most of life whatever age you are.

Even in retirement, most people tend to have some exposure to the stock market. Depending on the actuarial charts you use, current life expectancy in Britain for someone in their mid-40s in 2020 is somewhere around 84 for men and 87 for women. So, if we live to that sort of age, both of us expect to be investing for several decades yet.

Realistically, Ben will be investing for another 40 years or more. In that time he’s expecting to experience around ten more bear markets, about half of which will constitute a market crash in stocks. There will also probably be at least seven or eight recessions in that time as well.

Can he be sure of these numbers? You can never be sure of anything when it comes to the markets or economy, but let’s use history as a rough guide on this.

Over the 50 years from 1970–2019, there were seven recessions, ten bear markets and four legitimate market crashes with losses in excess of 30% for the US stock market. Over the previous 50 years from 1920–1969, there were 11 recessions, 15 bear markets, and eight legitimate market crashes with losses in excess of 30% for the US stock market. The figures for European markets, including the UK, are fairly similar.

Bear markets, brutal market crashes and recessions are a fact of life as an investor. They are a feature, not a bug, of the system in which we save and invest our money. You may as well get used to dealing with them because they’re not going away anytime soon. They can’t go away, because the markets and economy are run by humans and humans always take everything, both good times and bad, too far.

The risk of these crashes and economic downturns is not the same for everyone though. How you view the inevitable setbacks when dealing with your life savings has more to do with your station in life than how scary you think those times are. Risk means different things to different people depending on where they reside in the investor’s lifecycle.

When you’re young, human capital (or lifetime earning potential) is a far greater asset than your investment capital. If you’re in your 20s, 30s or even 40s you still have many years ahead of you as a net saver and earner, meaning market volatility should be welcomed, not feared.

There’s an old saying that the stock market is the only business where the product goes on sale and all of the customers run out of the store. Your actions during down markets have a larger say in your success or failure as an investor than how you act during rising markets.

Down markets lead to higher dividend yields, lower valuations and more opportunities to buy stocks at lower price points. It may not feel like it at the time, but if you’re saving money and putting it into the stock market regularly, more opportunities to buy stocks at lower price points is a good thing.

The problem is during a market crash, it will always feel like it’s too late to sell but too early to buy. If time is on your side, you shouldn’t worry about nailing the timing of your investments, especially during down markets.

The good thing about being a young person is you don’t need to worry about timing the market to succeed. You have the ability to wait out bear markets since you have such a long runway in front of you.

The important thing for you is to keep saving and investing regularly, no matter what is happening in the stock market.

People who are nearing the end of their working lives, on the other hand, are lacking in human capital, but they should, in theory, be sitting on plenty of financial capital. People are living longer, meaning the management of your money isn’t over when you retire.

But you have to be more thoughtful about how your life savings are invested at this stage of life because you don’t have nearly as much time to wait out a down market, nor do you have the earning power to deploy new savings when stocks are down by buying when there’s blood in the streets.

Market risk not only has different connotations depending on where you are in the investor’s lifecycle, but also how your personality is wired. Your risk profile as an investor is determined by some combination of your ability, willingness and need to take risk. These three forces are rarely in a state of equilibrium so there will always have to be some trade-offs:

1. Your ability to take risk involves your time horizon, liquidity constraints, income profile and financial resources.

2. Your willingness to take risk involves your risk appetite. It’s the difference between your desire to grow your wealth and your desire to protect your wealth.

3. Your need to take risk involves determining the required rate of return necessary to reach your goals.

Those who are unprepared for retirement may need to take more risk in their portfolio to achieve their goals, but they may not have the willingness or ability.

Those who have more than enough money saved may have the ability and willingness to take more risk to grow their wealth, but they may not need to because they have already won the game.

Rarely do the planets align when it comes to figuring out the right investment mix, but the good news is there is no such thing as the perfect portfolio. The perfect portfolio only exists with the benefit of hindsight. And even if the perfect investment strategy did exist, it would be useless if you couldn’t stick with it over the long term. A half-decent investment strategy you can stick with is vastly superior to an extraordinary investment strategy you can’t stick with. Discipline and a long time horizon are the big equalisers when it comes to financial success.

Your ability to withstand losses in the market and stay the course with your plan come hell or high water comes down to some combination of time horizon, risk profile, human capital, temperament and ego. If you don’t understand yourself, your circumstances and your deficiencies when making decisions about money, it’s impossible to truly gauge your tolerance for risk.

Invest Your Way to Financial Freedom by Ben Carlson and Robin Powell will be published by Harriman House on 28 September. But you can pre-order your copy right now!

The post The investor’s lifecycle appeared first on Monevator.

Weekend reading: DIY disaster capitalists

What caught my eye this week.

When I began investing in the early 2000s, the September 11th attacks still loomed large in investors’ minds.

Of course, that shadow extended everywhere then. The West was at war in Afghanistan and soon Iraq. Terrorist plots exploded or were foiled with numbing regularity. It all hogged the news like Covid or Brexit.

In investing circles there was seemingly an extra moral question, too.

Was it right to try to profit from the share price moves that resulted from this chaos?

I spoke to some investors who had lost friends in the attack on New York.

Others had been able to profit from the gyrations – although the slow, grinding bear market of those years hardly gave one FOMO.

Welcome to the Terrordome

When equities moved in response to this advance in the conflicts or that hideous attack on civilians, vocal investors were split.

One camp believed life – and investing – went on.

We live in a capitalist economy, and markets are vital to its functioning. Giving up on making a profit and improving our lot was what the terrorists wanted. If you didn’t scoop up a bargain due to moral squeamishness, someone else would.

The other camp basically reacted as many of us do when faced with sudden, horrible news: really, is that what you are thinking about right now?

For the little my pennies mattered to the world, I was in the first camp.

I didn’t wish for more ghastly opportunities that scared investors witless. But I stood ready to act if they did.

After all, who knows or cares now who bought or sold shares during the Cuban missile crisis or on the eve of World War 2?

This too shall pass.

I also find it hard to believe that the world would be a better place if markets went haywire and prices crashed towards zero every time something awful happens. Quite the opposite.

And it’s not like I was being torn away from important official business as these dramas unfolded. Making my little trades to support efficient markets maybe even felt like a small contribution from the Home Front.

Convenient thinking, no doubt.

Many did – and do – disagree.

Public Enemy No. 1

The Covid pandemic has been interesting to watch through this lens.

Firstly, you can definitely believe that terrorists want to stop life going on as normal – and that we all need to resist this where we can.

The virus, however, ‘wants’ life to go on as normal, so it can replicate and spread. This time it really was in our interests to disrupt our everyday life.

Then there’s the lockdown trading boom that has taken off with nary a word of ethical debate.

Sure, some wonder what manipulated meme stocks mean for markets, or whether crypto speculators will end up millionaires or bankrupt.

But we saw little if any push back urging today’s bedroom traders to spend more time thinking about virus victims in the ICU.

Maybe the world has gotten tougher, or greedier?

Or maybe we understand that we’ve all had to find our distractions where we could since March 2020.

Either way the explosion in wealth that has occurred right alongside the miserable pandemic has been much reported on – but little reflected over.

Incidentally, I’m sure some of you passive purists out there are now shaking your heads – if not your fists – and grumbling over talk of such greedy opportunism, while you sit sedately in your tracker funds.

Fair enough, but remember the reason you have seen those funds bounce back from the Covid crisis lows is because some active investors looked through the noise and bought back expecting better times ahead.

Indexing is a great strategy – one driven by the decisions of active investors.

911 is a joke

I thought about all this as I found myself enjoying – literally – a recap of the early days of the Covid crash in The Atlantic.

An extract from Adam Tooze’s new history of the Covid era, Shutdown, it’s a reminder of how crazy things got in the early days of March 2020:

The trillion‑dollar Treasury market, which is the foundation of all other financial trades, was lurching up and down in stomach‑churning spasms.

On the terminal screens, prices danced erratically. Or, even worse, there were no prices at all. In the one market where you could always be sure to find a buyer, there were suddenly none.

On March 13, JP Morgan reported that rather than a normal market depth of hundreds of millions of dollars in U.S. Treasuries, it was possible to trade no more than $12 million without noticeably moving the price.

That was less than one‑tenth of normal market liquidity.

This was a state of financial panic, which, if it had been allowed to develop, would have been more destabilizing even than the failure of Lehman Brothers in September 2008.

This all happened little over a year ago, yet I’d almost forgotten how mad things were for a few weeks back then.

I do remember huge chunks of value falling off my portfolio early on, like sheets of ice shearing off a melting iceberg.

But in the rosy afterglow of Central Bank intervention and the bull market that followed, my memory of the initial drama has faded.

Don’t believe the hype

The truth is I had a good pandemic, trading-wise. I sold down into the falls and mostly bought back before the climb.

By 22 March I was pretty sure the sell-off had become a headless panic and tweeted as much:

There’s too much panic and gloom out there. This is very bad, but it’s not the end of the world. It’s not even the end of the equity market. A message to my readers, and anyone else who needs it. pic.twitter.com/7oEI5yMYKu

— Monevator (@Monevator) March 22, 2020

Yet re-reading that is suitably humbling. I got some things right but many things very wrong.

Remember when just two weeks of self-isolation seemed worth fussing over? I recall a bunch of Hollywood stars singing that we could make it through – and that was about three days in.

My prediction of the death count, even if I was only thinking about the UK, was also woefully short.

In some ways, however, that’s the point.

