Weekend reading: First they came for the growth stocks?

What caught my eye this week.

For the past few years, being an investor in disruptive growth companies has been easy.

There’s been the odd hiccup – a tantrum in late 2018, and of course March 2020 when everything not nailed-down was sold in a panic.

But mostly, you just got richer every week.

Perhaps the biggest challenge this cycle was seeing your go-go shares only rise 5% in a month, while some meme stock jumped 300% and a crypto asset you’d never heard of rose 10,000%.

Bull markets don’t just make everyone (seem like) a genius.

They make greedy geniuses, too.

But investing in shares on ever-higher valuations is a game of chicken.

Even if you’re a fundamentals-based investor (like me, la-di-da) who buys into businesses, not stock charts, the market will eventually call your bluff.

You may own firms with fabulous futures, but one day they’re going to look about as appetizing as chlorinated chicken sounds. They will be tossed overboard indiscriminately.

The greatest multi-bagging companies – Tesla, Amazon, Apple – saw their value plunge 50-90% on their way to trillion dollar valuations.

It’s a matter of when, not if.

Under pressure

Friday was one such day. Which was remarkable, because Thursday had already seemed like one such day.

I’d actually messaged The Accumulator a screenshot from my portfolio tracking spreadsheet on Thursday showing how much the growth portion of my sprawling portfolio had been roiled.

But then came Friday, which guffawed: hold my beer.

Not one but two of my shares fell more than 25% on Friday. The worst was down 40%. Many of the rest were down at least 5%.

And we’re not talking tiny fly-by-night stocks. My biggest plunger, Docusign, was worth more than $50 billion a month ago.

Here’s how a random selection of growth companies fared last week:

Of course all of these companies – with the arguable exception of Meta (nee Facebook – have looked super-pricey for the past couple of years.

And there’s a definite ‘de-digitalization’ theme among the companies that have been faring especially badly.

Even as Omicron has loomed, the so-called work from home stocks that were winners in the locked-down world have proven too pricey for some tastes. Especially with higher interest rates on the way.

I wrote last month about how inflation expectations have been getting stickier all year. That had suggested Central Banks will need to tighten financial conditions sooner or more severely – or both. And that’s potentially bad for growth stocks because of the impact on discounted cash flows that I flagged up a few years ago in discussing the problems with low interest rates.

Twelve months ago, fanciful commentators were opining that paying multiples of 50-times a company’s sales (that’s revenue, not profit) was the new normal.

And it was – in that everyone was doing it.

Until they weren’t.

Another one bites the dust

Obviously I can’t sound too smug. As I say, a good part of my portfolio was pummeled this week.

I’ve been trimming growth exposure for much of 2021 on the back of re-openings and scary multiples.

But clearly in hindsight I kept too much and – hilariously – I’d even bought back some fallen high-flyers because they had begun to look tempting.


However this is not my first rodeo. I know shares in growth companies can look too expensive for years in a bull market, and I was happy to book the gains in the good times. A kicking was coming someday. The snag was I didn’t know when.

But will the legions of new investors who only began trading in 2020 and have never seen a bear market be so sanguine?

Thursday and Friday felt like a panicked liquidation – of traders on margin, if not of actual funds – but at the index level prices only dipped a little. This was a very localized earthquake.

There’s a lot more selling to come if people truly get the fear.

Of course, as I alluded to above much of the fastest money has moved onto trading cryptocurrencies.

Doubling your money in a growth stock in a year was a snooze-fest for Boomers by comparison to alt-coins and the like.

I wonder what such traders made of the past 24 hours in crypto prices on checking their screens this morning:

Come back plunging growth stocks – all is forgiven!

It sure looks like the euphoria is over.

Don’t stop me now

If you’re a passive index fund investor then you’re entitled to feel pretty good about all this.

For UK investors, the Vanguard World Index Fund was down less than 1% in the week.

It actually rose on Friday!

The mega-tech companies that dominate the market (Alphabet, Microsoft, Amazon and the like, though not Meta) have barely wobbled so far.

Passive investors also save themselves a lot of grey hairs by avoiding days like Friday – albeit at the cost of rarely being able to brag about your returns on Twitter.

Most people will do much better with index funds than stock picking, which is why we recommend passive investing so much on Monevator.

But I wouldn’t get too complacent.

An interesting feature of the recent sell-off is that it’s occurred while the all-important US ten-year yield has actually been softening.

Indeed market expectations for US interest rates are flattening across all maturities recently.

Say what?

Basically, as of recent days, the market is seemingly expecting US interest rates to rise less in the future.