When investors lose their bearings you can afford to get a lot wrong and yet for it still to be right to invest.

That’s because at such times your ‘margin of safety’ – typically squeezed dry by today’s mostly efficient markets – becomes a chasm. If you’re brave and you have the spare capital, you can bridge it with some confidence.

Or at least you always have been able to in the West, so far.

Maybe someday you won’t, and such a Tweet will look like hilarious hubris.

(But by then you may well have bigger worries on your mind, if so.)

Brothers gonna work it out

Thinking about how mis-priced securities were in early 2020 makes me wonder if I should simply sit in trackers until such times roll around again.

Remember, I’m the naughty active investor here at Monevator HQ. And a lot of the time my activity feels like running on a hamster wheel for just a few basis points of out-performance.

Maybe I should just wait for those rare moments when the markets go back to the 1950s? When Warren Buffett’s golden apples lie all around on the floor, ready to be scooped up?

Well perhaps, but again that’s probably hindsight speaking.

What’s more, the reason I have hitherto had the confidence to buy stuff that others are throwing overboard in bear markets is because of the months and years of trying to understand where the value was beforehand.

Fight the power

I do feel sheepish about admitting I now look back to March 2020 with a sort of grim fondness.

Only from an investing perspective, obviously. But I appreciate it’s still not a great look.

I saw the same nostalgia in the aftermath of the financial crisis. Indeed people today watch The Big Short not to be horrified but to laugh and toss popcorn into their mouths and remember how insane things were.

One thing is certain, as a potted history of the 1792 crash at Investor Amnesia this week showed, financial panics are old as markets.

So we’ll all be tested once more – on whatever axis of character you believe is most important – before too long.

For now though, have a great weekend!

From Monevator

How to save money on travel – Monevator

Which portfolio tracking tool to use – Monevator

From the archive-ator: Five lessons my frugal dad taught me about the value of money – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Retail sales dip for fourth consecutive month as supply chain crunch bites – ThisIsMoney

UK inflation in record August jump as food and drink prices rise – Guardian

Rishi Sunak takes taxpayer stakes in kombucha, solar power, and VR startups with Future Fund – Yahoo Finance

Half a million homes to be given new energy supplier after two more go bust – Guardian

China has successfully devalued all its giant companies out of the global top 10 – Yahoo Finance

Computing pioneer Sir Clive Sinclair dies aged 81 – Guardian

Smooth investing returns in the US for the past decade point to choppier times ahead – Compound Advisors

Products and services

Monzo launches Monzo Flex: a ‘better’ buy now, pay later? – Which

Too tiny? A 400 sq ft London home from Barratt – ThisIsMoney

Will Covid and Klarna kill the credit card? [Search result]FT

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Securing a catchy stock ticker is getting competitive in the US – Axios

Earn up to £500 cashback when you transfer your pension to ii [Offer ends 30 September 2021] – Interactive Investor

Interactive Brokers adds crypto trading to US platform, with plans for global rollout – The Block Crypto

“I’ve lost all trust since being scammed” says victim of £64,000 bank transfer fraud – Which

Homes for sale near Michelin-starred restaurants, in pictures – Guardian

Comment and opinion

The first 1% on the road to financial independence – Getting Minted

William Bernstein: bad bubble behaviour [Podcast]The New Bazaar

Why financial manias persist – A Wealth of Common Sense

Losing money can help you earn money – Darius Foroux

Rebalancing your portfolio the right way – Peter Lazaroff

Mr Money Mustache: how I retired, aged 30 [Search result]FT

Anchors aweigh – Indeedably

How you feel about money – The Irrelevant Investor

Investing vs mortgage repayment: advanced considerations – Banker on FIRE

50 things learned in a decade of blogging about quant retirement finance [Nerdy, mostly]Rivers Hedge

Keep working mini-special

We should work for longer, but different [Podcast]Morningstar

The joy of work – Humble Dollar

Four reasons to work in retirement – Mullooly Asset Management

The hook – The Escape Artist

Naughty corner: Active antics

A free curriculum for would-be security analysts [PDF]Verdad

Getting to grips with returns from crowdfunded startups – Crowdcube

It’s hard to sell – Humble Dollar

Why institutional investors are looking beyond Bitcoin – Institutional Investor

Michael Mauboussin: sports teams and investing [PDF]Morgan Stanley

Weed stocks look shunned enough to be cheap – The Felder Report

Covid corner

Can England avoid ‘lockdown lite’ this winter? – BBC

What might happen with a ‘mild’ breakthrough case of Covid – NPR

Kindle book bargains

Stuffocation: Living More with Less by James Wallman – £0.99 on Kindle

Total Competition: Lessons in Strategy from Formula One by Ross Brawn and Adam Parr – £0.99 on Kindle

Captivate: The Science of Succeeding with People by Vanessa van Edwards – £0.99 on Kindle

Understand Psychology: Teach Yourself: How Your Mind Works and Why You Do the Things You Do by Dr Nicky Hayes£0.99 on Kindle

Environmental factors

Britain’s last coal power stations to be paid huge sums to keep the lights on – Guardian

Asos and Primark set out new green pledges – BBC

The big problem of building waste and how to tackle it – BBC

ESG investing could do more harm than good – Musings on Markets

Off our beat

UK government to require public broadcasters to produce more ‘British’ content – Deadline

The last glimpses of California’s vanishing hippie utopias – GQ

Havana syndrome: the mystery illness affecting spies and diplomats, blamed on microwaves – BBC

The effects of home working on collaboration at Microsoft [Research]Nature

How a ‘tragically flawed’ paradigm has derailed the science of obesity – STAT

Let it die: the slow Internet death of once-loved media brands – On Posting

And finally…

“Saving not only frees your time in the future but also gives you a buffer in the present.”
– Ben Carlson and Robin Powell, Invest Your Way To Financial Freedom

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Which portfolio tracking tool to use

New Monevator readers often ask what’s the best way to track and manage their portfolios.

Old hands may rock a custom spreadsheet. One that’s probably more sophisticated than the software aboard an Apollo spacecraft.

However I’d happily recommend Morningstar’s Portfolio Manager. It’s a free online portfolio tracking tool that does the important things well.

This portfolio tracker automates returns for a wide range of investments. You can easily dial-up funds and ETFs, shares, and investment trusts from its enormous database.

All you have to do is input your trades.

With Portfolio Manager you can track your performance in XIRR money-weighted or unitisation time-weighted mode.

You can also assess your progress against an index, and ever-popular time-frames, such as the last ten years, year-to-date – or even yesterday.

The tool comes courtesy of Morningstar – the financial data powerhouse. It’s number-crunching is widely white-labelled1, including by a number of UK platforms.

Portfolio tracking features

Let’s run through the main features of Portfolio Manager. (You can see Monevator’s Slow & Steady portfolio in the pics below).

Snapshot

Behold the at-a-glance overview screen! Here you’ll find your investments’ price, market value, number of shares, and asset allocation percentage.

This snapshot lets you maintain a unified view of your investments. Especially handy if they’re diversified across multiple brokers.

Now check out the ‘Add a Transaction to This Portfolio’ zone towards the bottom. Woah!

This is where you fill in your latest trades from your contract notes.

The portfolio tracking tool then automatically updates your portfolio in line with your market machinations.

Performance

This is my favourite screen. (Okay, I don’t get out much, pandemic or no.)

With the Performance tab, you can watch your portfolio race your benchmark on the graph at the top.

Here we see the bond-heavy Slow & Steady portfolio (green line) is lagging the FTSE All-Share (blue line) this year.

The same Tron Light Cycle battle plays out in numbers in the Trailing Returns section.

Total Return is your portfolio’s time-weighted, unitised annual performance. The Investor likes this metric. (So does the fund industry.)

Personal Return is your portfolio’s money-weighted, annualised performance. It’s also known as the Geometric Return or Compound Annual Growth Rate (CAGR). This is what I care about.

The Holding section shows the time-weighted return contribution of the individual investments you currently own. It’s fascinating to see how strategic asset allocation decisions have played out over the years.

Some expectations are confirmed, such as equities beating bonds.

Other predictions have been confounded. Like, for instance, prior calls for a decade of poor returns for US equities. (The US market was the driving force behind the stellar results of the Vanguard FTSE Developed World and Global Small Cap funds).

Note, Morningstar’s returns are nominal. Subtract average inflation to get your real2 returns.

Gain/Loss

The Gain/Loss tab shows you the contribution made by every investment you’ve ever held. It’s quite the trip down memory lane. Especially if your past is strewn with ten-baggers and questionable buys you regret like kipper ties.

Fundamental

Sometimes I check Morningstar’s Price to Earnings Forward guidance (P/E Forward) to see which investments look good value. Lower numbers are better, in theory. But I don’t really trust this metric.

UK equities looks relatively cheap. If nothing else, that makes me feel less queasy about rebalancing into the FTSE All-Share.

Transactions

You can input your trades, review every change back to the year dot, record dividends, split shares, and set up regular purchases.

Tracking device

I’ve skipped past functionality I don’t use, such as email alerts. I’ve also ignored the extended play you unlock with a Morningstar subscription.

The freemium model gives you five portfolios gratis. That’s great if you’re managing multiple allocations on behalf of family members, or you’re juggling different investing objectives.

(You could use a slot to peer into a parallel universe where you didn’t sell that golden ticket. Although that way madness lies.)

Boring!

Staring at the screenshots, scornful of the shabby interface?

Congratulations, you’ve spotted one of Portfolio Manager’s best features.