That could be because it foresees another recession, maybe virus-driven.

It could be because it’s thinking that inflation is more transitory, after all.

Or it could be that bond investors are growing increasingly fearful in general, perhaps due to the same flight to safety instinct that drove the mass dumping of expensive growth stocks this week.

After all, if you expected Omicron to lock us all inside again, then the likes of Zoom Video should perhaps be rising.

So there’s some circles to be squared here.

I could speculate about this all day but it’s not really our beat.

Suffice to say we’re potentially in one of those periods of dislocation for the markets, where things change and it only looks obvious how in hindsight.

It had seemed like stock markets were getting ‘healthier’ in 2021.

Last year’s returns were dominated by the biggest companies. But the spoils had been shared more evenly recently, as Morningstar reported:

Will this continue?Maybe the recent sell-off is evidence of investors coming to their senses, as value investors might put it, and dumping their growth shares for solidly profitable companies?

Or is a new bear market coming – taking out the easy targets before moving on to the biggest prey?

Who knows. Anyone being too defensive has made a mistake for most of the past ten years.

I was too exposed to growth stocks in partly because the end of the year is usually so strong, and the outlook seemed favourable until a fortnight ago. Things can change quickly.

Who wants to live forever

We’re all playing a long-term game. As an active investor, I believe I can outperform the market by discerning the best companies that will prosper over the next 5-10 years (albeit I shuffle my cards continually, which is heresy in the circles I hail from).

I even bought some growth shares on Friday – buying into boutique cloud provider Digital Ocean and adding to old favourite Mercadolibre (the so-called ‘Amazon of Latin America’, only not that Amazon…)

These still look like long-term winners to me. But in the short-term anything can happen.

Meanwhile for passive investors, the best defense is and always will be diversification. Even steep crashes will eventually look like blips provided you’re properly diversified and can hold and add through such declines.

Because a time will come – maybe next week, maybe next decade – when the sort of falls growth stocks ‘enjoyed’ on Friday will occur at the index level.

The S&P 500 will be down 8% in a day. The FTSE 100 will be off double-digits.

It’s always inconceivable until it happens. But it does happen.

Maybe this week was the market re-calibrating for a long expansion ahead. Perhaps the old companies that burn and bash stuff are due some time in the sun.

The bull market is dead – long live the bull market!

Perhaps, but I fancy it still isn’t a bad time to make sure you’ve got the right balance in your portfolio for navigating whatever comes next.

Have a great weekend.

From Monevator

Buy the rumour, sell the news – Monevator

What your retirement could look like – Monevator

From the archive-ator: Bonds are for pessimists, shares are for optimists – Monevator


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

UK shelves proposals to raise capital gains tax rates and cut allowance [Search result]FT

New rules for London Stock Exchange aimed at attracting IPOs – ThisIsMoney

Economic uncertainty as Omicron cancels the Christmas office party – BBC

Seedrs bought by US firm Republic for $100m – TechCrunch

Zog Energy becomes 25th UK supplier to go bust in three months – Guardian

One British family’s experience of the soaring cost of living – Guardian

Products and services

AJ Bell to strike back in 2022 with a commission-free trading app – AJ Bell

The best deals for first-time buyers on a 90% or 95% mortgage – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

American Express’ Shop Small cashback scheme returns this month – Which

The duo-oligopoly of ETF/index providers – Klement on Investing

Doing the sums on 40-year fixed rate mortgages – ThisIsMoney

Cosy cottages for Christmas, in pictures – Guardian

Comment and opinion

How to avoid another lost decade… – Compound Advisors

…starts with avoiding investment manias – Compound Advisors

Read before selling – Humble Dollar

Healthy, wealthy, and wise – Klement on Investing

Fear Of Losing Big – Humble Dollar

Don’t overdo money obsession – The Belle Curve & Female Finance

How can couples make peace over money? [Podcast]Morningstar

The pros and cons of borrowing to buy stocks – MarketWatch

For the bond market, this time might be different… – Morningstar

…but for now you can’t escape the hard truth about TIPS [US but relevant, nerdy]ThinkAdvisor

Crypt o’ crypto

We built a crypto index – The Irrelevant Investor

Fleshing out a crypto investment strategy – Banker on FIRE

Bitcoin and electricity – Marginal Revolution

How to meme a Banksy painting via an NFT – Felix Salmon

The DAO of DeFi Index funds [Podcast]A Wealth of Common Sense

Naughty corner: Active antics

A deep dive into Disney [Podcast/transcript]Telescope Investing

Interview with fund manager Terry Smith [Video] – I.C. via YouTube

The importance of execution – The Undercover Fund Manager

What are the odds of success for a US seed funded start-up? – Crunchbase

Oh Omicron! From panic to possibility – Investing Caffeine

Can prospect theory explain anomalies like the momentum factor? – Alpha Architect

Workaday mini-special

Remote work should be (mostly) asynchronous – Harvard Business Review

How leisure time became work – The Atlantic

For many US workers, leaving their jobs has been exhilarating – Guardian

Covid comeback

First data points to Omicron reinfection risk… – BBC

…with more than half the UK cases in double-jabbed – Guardian

Variant driving record infection rates in South African province – Guardian

Why firm answers about Omicron could be weeks away – Stat

The inside story of the Pfizer vaccine: ‘a once-in-an-epoch windfall’ [Search result]FT

Kindle book bargains

Economy Gastronomy by Allegra McVedy and Paul Merrett – £0.99 on Kindle

How Will You Measure Your Life? by Clayton Christensen- £0.99 on Kindle

Anthro-vision: How Anthropology Can Explain Business and Life by Gillian Tett – £0.99 on Kindle

Alchemy: The Surprising History of Ideas That Don’t Make Sense by Rory Sutherland – £0.99 on Kindle

Environmental factors

Ten million a year [On air pollution]London Review of Books

This is what it sounds like, when bugs cry – BBC

Carbon-cutting app aims to ease Londoners into net zero future – Guardian

Off our beat

Assured misery – Morgan Housel

Predicting with ‘superforecasters’ [Podcast]The Ezra Klein Show

And finally…

“Never invest in any idea you can’t illustrate with a crayon.”
The Motley Fool Guide to Investing for Beginners

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What your retirement could look like

Anyone planning for financial independence (FI) knows it’s hard to picture your life in retirement. Like a precog from Minority Report, you can only glimpse fragments of your future.

However we’ve uncovered intriguing research that might help you fill in the ‘Here Be Dragons’ gaps in your FI map.

The research – Retirement Living Standards in the UK in 2021 – plots three tiers of retirement spending, ranging from minimal to moderate to comfortable.

The paper also serves up insights into what kind of lifestyle that spending really buys, from people already living it.

Much ado about much more than nothing

Retirement research gives you a shortcut to answering that perennial awkward cocktail party question: How much do I need to retire?

Okay, maybe it’s only us who invites those sorts of questions…

Anyway instead of doing laborious calculations on a spreadsheet, you could just pick one of the consensus retirement income answers published by the Pensions and Lifetime Savings Association (PLSA).1

An unexpected bonus of the research is it also incorporates testimonies from retirees and near-retirees drawn from various socio-economic backgrounds and regions across the UK.

If our retirement future is an unknown country then their words act like an audio tour guide.

It tells us something about what really matters to people in retirement. And as ever, the experience of others might help us find our own path.

Plus it’s an interesting read because there’s nowt so queer as folk.

OK, let’s start with the hard data. We’ll then move on to the fluffy anecdotal evidence.

Retirement income standards 2021

Source: Retirement Living Standards 2021, PLSA

This table is a bronze, silver, and gold rostrum of annual retirement incomes – as determined by members of the UK public aged 55 or older.

The underlying research explains what you get for your money at each level. We’ll come to that shortly but – spoiler alert – the Minimum lifestyle isn’t factoring in many trips to Ayia Napa.

What’s also not clear from the table is the income numbers are after-tax.

An interesting contrast is the UK median household disposable income2 of £29,900.

The median retired household income is £23,557, according to the ONS. That’s well below the Moderate spending level for couples in this table.

Note that the PLSA expects the State Pension to do much of the heavy lifting in retirement. Especially at the Minimum standard.

This is the single biggest reason why nobody should fear the State Pension being done away with. The social fallout of scrapping the State Pension would be catastrophic for any government.

What really leaps out from the table is how expensive life is for singletons.

The most effective cost-saving measure any retiree can make is to couple-up. No wonder there are so many senior Casanovas out there.

Be sweet to your significant other and keep ‘em healthy. Give flowers, not chocolate. (But think twice before buying them a Peloton!)

The table also invites us to compare our own retirement prospects with the PLSA’s pecking order.

To understand the life of Riley promised by each level, feast your eyes on the next table…

What you get for your money

There is much social division written into the curt lines above.

For example, I struggle to imagine life without a car. Then again I don’t need three weeks in Europe per year.

I also know plenty of people who substitute time and talent for money when it comes to gift giving.