This tool is not mobile-optimised. Indeed Morningstar hasn’t made a single UX improvement in over a decade.

It’s not compelling, it’s not addictive, and I don’t want to sneak a peek every ten minutes…

…and such old school clunkiness is an advantage when Silicon Valley is using every psychological trick in the book to bend my attention towards its fruit machines.

Portfolio Manager harks back to a more utilitarian Internet age. An era when tools did one thing well enough, and not every app let you order pizza and ethereum.

Anyway, I’ve used Portfolio Manager for well over ten years. I’ve never regretted it. My manual spreadsheet now gathers dust.

Take it steady,

The Accumulator

That is sold to and rebranded by third-parties.
Inflation-adjusted.

The post Which portfolio tracking tool to use appeared first on Monevator.

How to save money on travel

This piece on how to save money on travel is by The Treasurer from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

Since joining the corporate world, I’ve spent less than I’ve earned. It comes naturally to me, as does a desire to save 30-50% of my net income each month.

Even when I do spend money, I aim to get as much value as I can. I avoid impulse spending. I don’t buy the latest gadgets or the most expensive phone.

Being an avid reader of Monevator, I know I’m not alone in this philosophy!

Yet I wouldn’t consider myself a tightwad. There’s a balance to be had between becoming financially independent and enjoying your prime years.

For this reason, I mainly focus my frivolous spending on one thing – solo travel.

At this point I should acknowledge that solo travel isn’t for everyone. That’s why I’m not going to suggest it ‘broadens the mind’, or helps you ‘find yourself’. Such comments can be rather tiresome.

Yet for me, the more I travel, the more I convince myself that it’s one of the best ways for me to spend my money. In terms of the cost to enjoyment ratio, nothing comes close.

Cheap accommodation…

As you can probably guess, my idea of travel isn’t five-star hotels or first class plane tickets. I’m more of a budget airline, bargain hostel type.

Happily, while I’d probably enjoy a few nights in a luxury resort, one of the big draws of travel for me is meeting people and sharing experiences. So I don’t see opting for a hostel over a hotel as much of a compromise.

Luckily, hostels are generally cheap. I’ve stayed in tonnes of them across six continents, with prices ranging from £5 to £25 per night, depending on the country. To book I typically use Hostelworld, but I often check with a hostel directly to see if they can give a discount.

If a shared room isn’t for you, many hostels offer cheap private rooms, too.

When I say I stay in hostels, many people flinch at the thought. Yet stay in a hostel with a good rating (at least eight out of ten on Hostelworld or TripAdvisor) and I’m confident any negative preconceptions will vanish.

That said, I won’t criticise anyone who opts for a cheap hotel or AirBnb instead.

…and bargain flights

As for getting there, I use scraper services such as Skyscanner. I play around with the ‘whole month’ option to maximise the chances of a deal.

If I’m unsure about where to travel to – or if I’m in a bargain-hunting mood – I’ll often select the destination as ‘everywhere.’ This shows the cheapest places to fly to in any given month. It’s led me to a £20 weekend return to Timișoara, Romania, and a £30 trip to Bydgoszcz, Poland. (A hidden gem!)

If I’m planning a long trip, I’ll look into open-jaw flights. This involves flying into one airport and out of another.

Open-jaw flights often don’t cost any more than a typical return ticket. And they can save the need for backtracking, which can save both time and money.

Google Flights is good for playing around with open-jaw options. Use its ‘multi-city’ drop down box.

More tips on how to save money on travel

With the biggies out of the way, here are eight more personal finance travel tips to help you save some dollars, dinar, or dong when you next go abroad.

Get yourself a top travel card

If you use your normal debit or credit card while abroad, you’re likely paying for the privilege. Many cards charge a non-sterling transaction fee every time you use your card – typically 3% – as well as charging for overseas cash withdrawals.

To avoid these hefty fees, bag yourself a specialist card with no extra charges when you use it abroad.

If you’re happy to open a new bank account, Starling Bank doesn’t have any fees for spending on your card abroad. It also offers fee-free overseas cash withdrawals. You can make six withdrawals or withdraw up to £300 each day. That should be sufficient for most of us.

Alternatively, Virgin Money’s new ‘M’ account offers fee-free overseas usage, with no spending or overseas cash withdrawal fees. As an incentive, it’ll give you a £150 Virgin experience day voucher if you switch to the account.

If instead of opening a bank account you’d prefer a credit card, then Halifax Clarity (19.9% rep APR) offers fee-free spending and withdrawals overseas. Plus if you use the card within 90 days, Halifax will pay you a cool £20. You will have to pay daily interest on cash withdrawals though, so it’s best to spend on the card if you can.

Barclaycard’s Rewards Visa (22.9% rep APR) also offers fee-free spending and cash withdrawals. Plus it pays 0.25% cashback on most spending.

If you do opt for a credit card, always, always set-up a direct debit to repay your balance in full. That way you avoid paying interest on purchases. If you don’t, you’ll wipe out any savings you make from using them abroad.

Bag a free GHIC for European trips

You can get a Global Health Insurance Card (GHIC) provided you live in the UK. Holding one entitles you to the same medical treatment in public hospitals as a normal citizen living in the EU. If you fall ill while on a European trip, having a GHIC in your pocket could be a literal life-saver. 

Applying for a GHIC is free. If you haven’t already got one, you can apply on the NHS website.

The GHIC is a replacement for the old EHIC (European Health Insurance Card), introduced as a result of Brexit. If you already have a EHIC then you can continue to use it until it expires.

Having a GHIC does not necessarily mean you’ll receive free medical treatment abroad. Some EU countries require citizens to pay for medical treatment. Having a GHIC only entitles you to hospital access at the same rate as locals.

That’s why the GHIC shouldn’t be used as an alternative to travel insurance. Which leads me to the next tip!

Get good travel insurance

Travel insurance is often seen as a grudge purchase – a necessarily evil. But heading overseas without travel insurance is like driving without a seat belt.

Anyone can have an accident while abroad. Say you get run over in a country with extortionate prices for medical treatment, such as the USA. If you don’t have travel insurance, you can forget about retiring early. You could instead face financial ruin.

The good news is that travel insurance can be relatively cheap, especially if you travel often and opt for a multi-trip policy. There’s no set policy that’s best for all. Use a price comparison site to compare the options.

Treat yourself to a free airport lounge pass

While not for everyone, the American Express Gold credit card gives two free airport lounge passes to cardholders. You can use these at more than 1,300 lounges across the world.

While not as luxurious as special airline lounges, they do provide a pleasant place to sit as you wait for your flight. You’re often treated to free food and drink, too.

The card also gives ‘Preferred Rewards Points’ as and when you spend on the card. This includes a 20,000 bonus if you spend £3,000 in your first three months. The card has a £140 annual fee, but the first year is fee-free. You don’t have to pay anything if you cancel before the anniversary of the first year.

As with any rewards credit card, set up a direct debit to pay off your balance in full each month. That way you can avoid having to pay extortionate interest. (56.6% rep APR variable).

I’ve used this deal myself and found it straightforward. For anyone flying out of London, the Luton lounge is a lot nicer than its Stansted cousin. You can visit Lounge Review to compare lounges.

Always pay in the local currency

When overseas, you’ll often be offered the chance to pay in pounds instead of the local currency. While this may seem like a kind offer, it is really a wheeze known as ‘dynamic currency conversion.’ It means the overseas retailer does the conversion for you, often at a terrible rate.

As long as you have a specialist debit or credit card, you’ll be far better off using that to pay in the local currency instead.

If you need cash, use a comparison tool

I’m a fan of going cash-free wherever possible. If I need cash – which can be near-unavoidable in some countries – I’ll use my Starling card to withdraw foreign currency while overseas. The biggest challenge is finding an overseas ATM that doesn’t charge.

Many people do prefer to have a wad of foreign notes in their wallet before heading away. If that’s you, don’t make the mistake of defaulting to your local Post Office. Instead use the services of a travel money comparison tool that will list the most competitive rates.

MoneySavingExpert’s TravelMoneyMax is the best one I’ve come across.

Plan your car hire

If you need to hire a car while abroad then it’s cheaper to book early, rather than paying at the airport desk.

It’s also worthwhile to decline any top-up insurance you’re offered when you collect your car. Instead sort this insurance out yourself through a separate policy to save money. MoneyMaxim is a popular service for this.

Consider a frequent flyer scheme

I’ve done the maths and joining a frequent flyer scheme isn’t worth it for me. I hunt down budget airlines and jump on promotional airfares as and when they arise, regardless of airline.

However if you often fly a particular route or you stick to one airline for whatever reason, do take the time to look into some frequent flyer schemes to see if you can rack up some air miles.

Research is the way to save money on travel

While I hope the above travel tips will be useful to the health of your wallet or purse when you’re overseas, the number one rule of planning the trip is to research before jetting off.

For instance, knowing the best way to get from the airport to your accommodation can be a real time and money saver.

I usually ask myself the following questions:

Does Uber (or another taxi app) work in the country I’m flying to?
Does Uber work from the airport? Or do I have to walk out of the airport onto a public road?
Is the public bus or metro from the airport easy to use?
Does local transport accept card payments?
Are there any common scams to be aware of?

While you may think these questions are simplistic, I once had a friend visit me in London who decided to jump in a black cab from Gatwick Airport to central London. I heard similar stories of a couple getting a £100 taxi from Reykjavik airport to downtown. (Iceland can be notoriously expensive).