You’ll draw your own conclusions. I’d love to hear them in the comments.

While the table forces a statement of spending priorities, the reality is that many of us will drift back and forth across the tiers.

For example, The Accumulators spend less than the Minimum on clothing. We’re in the Comfortable zone on food, though.

Meanwhile our overall budget is closest to the Moderate camp, albeit we undershoot.

Retiree vox pops

What I love about this research isn’t the numbers, however. It’s the voices.

The participants discuss their lived experience for each major spending category.

A portrait thus emerges of retirement reality, painted in the primary colours of what money can buy.

The anonymous quotes below are excerpts from the study’s group sessions.

Food spending

The snapshot above shows the foodie living standard each income band affords. The major difference is eating out and takeaway:

Minimums: £45 per month
Moderates: £200 per month
Comfortables: £533 per month

The Comfortables are clearly loading their plates with much more spice of life than the Minimums. 

At least on the surface.

One of the things the FIRE community has been great at is uncovering ways to enjoy life without throwing money at it. 

In my 20s I spent like The Comfortables on eating out. It was how I lived the life. Now I’m under-spending The Minimums and I’m happy with that.  

Others will think differently. Social eating has shot up the priority list of many after lockdown, as encapsulated by this quote:

I hadn’t realised how important it is for emotional well-being and so on, just the act of sitting down and breaking bread with friends and family, so … I guess what I’m saying is I think that … once Covid has finished, that’s going to go up because a lot of people have realised how important it is.

Moreover, financial flexibility is an important part of social inclusion:

…at one time eating out would have been seen as luxury but to have … take part in society and be … have a reasonable standard of living, you would have to include things like this, wouldn’t you because it’s … not … essential’s the wrong word but it’s part of what it is to be in a modern society isn’t it?

As a lean-FIRE-ee I sometimes wonder if I’ve cut my cloth too tight on this score. We’ll see.

Housing spending

Minimums pay social housing rent. Moderates and Comfortables are assumed to have paid off their mortgages by retirement.

But today’s retirees don’t think the next generation will be so fortunate:

I was just going to say that in my experience at least, the expectation of certainly people in their 30s and 40s, which my kids and nephews and niece and so on all are, very few of them have an expectation now that they will own their house by time they’re 50 or 60.

Personally, I think we’ve fallen short as a country on this. It’s the height of hypocrisy to hoover up housing stock and lock future generations out of the market by failing to build.

The Generational Compact is a cornerstone of society. Earlier generations invest in their children’s future, and their children look after them in old age.

But we’re creating generational divides that put social cohesion at risk.

Meanwhile, up-and-coming generations are meant to bankroll the NHS, long-term care, State Pensions, and clean up the climate crisis. 

Back to retirement, and divorce looms large as a catastrophic roll of the dice in the game of housing snakes and ladders:

…the thing is though I’m in a position where for lots of reasons I… I have to rent, so I have to share a house with somebody… you can’t always guarantee that you’re going to end up owning your own house because circumstances change and things happen don’t they, and people get divorced and have to split their resources and all that sort of thing, and more and more people get divorced after retirement because the fact is when people suddenly find they’ve got to spend a lot of time together…

Divorce is sometimes mentioned in Monevator comments as a third-party calamity. But reading a first-hand account really drove home the awfulness of the situation to me. (Excuse me while I google ‘thoughtful gifts’.)

Speaking of unhappy endings that I’d rather not think about…

Body disposal etiquette

I’ve paid scant attention to funerals. But our focus-grouped retirees have, and they’re very pragmatic:

I think for me, a funeral you know is my party that I’m not actually attending, except (laughs) in a dead fashion! And I’d rather spend the money on you know allowing people to have a good time, without all that money spent at the Co-op, on a box which is just going to be burnt.

I think it’s a logical extension of the country’s descent into … or ascent, depending on your perspective, into being agnostic or atheist that you know it’s the last pillar that’s being kicked away in terms of you know the death ceremony and some official presiding at it, and you just don’t … you don’t need that anymore.

Worst case scenario, you can just donate your body to science and you’re not paying for anything at all, are you?

The retirees have built pre-paid cremation plans into the Moderate and Comfortable budgets. But they’re also tempted by adverts for services that skip the church, cars, and wake.

Thankfully those ads aren’t showing up on my feed yet.

Mrs Accumulator is under instruction to pop me out with the bins. She says she will put me in the freezer so she can still chat to me.

We’re gonna need a bigger freezer.

Health issues

In another ominous sign of the times, some contributors voiced their fears about being able to get medical treatment when they need it.

[A] health plan is probably becoming a necessity, it’s certainly something that I have started actively worrying about … getting any kind of appointments with GPs, dentists, and when you hear about the long, ever increasing waiting lists for NHS, it’s certainly playing on my mind…

I suppose it’s just the way I’ve been brought up, but I’ve always thought of private healthcare as a luxury. It may be that the situation, the circumstances for all of us are changing so that that needs to be revisited…

Mrs Accumulator and I had the same conversation, triggered by the Covid deluge.

Ultimately, private healthcare wasn’t included in the retirement budgets this time around but for how much longer?

Funding the NHS feels like another slow-moving car crash that we’re not grappling with as a society.

Are we prepared to pay more in taxes? Do we help relieve the burden on the NHS by looking after ourselves more? (By which I mean living healthier lifestyles that increase our chances of staving off chronic conditions.)

All the private health insurance in the world won’t save us from dying if we need urgent medical assistance but have to wait five hours for an ambulance.

Social and cultural participation

Comfortables are spending 150% more per person per week on leisure activities than The Minimums. The potential impact of that spending power on a life well-lived is captured in this quote:

Sociability is such an important factor for well-being … sociability and connection and belonging, which is so important for mental health and continuing…

That said, the interviewees also talk about how Covid has forced a reassessment of spending needs in this area. For example, gym memberships have given way to running shoes, bicycles, and walking boots.

Early Mr Money Mustache was a trailblazer in rethinking life’s riches so they don’t cost a packet.

I’m not sure anyone has replaced him in that respect? Let me know who I’m missing in the comments.

The social participation category also includes tech. DVD players are clinging on but streaming is now considered an essential part of engaging with the world at every income level:

My partner, her quality of life would not be the same if she didn’t have Netflix … So these things … as I said, these things were a luxury but then they become a necessity in certain circumstances, don’t they?

Moderates and Comfortables get a smart TV. Comfortables get a bigger smart TV.

(We were warned against that escalation in the movie Trainspotting. Possibly not the best source of retirement advice.)

The contributors are prone to lifestyle creep:

…the other thing I’d say on your list is that at one time, HD TV was kind of like an exotic upscale from standard definition, but now HD is just very basic, and now 4K is becoming a minimum. So I’d say that you’re not far off now where 4K will be just your minimum and HD is already looking a bit old-fashioned.

That person is a marketeer’s wet dream. At some point your eyes can’t tell the difference! And your well-being certainly won’t.

Technical sidebar

Smart speakers are now included for Comfortables but not yet Moderates.

I do wonder how much tech is bought just because the neighbour’s got one?

Some retirees I know would be much better off if they could just get to grips with a smartphone.

I say this with my tongue in cheek after watching many a Boomer respond to a smartphone like a caveman faced with a mortgage loan application. 

On the other hand, I know a pensioner with chronic health issues who loves their smart speaker’s simplicity. They’re also greatly reassured that they can use it to call for help.

I’m sure there’ll be tech in the future that passes me by. Hell, there is now.

Regardless, if you enjoy keeping up with trends and aren’t keen on trade-offs, you should be planning for the Comfortable spending band.

“Hello Future Me”

Retirement is difficult to imagine until you get there. We plan it on colourless spreadsheets and emotionally struggle to relate our parents’ experience to our own.

Friendship groups tend to be intra-generational. I probably know more about the trials of my elders via Monevator than I do from real life.

That’s why I found the retirement thumbnails in this research so fascinating. It let me hear things that people don’t normally talk about.

So what have you got to say for yourselves? Let us know below.

Take it steady,

The Accumulator

P.S. If you don’t like the PLSA’s retirement income numbers then try the ones from Which instead.

The PLSA is a financial industry group. It includes asset managers, consultants, law firms, and fintechs. They’re so keen to get Britain saving for retirement that they commissioned research from Loughborough University’s Centre for Research in Social Policy.
Disposable income is what’s left after direct taxes, such as Income Tax, National Insurance, and Council Tax.

The post What your retirement could look like appeared first on Monevator.

Buy the rumour, sell the news

A new investor has a thousand ways to be confused by the stock market. Hearing the old adage ‘buy the rumour, sell the news’ won’t help.

What on earth?!

Why buy shares when you’re not sure what’s going on?
Or sell when a great thing is finally confirmed?
Why be uncertain at all in 2021 – when the facts are just a Google away?

If you’re asking these questions, then you don’t yet understand how markets work.

Which is what makes this old instruction so – well – instructive.