Other cost-cutting tips to bear in mind include heading away during off-peak times, traveling to places that don’t require a costly visa, and planning your accommodation in advance to avoid having to fork out for the last empty hotel room in the city.

If you’ve any tips I’ve missed or you’ve employed any of the above with success, then I’d love to hear from you in the comments section below.

You can see all The Treasurer’s articles in their dedicated archive.

The post How to save money on travel appeared first on Monevator.

Weekend reading: Bonfire of the magic money trees

What caught my eye this week.

A bad week for those who long for sunlit uplands swathed in magic money trees.

National insurance rates up. Dividend tax rates up. The triple-lock on pensions suspended.

It’s good that the government has at least made a stab at fixing the social care crisis, with a new cap on lifetime costs.

But otherwise the best that can be said about this week’s machinations is that nearly everyone has something to moan about.

Time to pay

Credulous people who voted to leave the EU on the promise of a £350m a week ‘dividend’ for the NHS – £17bn a year – might wonder why their incomes are now being docked in part to fund the health service.

Those who saw in Tory Brexiteers a plan for Singapore-on-the-Thames might question why taxes on wealth creators are rising and UK graduates will soon face a marginal tax rate of effectively 50% [search result].

Meanwhile those on the left – for whom even the unprecedented hundreds of billions of public money spent on Covid relief measures wasn’t enough – have been reminded that one way or another the bill always come due.

And those who argue – with some justification – that today’s low rates mean it’d be better for the government to keep borrowing rather than hiking taxes are re-learning that politics doesn’t work that way.

All this while the economy stops and starts, supply chains snag, and the US return to work stalls.

A rebuke to those who thought we could just put daily life into suspended hibernation via repeated lockdowns without deep economic consequences.

Tax take

None of this is to argue that lockdowns, the pausing of the triple-lock, extra money for the NHS, or even Brexit was necessarily a bad thing.

Well not today, anyway.

I’m just highlighting that this week’s reality check ought to be felt more widely than simply in one’s (digital) wallet.

It’s a theme picked up by Merryn Somerset-Webb in the FT [search result]:

You might be beginning to feel the sands shifting slightly beneath your feet.

Nothing is quite what it used to be — or supposed to be.

Indeed. When even the cosseted pensioner class starts complaining, the times are surely a-changing.

For us as investors of course, it’s (always) time to take evasive action.

This latest mishmash of tax measures makes things yet more complicated.

But nobody is more interested than you are in getting yourself through this tax maze.

(And yes, National Insurance is just income tax with better PR).

Hands off my castle

Make strenuous efforts to fill your ISA to avoid being taxed on your gains again later.

(Probably) only after contributing all you can to your pension, to truly soften the blow.

But when we recover from this week of tax whammies, we might ask ourselves why those owning property outside of a limited company were spared a hit to their income.

Or why as ever Government policy is hellbent on protecting those who would inherit a family home from the impact of social care costs.

All at the expense of young people from less-moneyed backgrounds who stand no chance of ever buying their own home.

It’s all very feudal.

Most Britons are against inheritance tax paid by those who’ve done nothing to earn it.

Yet they will shake their fist at this week’s tax hike on others struggling just to get by – whether young wage earners or pensioners living off dividends.

I suppose we can’t see the wood for our own magic money trees.

From Monevator

How to read a bond fund web page – Monevator

Is there a case for gearing up your investments? – Monevator

From the archive-ator: Never say never again – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Triple-lock pension guarantee to be temporarily suspended – Which

UK house prices up 7.1% to hit new record high in August – ThisIsMoney

‘Why have we not grown any giant companies?’: the UK’s attempt to take on Silicon Valley [Search result]FT

Brexit bungling sees EU nationals in the UK hit by status SNAFUs – Guardian

Nuisance robo-calls could lead to multimillion-pound fines – Guardian

Bitcoin crashes on first day as El Salvador’s legal tender… – BBC

…but El Salvador’s president tweeted he bought the dip – via Twitter

Rents outside London increase at the fastest rate for 13 years – Zoopla

Products and services

A deep dive into Lloyds’ new £100 switching offer – Be Clever With Your Cash

Nationwide to end free European travel insurance for FlexAccount customers – Guardian

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Six benefits of getting a Power of Attorney – Which

Get up to £500 cashback when you transfer your pension to ii [Offer ends 30 September 2021] – Interactive Investor

Homes fit for a start-up, in pictures – Guardian

Comment and opinion

The US house price boom is small potatoes on the global stage – AWOCS

The importance of drawdowns in retirement planning – Validea

Hiding in the doing – My Quiet FI

Allan Roth: Six things learned in business school that turned out to be absolutely wrong – Advisor Perspectives

‘Bucketing’ a retirement portfolio in withdrawal mode – Humble Dollar

Cripes, @ermine has bought [a bit of] Bitcoin – Simple Living in Somerset

Research finds selective memory drives investor overconfidence – Ars Technica

Future of funds mini-special

Direct indexing: the next big thing in passive investing [Podcast]Oddlots

Are funds still the future? – Morningstar

Naughty corner: Active antics

The two types of investors – Compound Advisors

Dave Nadig on apes, rocks, and the future of finance [/NFTs]…ETF Trends

…Seth Godin says such speculation is the new luxury good – Seth Godin

Should we abandon fair value calculations? – Part One and Part Two by Klement on Investing

Was Ben Graham a quant? – Albert Bridge Capital

Covid corner

Boris Johnson to publish Covid blueprint for ‘difficult’ winter – Guardian

Rare heart inflammation side-effect dogs decision to vaccinate teens – BBC

How Valencia crushed the coronavirus with AI – Wired

When an athlete gets long Covid – ESPN [hat tip Abnormal Returns]

Kindle book bargains

Stuffocation: Living More with Less by James Wallman – £0.99 on Kindle

The Basics of Bitcoin and Blockchains by Antony Lewis – £2.19 on Kindle

Captivate: The Science of Succeeding with People by Vanessa van Edwards – £0.99 on Kindle

The Smartest Guys in the Room: The Fall of Enron by Peter Elkind and Bethany McLean – £0.99 on Kindle

Environmental factors

Space-based solar power will finish off fossil fuels – Charlie Stross

There’s gold in green investing – Evidence-based Investor

Off our beat

The exponential age will transform economics forever – Wired

Study links too much free time to lower sense of well-being – Guardian

One woman’s mission to rewrite Nazi history on Wikipedia – Wired

Video games will change humanity as we know it – Bloomberg

Can progressives be persuaded that genetics matter? – The New Yorker

Why William Gibson is a literary genius – The Walrus

The history of the Frappucino – History of Business

How computationally complex is a single neuron? – Quanta

“A stranger secretly lived in my home…”Guardian

And finally…

“I have an income nearly sufficient for my wants (no one’s income is ever quite sufficient, you know).”
Anthony Hope, The Prisoner of Zenda

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Freetrade. We may be  compensated if you pursue these offers – that will not affect the price you pay.

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The post Weekend reading: Bonfire of the magic money trees appeared first on Monevator.

How to read a bond fund webpage

This is my take on the important elements of a bond fund / ETF1 webpage.

By running through the info that I pay careful attention to, my hope is that new investors will find it easier to understand bonds and to do due diligence on an asset class that many find confusing.

If you’re doubtful about the wisdom of owning bonds, learn more to see why they may still be a good investment.

If you’re truly a bond refusenik you can also check out my equity-orientated article on how to read a fund factsheet.

Diving into a bond fund

I’ll illustrate my approach using the webpage for iShares Global Government Bond ETF (IGLH).

iShares fund webpages are pretty good overall. They contain much that you need as well as plenty that you don’t.

Other fund providers offer similar fare, but the data may be labelled differently.

If any of the information below is AWOL from a bond fund webpage or factsheet then I mark it down versus other candidates on my shortlist.

Fund name and overview

Fund names can reveal quite a lot of information, which makes up for them being about as memorable as a robot’s serial number.

Our fund names explained piece reveals what’s in a boring name.

Several funds may share a similar name but actually invest in materially different sub-asset classes.

It’s like going to a big family gathering, when you’re age seven, and meeting an endless parade of uncles and aunts. They all seem friendly but you’re mystified as to how they relate to you.

A fund family tree can reveal a hierarchy of spin-offs (known as share classes) that differ by currency, cost, income distribution, and so on.

Note down the ISIN number, SEDOL, or ticker. This way you can guarantee you’ll get the same product when you later search for it via your broker’s platform. Don’t rely on the fund name.

iShares have a nice dropdown menu just under the fund name that reveals your choice of share classes.

Vanguard doesn’t always list its funds’ available share classes, but the passive giant typically offers both Accumulating and Income flavours. Check your broker or dealing platform to see if it offers the version you’re after.

Investment objective

Check the fund’s description mentions the sub-asset class you expect the fund to track.

For example: ‘developed world government bonds’.

I also look for a phrase like ‘…tracks the performance of an index…’ to affirm I’m definitely dealing with an index tracker.

Performance

Past performance is not the big deal many people think it is.

You can’t tell anything from one-year returns and not much from three years.

Five years gives you a sense of how well the fund matches up against its rivals. Ten years is far better, and about as much data as you can expect for free.

But what really matters is your strategic asset allocation and the role your fund fulfills in that.

If you decide an asset class belongs in your portfolio, then make sure:

Your fund properly captures that market – see the benchmark index section below.

It’s not outclassed by its peers. (I’ve explained before how I use past performance to compare the best bond funds on the market.)

It’s irrelevant that a particular global government bond fund lost 1% over the last three years, provided other global government bond funds lost much the same.

Don’t worry if your fund trailed a competitor by 0.5% in one year. Subtle differences in index composition and fund methodology can easily explain that away. Your fund may well beat the pack next year.

However if your pick consistently underperforms its near-rivals by that amount or worse, on a five-year view, then investigate why.

If your fund always lags when you compare like with like, then switch to another.

Key facts

iShares’ ‘Key Facts’ mostly just need a quick eyeball to check nothing is amiss.

Net assets or Assets Under Management (AUM)

Small funds are vulnerable to closure if they don’t attract enough investment cash. Assume new funds will get 12-months to prove themselves profitable.

Anything over £100 million in assets under management should be okay.

Remember you don’t lose your money if your fund closes. Its underlying assets still retain their market value.

However your shares will be sold on closure of the fund. That could trigger Capital Gains Tax, if your fund isn’t tucked inside your tax shelters.

You also run the risk of an adverse market movement when you’re sitting in cash.

Your provider may offer two AUM figures.

A larger one labelled ‘fund’ or ‘umbrella’ is liable to be the sum of the master fund’s share classes.

Go with the smaller figure, which concerns your particular sub-fund.

Currency

Your exposure to currency risk depends on the currency your fund’s underlying assets are priced in.

Remember, you are still taking currency risk if you choose a GBP (British Pound) version of an unhedged fund that invests in overseas securities.

If your global bond fund holds US, Japanese, and German securities, say, then you’re exposed to the pound’s exchange rate versus those country’s currencies.

Terms like base currency, denominated currency, or fund or share class currency refer to the currency your fund reports in. These are simply accounting terms.

Trading currency means the currency the fund is bought and sold in on your local stock exchange. That makes no difference to currency risk but choosing GBP can save currency conversion fees.

You’re only shielded from currency risk if your bond fund explicitly states it is hedged to GBP or if it only holds securities priced in pounds. 

Dive deeper into currency risk and the hedging decision.
For more on global government bond funds.

Ongoing Charge Figure (OCF) / Total Expense Ratio (TER)

Your fund’s headline cost is a key metric. Cheap is good and less is more when it comes to fees.

But neither the OCF nor TER include all charges due. 

Fund providers routinely deny us the complete picture because they’re not harried into full disclosure by the regulator.

For instance, transaction costs add up like baggage fees on a budget airline flight.

I give bonus transparency points to providers who publish transaction costs on their fund’s webpages. Xtrackers does this, for instance.

Vanguard scores half marks because it publishes its extra expenses – but only in an obscure PDF squirrelled away on its website. 

If iShares does us a similar service then it keeps it quiet like a shameful family secret.

You can uncover the impact of undisclosed charges using this tracking difference technique.

Product Structure / Replication Method

Physical means your ETF actually holds the assets it claims to track.

Duh, yeah. So what?

Well, you’d think that it’s de rigueur but it’s not…

Because in contrast synthetic means your ETF typically does not hold the assets it aims to track.

Instead, investors’ cash is ploughed into a derivative that matches the return of the fund’s index. 

Synthetic ETFs get to the same place as physical funds by way of ever-popular financial engineering.

The term synthetic has an image problem nowadays. Hence these synthetic ETFs are usually branded as ‘indirect replication’ or ‘swap’.

But I don’t particularly discriminate between physical and synthetic because both types usually come bundled with counterparty risk, anyway.

Methodology

Sampled or optimised means the fund doesn’t hold every last security covered by its index. Very few funds do because small and illiquid securities rack up costs while making little difference to your returns.

You can use tracking difference to test whether the methodology’s deviation from the index has historically cost much by way of return.

Securities lending return

Many funds lend out your securities to short sellers (including active fund providers that often neglect to mention it, incidentally).

Your provider’s lending policy should be published. Some portion of the fees earned may be paid to the fund, which should nudge up its returns.

Securities lending exposes physical funds to counterparty risk, however.

I don’t worry about this risk but I’m aware of it. I think of it as a tie-breaker situation.

Ideally, my choice will keep its securities under lock and key. If it lends them out, then I want the highest possible share of the profits. 

But if one fund lends and regularly beats my other candidates then yeah, I’ll probably take jam today. 

Domicile

Where is the fund based and regulated? Most ETFs are quartered in Ireland and Luxembourg. The UK regularly crops up for funds, as opposed to ETFs.

A UK domicile offers you the comfort of the FSCS compensation scheme.

Ireland and Luxembourg’s equivalents are much less generous.

Ireland’s double-taxation treaties give it a withholding tax edge over Luxembourg.

Benchmark index

Trackers track indexes. That’s their job so make sure you get the right match. Google the index and read its factsheet.

Think about:

What market does the index track?
Does that market adequately capture the asset class returns you’re after?
Is the index widely used by the industry? If not, why not?
Can you find good information about the index?
Is the index diversified? If not, does that matter?
Do the index holdings overlap with other funds you own? That can mean the fund is redundant in your portfolio.
Does the index guard against over-concentration by capping the weight of its constituents? If not, do its rivals?

Other Key Facts

Risk rating – I don’t think this offers much in the way of genuine information. Still, if you think that you’re buying a low-risk fund but the rating indicates Indiana Jones-style adventures ahead… that could be a sign something is wrong. 

UK reporting status (UKFRS) – Check it’s a yes, otherwise you may pay excessive tax.

UCITS – Again, we’re after a straight yes. This is comforting EU regulation that was transposed into UK law after Brexit.

Use of incomeDistributing or Income means interest will be paid into the account of your choice – handy for retirees. Accumulating or capitalising means the fund automatically reinvests your payouts – handy for accumulators.

Minimum investment – Don’t be thrown if this says something like £100,000. That is directed at institutional investors, not us. Look for the product on your investment platform. If stocked then you’ll be able to invest the minimum decreed by your broker – £50 or whatever.

Portfolio characteristics

These elements are key to understanding what you’re getting from a bond fund:

Yield to maturity (YTM)

This is the annualised return you’d expect to receive if you invest in a bond and hold it to maturity (accounting for its market price and the remaining interest payments, which are assumed to be reinvested at the same rate).

Providers will often display other yields but yield to maturity is the only one you really need. That’s because you can use it to compare similar bonds that vary by price, maturity date, and coupon rate.

The Investor wrote a classic piece about the most common bond yields.

Maturity

We often talk about short, intermediate, and long bonds on Monevator. Those lengths refer to the average maturity dates of a bond fund’s holdings:

Short-dated bond funds are the least risky, least rewarding and least sensitive to interest rate changes.

Long-dated bond funds are the most risky, most rewarding (potentially) and most sensitive to interest rate changes.

Intermediate bond funds sit somewhere in the middle. They hold short and long bonds, along with medium maturities, in a diversified portfolio.

See the duration metric below for a practical measure of your fund’s interest rate risk.

Short bond average maturities are five years and less.
Long bond average maturities are 15 years and more.
Americans think of five to seven years as the intermediate maturity sweet spot. But gilts skew longer.

Long bond funds should have a higher yield to maturity and duration than short bond funds of a similar type.

Duration

Duration can be used to gauge your bond fund’s sensitivity to interest rate changes:

As a rule of thumb, a bond fund with a duration of 7 will:

Lose 7% for every 1% rise in its yield to maturity.
Gain 7% for every 1% fall in yield to maturity.

Whatever your bond fund’s duration number, that’s roughly how big a gain or loss you can expect for every 1% change in its yield.

Duration helps you assess the risk you’re taking, assuming you have a strong opinion about the future direction of bond interest rates. 

There are multiple types of duration but it’s not worth losing sleep over the slight differences between them.

This piece on bond prices helps explain how interest rate changes impact bond yields.

Credit rating / credit quality

Credit quality is a verdict on the financial strength of the bond issuer as delivered by the main credit rating agencies.

The lower the rating, the greater the perceived risk that the borrower will fail to pay their debts.

All things being equal, investors demand higher interest rates from weak borrowers.

Annoyingly, many providers don’t publish an average credit rating for their fund’s holdings. Kudos to Vanguard who does.

So when you’re parsing your fund’s credit quality chart, be mindful of these thresholds:

AAA is tip top.
AA- and above is considered to be high-quality.
BBB- and above is investment grade.

Anything below investment grade is junk. (That’s the industry term, not my opinion. Well, not exactly! A less evocative term for junk is ‘high-yield’).

Only investment grade to high-quality funds belong in the defensive side of your asset allocation.

Investors flee to quality in a crisis. So that’s when you need your bond funds to come through.

Beware – Some naughty providers feed you the index’s key characteristics and not the fund’s. That’s a serious transparency transgression.

Sustainability characteristics

Given the finance industry is deluged with greenwash, I don’t pay much heed to self-reported sustainability metrics.

If you think that sounds glib then please read this Monevator piece on the complexity of Environmental, Social, and Governance investing.

Here’s my take from the days when trying to do good was called Socially Responsible Investing

Holdings

I look at the Top 10 holdings to ensure they tally with what I think the fund does.

I’ll also check the Top 10’s percentage weights to verify my pick isn’t over-concentrated in comparison to its alternatives.

A diversification once-over isn’t necessary for gilt funds. All gilts are high-quality bonds priced in pounds. There’s no need to look under the bonnet.

I also stop short of wading through spreadsheets that name-check hundreds of holdings. I’m not qualified to judge individual securities.