Buy the rumour because the market prices forward

The basic idea here was as familiar to white-wigged traders swapping paper in 17th Century Amsterdam as it is to today’s meme stock chasers punting on Freetrade and RobinHood.

Buying the rumour is all about what is priced into a share – and when – and whether you have an edge against your fellow share sharks.

In theory, a share price reflects the market’s best guess as to the current value of all the cash that will ever come due to its holder in the future – with a discount applied for risk and the time value of money.

Of course, prices can be buffeted by emotions and fads. This is what we mean when we gravely intone how a share “has become disconnected from fundamentals”. Recall, say, the manic trading of GameStop in early 2021.

But most of the time, most of the share price in an efficient market reflects a best estimate of a company’s cash generation potential.

Granted, this theoretical truth is seen best in an economist’s model. It’s not always so apparent in the hurly burly of a real-life stock exchange.

Not least because the market is no single entity. There’s no godlike bookkeeper with one eye on Excel and the other eye on the newswires.

Rather the market comprises millions of individuals, funds, and AI algorithms churning billions of shares. There’s a wide disparity in aims and time horizons. There’s also a varied appetite for risk and reward.

Mr Market has many faces

Sometimes in aggregate investors are greedy, and will pay a lot for future cashflows. That leads to higher equity prices.

Other times they’re scared and are prefer the certainty of cash in the bank. This reduces the general appetite for shares.1

Much of the time, very few market participants are seemingly doing any sort of discounted cash flow analysis or similar on those future earnings at all.

Instead they are chasing news. Or rising prices. They are buying because of an economic report or a release from a rival firm. Or a million more reasons.

A fund manager may pay more because it was sunny on the way to work, or because her database says a share is priced cheaply compared to history.

An investor may put money into Tesco because he just did his shopping there. He may buy on the rumour that a new gizmo is already selling out. He may sell on a hunch that a popular CEO is leaving.

Yet the object of most of this guesswork typically does have some bearing on future earnings. Okay, not that sunny commute maybe, but leadership changes or a smash hit product will impact the bottom line someday.

It all adds up.

You can think of a share price’s moves in the short-term as almost like the result of ‘Asking the Audience’ in Who Wants To Be A Millionaire.

Trades on a stock exchange are like votes cast with money.

Told you so

Sooner or later, any bit of guesswork is confirmed or refuted.

A CEO stays or goes. The hit Christmas toy sells out – or it transpires such rumours were a marketing stunt. Or maybe the toy does sell out, but only because they didn’t make enough of them. As a result the anticipated earnings boom never happens.

When millions of rumours are replaced by more knowledge in this way – whether through formal press releases, or by altering the profit and loss statement or the balance sheet in a firm’s reporting – mis-pricing begins to be corrected.

A bit of froth is taken off a share price here. Some gloom is dispelled there.

And so – over the long-term – share prices track earnings.

True, you may have to wait an age to see this. Think Amazon or Tesla.

Alternatively, the relationship between profits and a share price might be apparent quite quickly with a consumer staples company like Unilever.

Cyclical outfits such as miners typically see their share prices rise and fall well ahead of big earnings changes, like cats chasing their own shadows.

And did you notice I said ahead of earnings?

Wait for a cyclical company to confirm a downturn and you’ll probably have already taken a chunky loss by the time the news arrives.

Guessing ahead is the name of the game with cyclicals.

Buy the rumour to buy mispriced shares

Hopefully the adage ‘buy on the rumour sell on the news’ now makes sense.

If you’re trying to beat the market, you need to think and do something different to the market in aggregate, as represented by current share prices.

You might value a particular security differently.

Perhaps you’re operating at a different timescale to most participants?

Maybe you have a different attitude towards risk and reward.

(An apparent bargain price is often just a discount applied by the market to reflect the chances of something good and expected never happening.)

In any event, in most cases being able to anticipate something before it happens will be more profitable than waiting until everybody knows about it from an official news release.

Sure we can argue at the margins.

For example, the momentum factor’s history of out-performance may be due to investors taking longer than expected to properly incorporate new information – even when fully confirmed – into their valuations.

Meanwhile a lover of so-called quality shares like Warren Buffett or the UK’s Nick Train might argue the market systemically undervalues long-term compounded earnings generated by duller, more predictable companies.

I’m the sort of investing nerd who would happily debate all this with you in the pub, but that’s for another day.

Just make sure you grasp the main point before you look for exceptions.

Don’t be that guy

Don’t be like the talking heads on financial TV who every day seem amazed: “Monevator Enterprises shares soared after-hours despite reporting big losses”.