What’s more, I’m not a masochist. This article not withstanding. 

Exposure breakdowns

Reading the portfolio breakdown section is like checking the ingredients label on a supermarket food item. Write-off the calories, wince at the sugar content, then stare blankly at the long list of emulsifiers and other chemical mysteries.

Well, there’s no sugar in bonds but it’s worth corroborating there aren’t any other nasty surprises in store.

Returning to our iShares Global Government Bond ETF candidate, you may be surprised to see that the currency exposure on a global government bond fund is 99.6% pound sterling. However that simply confirms we’re definitely looking at the hedged version.

The currencies listed show you what currency risk you’re taking in an unhedged fund.

The geographic breakdown verifies this fund invests purely in the developed world. I don’t attempt to second-guess whether, for example, 7.35% German bunds is just the right amount, however. Knowing that is about as useful to me as wine notes:

“Oh, this bond fund has wonderful notes of coarse sausage, accented with wild French garlic, and a heavily hocked public sector. One can almost hear the creaking of the balance sheet.”

Sector / issuer splits are worth a shufty, especially in aggregate market funds. The weight of corporate holdings is liable to reduce your fund’s recession-resistance versus high-quality government holdings.

You should get credit quality and maturity breakdowns, too, but we’ve discussed what to look out for earlier. 

Fund documents

Read the KIID and factsheet at least. The factsheet often contains useful, extra info.

Valuable nuggets can occasionally be plucked from the legalese spoil within the annual report.

Check the Reportable Income docs if your fund sits outside your ISA / SIPP tax redoubts.

Bond article survivors’ group

Peace be with you weary reader. It’s over! Please give me a shout-out in the comments if you made it this far.

It took me seven years to summon up the strength to write this beast. Hopefully it will help someone struggling with bond funds.

As for me, I’m off to have my head examined.

Take it steady,

The Accumulator

An ETF is a type of investment fund, so I’ll use the term ‘fund’ when referring to generic characteristics shared by index trackers.

The post How to read a bond fund webpage appeared first on Monevator.

Is there a case for gearing up your investments?

This article on gearing is by Planalyst from Team Monevator. Every Monday brings more fresh perspectives from the Team.

Borrowing to invest – or ‘gearing’, as seasoned investors call it – is as simple as it sounds to get started.

You take out a loan. Then you invest it as you would your own capital for potential growth. 

However the journey and outcome you’ll get from gearing is much more complicated and uncertain from there.

What a difference a decade makes

The Investor explained in a mini-series a decade ago why borrowing to invest is usually a bad idea.

Just as he was writing coming out of a recession, so I am with this article. 

Gearing is common practice for businesses, investment trusts, and fund managers. And it has been steadily increasing to the point that margin debt – gearing directly applied to an investment portfolio – is at its highest level in the US for more than 10 years. 

But a big difference between now and back then when a younger, better-looking Investor was sharing his thoughts is that personal loan interest rates are much lower today.

Best Buy personal loan rates are below 3% APR. That’s a far cry from the 10% The Investor talked about in the aftermath of the financial crisis. 

Still, with the post-pandemic economy recovery we’re already hearing talk of central banks pushing up base rates to combat higher inflation.

Does that make it a good time to gear up your portfolio by fixing a low interest rate loan for long-term investment? 

The good, the bad, and the gearing

I recently explained gearing to Mr Planalyst. He wondered why I didn’t use gearing for my investments to try to ratchet my returns even higher?

Particularly, he noted, because my investments have made an average 11% return a year. (Thank you, bull market!)

Mr Planalyst saw it in simple terms. Why not use someone else’s money to make us more money? 

So we sat down to planalyse this idea. And I created the tables below to explore the following ‘what if’ scenario.

Say we borrowed £30,000 to invest, at a 3% annual interest rate over a 10-year term.

For simplicity, we’ll assume the compounded debt interest is rolled up to be repaid at the end of the term, with the original capital. (Personal loans are usually repaid over time, but this makes the maths very complicated).

A calculator tells us that this borrowing and interest totals £40,317.

We’ll also assume the borrowing is all invested in a single passive tracker fund. And we’ll model returns according to two example scenarios.

Gearing scenario 1: good times

The UK market tends to see at least one steep decline every ten years or so. Typically stocks will fall 20% or more during these drawdowns. 

Our first table therefore shows the potential position of a borrowed £30,000 after ten years that suffers one such crash. (All numbers rounded to the nearest pound.)

In this (fictitious!) example we see an average annual return of around 4% overall. But there’s a fall of -20% in one grim year halfway through:

Year
Portfolio value
Annual return %
Annual return £

1
£30,000
9%
£2,700

2
£32,700
8%
£2,616

3
£35,316
9%
£3,178

4
£38,494
7%
£2,695

5
£41,189
-20%
-£8,238

6
£32,951
2%
£659

7
£33,610
4%
£1,344

8
£34,955
5%
£1,748

9
£36,702
7%
£2,569

10
£39,272
9%
£3,534

End total / average return

£42,806
4%
 

In this first scenario, using gearing worked out positively – although the end result was only a little ahead of the cost of borrowing (£40,317).

Remember: market volatility means you can’t guarantee any returns.

There’s no certainty of a gain at the end of the borrowing period to repay the debt and the interest accrued. Never mind enough to deliver a profit for going to all this trouble in the first place!

Even if you come good in the end, seeing your total invested assets that you bought with gearing go below the amount at stake during the term won’t be easy. It could be emotionally upsetting.

Obviously it’ll be even worse if you come up short at the end of the term.

Talking of which…

Gearing scenario 2: bad times

In this scenario our returns are almost as before – except for the last two years.

This time the market’s recovery from its decline is very sluggish, rather than it bouncing back to pre-downturn levels as in the first scenario.

And again, after ten years your term is up and your debt must be repaid:

Year
Portfolio value
Annual return %
Annual return £

1
£30,000
9%
£2,700

2
£32,700
8%
£2,616

3
£35,316
9%
£3,178

4
£38,494
7%
£2,695

5
£41,189
-20%
-£8,238

6
£32,951
2%
£659

7
£33,610
4%
£1,344

8
£34,955
5%
£1,748

9
£36,702
4%
£1,468

10
£38,171
2%
£763

End total / average return

£38,934
3%
 

After ten years you don’t have enough to repay the loan plus its interest – £40,317 – let alone seen a profit.

This example demonstrates the risk of having to sell when your capital is down to repay your debt. You are forced to realize a loss.

You might have fretted about this outcome for half the loan term – from year six onward. And the risk would have come true.

Maybe you’ll have greyer hair, too.

Debts must be repaid. You would have to dip into other savings or income to repay the bank what you owe. Assuming that was even an option for you.

Outcome

Here’s how the numbers work out from these two scenarios after ten years:

Scenario
Debt and interest
Portfolio
Balance

1
£40,317
£42,806
£2,489

2
£40,317
£38,934
-£1,384

In the second example, we see how interest – the cost of debt – has amplified the losses compared to just investing £30,000 of your own money.

Of course you might see far higher average annual gains than 3% or 4% over ten years. That would make borrowing to invest very lucrative.

But you could also see lower returns, too.

This unpredictability of future market moves is why I wouldn’t consider gearing to invest. The risk of volatility and market falls at the worst time are too great to ignore – even for that chance to make a healthy profit.

Historically, stock market returns have been far higher than today’s low cost of debt, which might make the odds seem pretty good.

But personally I don’t have the stomach for it.

Gearing up for a fall

You say you’re willing to accept the market’s ups and downs? There are other factors and caveats to consider before you gear up. 

More risks to think about

In the above examples, I kept the structure of the loan very simple.

You could use monthly or annual interest repayments instead to take the pain away from repaying a lump sum at the end. The exact loan structure chosen upfront could even make or break the eventual returns. This adds extra risk – it could turn out to be wrong for your future circumstances. 

With such an arrangement you’d also need to keep up regular repayments, adding to your household expenditure. This would reduce your disposable income for any other investment opportunities that may arise over the fixed term of the loan. 

In the event of a market crash – perhaps with a recession – having to make regular repayments could prove tough if you faced job insecurity. 

And don’t forget investment costs along the way. These haven’t been explicitly broken out in my examples above. They will eat into any growth. 

You may also have taxes to pay on your gains when it comes time to repay, though this depends on how you invest.

Investing in an ISA can take away the tax pain, as a Monevator article by Finumus recently stressed

Risk reducers

You might be attracted to variable interest rates loans, particularly if they start off lower than a fixed rate option.

But variable rates add extra interest rate risk. Locking in a fixed rate now makes future budgeting certain, even if your investment returns are not.

Taking out a long-term loan for investment can soften the blow of short-term market volatility. Investing is a long-term game. Securing returns is more about time in the market than trying to time the market.

In contrast, you’re likely to risk making even greater losses by gambling to chase returns to repay a debt over a short timescale. 

This is why The Investor suggested in his series that a mortgage is the only debt that’s prudent for most people to consider while also investing in risky assets like shares.

Finally, you may choose to diversify across different asset classes and funds, rather than rely on one tracker.

Properly diversified investments would mitigate the downside risk, at least to some extent, but it could also curb your expected returns. 

Changing gear

Even if gearing is not for you when it comes to your portfolio, knowledge of how it works might still prove useful.

Case in point: there exists a financial calculation called the gearing ratio, which analysts use when assessing companies.

Companies typically take out debt to invest in their own businesses. 

The gearing ratio is a company’s total debt divided by its total equity.

If the gearing ratio is: 

Over 50% – The company is highly geared, so future downturns and high interest rates could put the company in trouble.
25%-50% – Considered normal for most large companies.
Under 25% – Probably a lower-risk investment, but potentially also a slower growing business

Gearing ratios need to be considered in the context of a company’s sector/specific industry.

For example, utility companies have strong recurring cash flows. Their higher levels of gearing might therefore be considered less risky than for instance a manufacturer borrowing to build a factory.

Gear for you

The gearing ratio might also be applied to your personal finances.

The ratio could give clues as to how much debt a household could comfortably carry before things get risky. Not only when taking out a loan for investing, but also when deciding to take on a mortgage or car loan.

To work out your personal gearing ratio, you’d divide the total level of actual or proposed debt by your total net assets.

Note: as far as I know there are no hard-and-fast rules here.

If we took the thresholds I gave for companies, for example, then having more than 50% of your personal assets in debt would seem very unwise.

However, this is typically what happens when buying a house, with today’s high prices. Many young buyers have very little elsewhere in the way of assets after scraping together the deposit for a 90% loan-to-value mortgage.

At least your home’s value won’t fluctuate like the stock market. (Which is exactly why borrowing to invest in a house is a mainstream activity.)

Reverse gear

If you’re thinking of gearing to invest, do your homework and thoroughly consider all the costs and the additional risks.

Some sophisticated investors could make it work for them.

But for a typical individual, gearing explicitly to invest in the stock market is not a risk worth taking. Better to get rich slowly!

See all Planalyst’s articles in her dedicated archive.

The post Is there a case for gearing up your investments? appeared first on Monevator.

Weekend reading: The return of the return gap

What caught my eye this week.

Rejoice that at some point you began reading – or even subscribed – to Monevator.

Because while our core message to invest passively, automate your savings, and then find a different hobby is a terrible business model for an investing blog, the evidence is clear its the best advice for the average person.

Just the latest salvo to scatter the hand of fund-shuffling hobbyists comes with a new ‘return gap’ survey from data giant Morningstar [Search result].

Its annual Mind The Gap survey reports investors earned about 7.7% per year on the average dollar they invested in the decade to the end of 2020.

That is about 1.7% less per year than the funds themselves delivered in total returns over the same period.

This so-called return gap reflects the wealth destruction average investors do to their portfolios by badly trading funds.

The return gap, yah

Morningstar surveyed the US, but there’s no reason to think things aren’t the same everywhere. Probably worse, in fact, given the greater inroads made by passive investing across the pond.

It’s worth stating that return gap studies do have their critics. (The similar DALBAR study in particular has been under the cosh for years). But regardless of the specific findings, the overall takeaway is sound.

In the image below, the vertical lines for each row in the graphic help to illustrate the gap between potential and realized returns for each category:

[Click to enlarge the gaps!]

How to mind the return gap

It’s especially notable that the the lowest return gap came with the Allocation fund category.

These are funds-of-funds like Vanguard’s Lifestrategy offering. They contain a mix of assets, and they do your shuffling for you as per preset rules.

Allocation funds work because you just lob money in each and every month, regardless of your hopes and fears.

And because you don’t see the sausage being made.

The average investor thinks bonds are too expensive or US equities are about to crash and takes action accordingly. Which would be fine if their timing was good – but it’s demonstrably not. Hence the return gap.

It gets even worse when you drill down into alternative and sector-specific funds – prime candidates for performance-chasing by both fund houses and the investors who belatedly get on the bandwagons the professionals set rolling.

Morningstar’s advice? Use index funds, lean on allocation funds to do your heavy lifting, avoid volatile sector-specific funds, and dollar-cost average to avoid taking a thousand nicks from poor timing decisions.

It’s not very exciting. It’s not for investing fanatics (like me). But it got my co-blogger to early retirement. For most readers it’s your best shot at achieving the same.

Have a great weekend!

From Monevator

On the plateau – Monevator

Compare funds: what to look for – Monevator

From the archive-ator: A mortgage is money rented from a bank – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Rise in National Insurance to fund boost for care and NHS – Sky / Guardian / [Search result] FT

Long delays to getting state pension being reported by many turning 66 – ThisIsMoney

Empty shelves and HGV driver shortages: Brexit eight months on… [Video]TLDR

…with missing HGV drivers also being blamed for flu jab delays – BBC

Downing Street again hints triple lock could be watered down – Guardian

UK enjoys property sales boom as prices continue to accelerate – BBC

Oxygen shortages due to Covid are disrupting the space industry – BNN

People need a £17,465 savings pot to feel secure, says Yorkshire Building Society/CEBR report – ThisIsMoney

Products and services

28 steps to get your money into shape – Guardian

How to get the best deal on a 90% or 95% mortgage – Which

Trick to getting a market-leading 1.9% on one-year savings – ThisIsMoney

Get up to £500 cashback when you transfer your pension to ii [Offer ends 30 September 2021]Interactive Investor

UK energy bills to rise after record surge in wholesale electricity prices – Guardian

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Is Chip’s new savings account any good? – Be Clever With Your Cash

Homes for sale with film connections, in pictures – Guardian

Comment and opinion

Where greatness lies – Compound Advisors

Why do we work too much? – The New Yorker

Cost versus sentimentality – Incognito Money Scribe

(Near) optimal retirement planning using machine learning [Podcast]Rational Reminder

Cash is still king, at least emotionally – Klement on Investing

Whimsical – Indeedably

Dating finances and the lessons of lockdown [Search result]FT

Blockchain for the rest of us mini-special

Bitcoin for Bogleheads – Accidentally Retired

An investor’s deep dive on Ether and Ethereum – Banker on FIRE

From the archive-ator – Should you own Bitcoin in your portfolio? – Monevator

Bitcoin futures roll costs are an impediment to any ETF [Nerdy]ETF.com

Naughty corner: Active antics

Beijing’s tech sector shock casts a long shadow [Search result]FT

Valuing China’s tech giants after the government crackdown – Musings on Markets

What shorting ETFs means for long-term investors – Morningstar

Value stocks don’t seem to be cheap for any intrinsic reason [Video]AQR

… but beware some academics now think the Value Premium was juiced – AlphaArchitect

Covid corner

Oxford-Astra vaccine technology used to design cancer-fighting jab – Sky

Long-haulers are fighting for their future – The Atlantic

What’s behind the clamour in the US for false Covid cure ivermectin? – NBC

Kindle book bargains

Stuffocation: Living More with Less by James Wallman – £0.99 on Kindle

The Basics of Bitcoin and Blockchains by Antony Lewis – £2.19 on Kindle

Captivate: The Science of Succeeding with People by Vanessa van Edwards – £0.99 on Kindle

The Smartest Guys in the Room: The Fall of Enron by Peter Elkind and Bethany McLean – £0.99 on Kindle

Get a Kindle: buy one to save money and space!

Environmental factors

American homebuyers are running towards climate change – Redfin

A cancer-quashing microbe emerges from the deep – Nautilus

What I learned renting my parents’ off-grid home on AirBnB – The Atlantic

Rural America is gearing up for a generation of change – RCM

Off our beat

Zoom dysmorphia is following people into the real world – Wired

Honesty researcher Dan Ariely retracting a study over fake data – Buzz Feed

China curbs amount of time kids can spend playing video games – Guardian

Afghan biometric databases abandoned to the Taliban – MIT Tech Review

Facebook is the AOL of 2021 – ZD Net

And finally…

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

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Freetrade. We may be  compensated if you pursue these offers – that will not affect the price you pay.

Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

The post Weekend reading: The return of the return gap appeared first on Monevator.

Compare funds: what to look for

How do you compare funds from a long list of me-too products? How do you factor in past performance, given that it tells you little about future results?

In this post I’ll outline the process that powers my passive investing strategy.

Best of all, it is centred on a freely available fund comparison tool.

Compare funds from a shortlist

First, narrow down your prospects to a select band of candidates by using:

Monevator’s cheapest index trackers page
Morningstar’s fund screener

JustETF’s ETF screener

Start with the cheapest funds you can find. Judge them by Ongoing Charge Figure (OCF) or Total Expense Ratio (TER).

Then pick some investments with a ten-year track record – or the longest you can find. This will help you benchmark the fund comparison to come.

We advise limiting your comparison to tracker investments, such as index funds and ETFs.

Passive investing explainer
Index trackers are key pillars of a passive investing strategy.
We believe a passive investing strategy is right for the vast majority of investors because:
– The vast majority of people have no investing edge.
Past performance tells you little about an investment’s future prospects.
Investment costs heavily influence your results.
– Passive investing is backed by hard evidence.

Once you have your shortlist, you can use a charting tool to compare funds.

We’ll use past performance data – not to predict the future – but to check that these funds actually do what they say they do.

This stage helps comb out weak or misidentified funds.

It also enables us to see if the cheapest funds by OCF / TER really do offer value for money.

Compare funds using a charting tool

The best publicly available tool I’ve found is Trustnet’s Multi-plot Charting tool.

It lets you perform a like-for-like fund and ETF comparison on up to ten year’s worth of data.

To add the funds on your shortlist to the table, go to the top-right Add to this chart dropdowns.

The Investment Type dropdown enables you to select Exchange Traded Funds (ETFs), funds, Investment Trusts, and shares.

Select the IA Unit Trusts & OEICs category to find most index funds.

You’ll often find obscure workplace pension funds in the Pension Funds and Offshore Funds categories.