The market already knew that losses were coming. Investors expected even bigger losses. Or they didn’t appreciate a shift in the earnings mix. Maybe they like the new-news that the CEO is flogging off the loss-making divisions.

Or perhaps it’s one of a hundred other things.

“Why have my shares plummeted after Monevator Inc. reported record profits? The stock market is insane!” – say day traders everywhere, every day.

Perhaps the market is indeed slightly over- or under-pricing your shares. (It’s very unlikely to have the valuation right on the nose.)

Or maybe it has cottoned on to the fact that the surge in revenues at your company looks unsustainable.

That your company is juicing profits by under-investing.

Or a hundred other things.

If I had a drink for every time I’ve heard media pundits or online posters bewailing an ‘irrational’ market that in fact was looking months or years ahead – and long before you were – then I’d be checking myself into the Priory.

Not least because I’ve bewailed like that myself, too.

We’re all only human.

Buy the rumour, sell the news

Remember, the stock market is a forward-looking prediction machine. It tries to discount the value of what it sees through the mists of time ahead via today’s share prices. It’s doing this all the time.

You’re probably best off not trying to do it better than the millions of smart people and machines that make up the market.

Invest passively, buy index funds, and benefit from their hard work.

But if you must play the crazy game of active investing, stop obsessing over what everyone already knows – or what they think they know.

Think different, and before they do.

You can see this in varying CAPE ratios over time, as investor fear and greed ebbs and flows.

The post Buy the rumour, sell the news appeared first on Monevator.

Weekend reading: Many shall fall that now are in honor*

What caught my eye this week.

Today would be embarrassing if Monevator was an old-fashioned print magazine (as opposed to an old-fashioned ‘weblog’!)

I’d be scurrying past the newsstands. Trying to avoid my cover story – already written by Wednesday due to magazine print deadlines – about the bull market disguising how last year’s mega-winners had cratered in 2021.

That post looks less topical this Saturday morning. Because in case you hadn’t noticed – in which case, collect your merit badge from The Accumulator by the door – markets were roiled on Friday by fears of a new Covid variant that seemingly has just been spun-up in someone’s body-lab in South Africa.

This ‘Omicron’ variant has more mutations than a Chernobyl-era chicken, and on the surface a transmission rate that makes Delta look about as speedy as an epistolary 18th Century love affair.

The City fears it’s seen this movie before. So traders have dumped first, and will ask questions over the weekend. At least the potential for a speed bump in that bull market, then.

To only rub salt into the wound, this was also the week I decided that the ‘Covid corner’ section of our weekend links had run its course. Oops!

Turn, turn, turn

In some ways though Friday’s reversal of fortune amplified the point I was set to make. Which was that nothing – ever – lasts forever in the markets.

If you’re a halfway active investor, you’ll remember that lockdown darlings like Zoom Video and Peloton were recently all the rage. Their shares skyrocketed while fund managers and everyday traders were using their products every day.

But as Will Hershey on Twitter recounts via a handy table, such shares – lauded as inevitable winners of a work-from-home revolution – have since crashed 35-70% from their highs.

On the Compound Advisors blog, Charlie Bilello makes the same point, adding:

after a year like 2020, [stock picking] almost seemed easy.

Had you purchased virtually anything in the high growth/tech/IPO/SPAC space, you would have outperformed the S&P 500 by a wide margin.

Right on, Charlie. I walloped the market in 2020.

But in 2021? Not so much!

Anyway, on Friday some of these 2021 reversals then reversed themselves again. At one point Zoom was up over 13% on the day, Peloton soared, and vaccine maker Moderna ended the session 21% higher on the not-unreasonable assumption that it might be busy retrofitting its vaccine for the new party pooper.

Some of those spikes were short-covering, I think. But it was also a reality check for investors that the pandemic was far from over.

Eight miles high

I’ve been following markets closely for 20 years. Even so I’m still amazed at how apparently unshakeable narratives crumble over time.

You had to own dotcom stocks in the 1990s. You were an idiot for believing in the Internet by 2003. UK private investors only cared about small cap oil and gas shares by the mid-naughties. Nobody should own equities in 2008 and 2009 – investing was all a con. The market was pumped-up and inflated by 2015. Retail share trading was finished by 2019 and we were all going to index – and then along came RobinHood and meme stocks. Government bonds could only crash said many Monevator commentators six weeks ago. They’ve since spiked higher. And so on.

Much of this stuff is only apparent if you’re naughty active investor. At the index level you tend to see broader, steadier moves.

That’s certainly not a reason to abandon index tracker funds – indeed for 99% of people it’s another great reason to own them. (If you want to keep enjoying sausages, never visit a sausage factory.)