Find the bulk of your funds by trawling through the list in the Sector dropdown.

Do your spear-fishing for specific funds in the Management Group dropdown.

Fund comparison hacks

Like most fund comparison tools, you need to know how to get the most out of Trustnet’s database.

You can easily dial-up a meaningless comparison by mistake.

I’ll show you how to use the tool by way of a Developed World index tracker face-off.

Accurate fund / ETF identification

Ensuring you’ve got the right fund is half the battle.

Identifying the correct product is crucial. It enables you to distinguish between the most competitive investment on the market and a similarly-named legacy fund with bloated fees.

The line-up of Lyxor MSCI World ETFs below highlights some of the issues inherent in browsing lists of investment products.

Source: Trustnet Chart tool. MSCI World refers to the index.

Fit for Brits

Problem: Not every fund listed is available to UK investors via UK brokers.

Solution: Make sure you choose the UK-facing branch of the fund provider. Find this under Trustnet’s Management Group Dropdown.

For example, the Lyxor MSCI World (LUX) UCITS ETF D is not available on the London Stock Exchange. Rather, it’s listed under the Lyxor Fund Solutions SA Management Group. This division caters to German and Luxembourgian investors.

UK investors can find Lyxor’s London Stock Exchange ETFs under the Lyxor Exchange Traded Funds Management Group.

Similarly, UK-relevant Vanguard ETFs are found under Vanguard Ireland and not Vanguard.

Naming shame

Problem: Trustnet misnames some funds.

Solution: Compare the name carefully with the version you want on the fund provider’s website. If you don’t get an exact match then click the fund name on Trustnet’s tool to find its dedicated page.

Here you may find Trustnet has labelled it correctly or discover other clues such as the OCF or inception date (labelled ‘Fund Launch’ on Trustnet).

These details enable you to deduce whether this is the same product you can see on the fund provider’s website. For example:

The Lyxor UCITS ETF MSCI World GBP is not on Lyxor’s website.
However, Trustnet lists the fund as the Lyxor MSCI World UCITS ETF – Dist on its dedicated page.
That ETF is on Lyxor but it’s an expensive legacy effort.

This product has an uncompetitive 0.3% OCF. And it’s a synthetic ETF, which gives some people the willies.

It’s also domiciled in France. France levies higher rates of withholding tax than Ireland or Luxembourg-based funds.

The Lyxor Developed World ETF we want on our shortlist is the Lyxor Core MSCI World (DR) UCITS ETF USD.

It’s got a low 0.12% OCF, is a physical ETF, and boasts a tax-ducking Luxembourg residence.

Short changed

Problem: This ETF lacks a long-term track record.

Solution: Find a proxy that enables us to assess Lyxor’s management process over a longer period.

The table shows that Lyxor’s UCITS ETF MSCI World GBP tracked the MSCI World index1 very well over ten years.

It only trailed by 0.1% annualised, which is less than its OCF.

That’s a sign of a well-run fund. Consequently, I don’t have any concerns about the management behind the more youthful Lyxor Core MSCI World.

You can also see that the younger ETF beat its older sibling by 0.2% annualised over three years. That’s in line with the performance differential you’d expect from a fund costing 0.12% versus one that charges 0.3%. Fees cost you return!

It’s much easier to compare index trackers when you know how to decode fund names.

Currency classes

It can be hard to wrap your head around the fact that a fund’s currency makes no difference. (That’s assuming you’re comparing two versions of the same fund).

But see below the returns of the GBP and USD version of the iShares Core MSCI World ETF:

The returns are identical across all time periods. The GBP fund is no less susceptible to foreign exchange fluctuations than the USD version.

This piece on currency risk explains why.

Note, the GBP hedged version of the fund delivers very different results. That’s because the hedge largely eliminates currency moves from the picture.

However, you can sometimes reveal a longer time-series of returns by changing the fund currency. This works when, say, the USD version of a fund predated its GBP twin by several years.

Otherwise, divergent currency class returns indicate you’re looking at different funds with similar names.

Income treatment

Accumulating funds should score the same returns as their income equivalents because Trustnet’s tool defaults to reinvesting income.

Outcomes will differ if the funds aren’t mirror images.

That’s ably demonstrated by these two iShares MSCI World ETFs:

iShares MSCI World ETF Inc is the expensive legacy fund, OCF 0.5%.
iShares Core MSCI World ETF Acc is the 0.2% hot take for the price-conscious.

It’s the ‘Core’ branding that reveals these funds are qualitatively different, not the Acc and Inc designations.

All things being equal, there is no return advantage to choosing an accumulating vs income fund – providing they’re spin-offs from the same master fund.

The impact of the index

Any index tracker worth its salt should match the returns of its index minus fund costs. (Index returns aren’t dragged down by costs.)

You can often uncover the index return on Trustnet if you know the following ‘cheat code’.

Every time you add an index tracker from the Add to this chart dropdown, tick the Add sector box under the dropdowns and hit the Add button.

You’ll get a message about how passive trackers load indices not sectors. Press OK and the index now graces your table. Assuming it’s available.

I’ve added the MSCI World and FTSE Developed World indices to the comparison below by using this method:

Trustnet also has an Indices category under the Investment Type dropdown. But you can dig up many more benchmarks using the hack above.

What’s in an index?

It’s hard to know which version of the index Trustnet presents. But we’ll mostly have to let that slide.

To briefly explain the main differences:

The price return version of an index does not account for dividends and interest. It only tracks the changes in the prices of the index’s constituents.
A total return (TR) index includes the impact of reinvested dividends and interest.
The net total return version of an index (TRN) includes reinvested dividends and interest after the deduction of withholding tax.

Most indices are published in multiple formats. But the data is often kept under lock and key.

Indices shown by the likes of Yahoo and Google Finance are typically the price return version.

You shouldn’t benchmark against a price return index – it’s missing a huge part of the returns story. Specifically, dividends and bond coupons.

Most index trackers benchmark against a net total return index.

That helps massage their results because fund providers don’t usually pay the full withholding tax whack that’s deducted from net total return index results.

Withholding tax workarounds and securities lending revenue are two ways that trackers can post returns that match or beat their index, despite costs.

Separately, Trustnet’s data suggests that the MSCI World index has performed slightly better than its FTSE Developed World rival over a decade.

It’d be worth delving into why. (Famously, the FTSE index includes South Korea whereas the MSCI World does not.)

Compare funds: putting it all together

Here’s my short (ish) list of MSCI World hopefuls put together using the fund comparison process outlined above:

Click the little arrow next to the 10y time frame in the table’s sub-menu. That orders the field by 10-year returns.

Developed World ETFs are listed under the Equity – International category on Trustnet’s Sector dropdown for ETFs.

One index fund2 also made the grade: Fidelity’s Index World P – listed under IA Unit Trusts & OEICs in the Investment Type dropdown.

Comparing the contenders

The Amundi Prime Global ETF is the cheapest fund available. However I’d rather choose a product with a longer track record. One year’s worth of data tells you nothing. Even three years tells you next to nothing.

I struck out L&G Global Equity and the SPDR ETF for the same new-kid reason.

The Lyxor Core MSCI World only costs 0.12%. It can point to okay three year returns.

Casting around for some insight into Lyxor’s management process, we can see that its longer-toothed cuz, Lyxor UCITS ETF MSCI World, lags the decennial funds by iShares and HSBC.

That implies HSBC’s and iShares’ management process is a little more cost efficient.

HSBC’s MSCI World ETF has delivered excellent results over each time frame. It is reasonably priced at 0.15% OCF.

But the HSBC ETF also appears to beat its index regularly. I’d want to understand how closely the ETF’s holdings actually track the MSCI World.

Perhaps HSBC’s index sampling is less faithful than the other funds? In which case I’d have zero faith that advantage would persist.

Or it could be that HSBC brings in more securities lending revenue than rivals, or that it shares the profits more equitably with its investors.

Sounds great – but securities lending incurs counter-party risk.

Perhaps HSBC’s global banking operation is better at swerving withholding tax?

I’d research these issues further if this fund pick is to be a mainstay of my portfolio.

If I was a new investor – restricting myself to index funds – then I’d choose Fidelity Index World P.

This tracker’s five-year returns are excellent, and its OCF is a competitive 0.12%.

Beware of bugs

Note, there can be puzzling discrepancies in Trustnet’s data.

You should compare Trustnet’s numbers versus the fund provider’s dedicated webpage to double-check.

Fund provider’s performance data is often stale. So make sure the dates used on both sites are reasonably close to ensure a meaningful comparison.

Also, flip to Trustnet’s cumulative performance table to see what difference annualised returns make over time.

You may well decide that switching funds is not worth the hassle.

Final checks

I make a few more checks when I compare funds and ETFs. This piece on how to choose index trackers runs you through the list.

I don’t blame you for thinking that this comparing fund malarky looks quite daunting.

However, consider two things:

Like any process, you can do it incredibly quickly after a bit of practice.

Picking the right fund upfront typically means you can hold it for the next five to ten years knowing that it’s competitive enough.

Take it steady,

The Accumulator

Bonus appendix

These pieces can help with your further research:

How to read a fund factsheet.
How to read a bond fund webpage. Coming soon!
Our best global tracker fund (equity) picks.
Find the best bond funds.
Ideas for the cheapest index trackers.

The first entry in the chart is the MSCI World index, although Trustnet doesn’t reveal which version it is.
As opposed to index tracking ETF.

The post Compare funds: what to look for appeared first on Monevator.