Nonetheless, passive investors will someday face their own narrative shift. The market will crash and it won’t bounce back for a good while. “Buy and hold is dead!” we’ll hear. We’ve been through that cycle at least twice in the lifetime of this website alone.

And then that in turn will pass. In investing, never say never again.

Have a great weekend everyone!

*Horace, via the dean of value investing Ben Graham.

From Monevator

Why you should think about your legacy and write a will – Monevator

How much should I put in my pension? – Monevator

From the archive-ator: Reasons to rent instead of buying a house – Monevator


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

HMRC issues tax scam warning to self-assessment taxpayers – Which

Leaseholders fury at being charged £450,000 for new intercom – MSN

Pandemic-era shortages come for yachts and planes – Axios

WHO names ‘Omicron’ a variant of concern… – BBC

What we know about the new variant [Search result]FT

Countermeasures mooted as Omicron reaches Europe… – Guardian

…meanwhile markets fall sharply as variant spooks investors – Sky News

Products and services

Investec launches a one-year fixed interest account paying 1.36% – ThisIsMoney

Travel bans are back. Who offers the best Covid travel insurance? – Which

Firms team up to bring 40-year mortgages to the UK – Yahoo Finance

Want to test your testosterone, cholesterol, Vitamin D, and more – all from home? Get £10 off when you try Thriva via my affiliate linkThriva

Smartphone pensions: should you switch? [Search result]FT

With Bulb RIP, what should you do if your energy firm goes bust? – ThisIsMoney

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

The rise of the many in consumer fintech [US but relevant]A16z

Buying shares in physical classic cars – ThisIsMoney

Homes for sale with statement staircases, in pictures – Guardian

Comment and opinion

Sir Steve Webb: Annuities deserve a fresh look [Search result]FT

Fees are your foe – Humble Dollar

A cap-weighted index fund offers wide diversification at a low-cost – Allan Roth

Closing time [On retirement]Finding Joy

Adversity is the pain you don’t see coming – Portfolio Charts

100% off – Maximum Gratitude, Minimal Stuff

What if the Bank of England isn’t in control of inflation? – David Smith

Career seasons: choosing a job based on the life you want – Ramit Sethi

Finding enough – Indeedably

People are overly panicked about inflation [US but relevant]The Bellows

Paths to success – Humble Dollar

Keeping up with the crazy mini-special

The golden age of grift – Young Money

This will not last – Of Dollars and Data

The Age of Funcertainty – The Reformed Broker

A billion dollars isn’t cool – The Irrelevant Investor

Wise and timeless words on investor behaviour – Novel Investor

Naughty corner: Active antics

The S&P 500 as seen through various valuation lenses – Factor Research

The US Grayscale Bitcoin Trust is a poster child for inefficient pricing – Morningstar

Betting against Warren Buffett [on time horizons]Behavioural Investment

Crypt o’ crypto

Is crypto bullshit? – Model Citizen

Tokenize everything – Dave Nadig

Web3 breakdown: Bored Ape Yacht Club [Podcast]Invest Like The Best

US firm experiments with mortgages on a blockchain – ThisIsMoney

What’s with all the decimal places when you trade crypto? – Bloomberg

Will crypto protect against inflation? – Morningstar

Exploring valuation models for digital assets… – CAIA Associates

…and a rationale for Bitcoin at $120,000 and more – Institutional Investor

How could all the new crypto wealth disrupt US politics? – Joseph Wells

Kindle book bargains

The Everything Store: Jeff Bezos and the Age of Amazon by Brad Stone – £0.99 on Kindle

Talking to My Daughter: A Brief History of Capitalism by Yanis Varoufakis – £0.99 on Kindle

Exponential: How Accelerating Technology Is Leaving Us Behind by Azeem Azhar – £0.99 on Kindle

Happy Sexy Millionaire: Unexpected Truths about Fulfillment, Love, and Success by Steven Bartlett – £0.99 on Kindle

Environmental factors

Scope 3 [carbon emissions] under the microscope [PDF]Lindsell Train

Breeding heat tolerant corals at the Great Barrier Reef – Guardian

Switching 100% to electric vehicles is no longer a fringe idea – NPR

Off our beat

Work from home works, until you need time off – The Atlantic

“I earned more than 40 million air miles”Guardian

Scary realistic entry-level CGI faces are nearly here [Video] – via Twitter

Yes, the super-rich are as miserable as Succession makes out – Guardian

The real-life quest to cook all 74 Stardew Valley recipes – Wired

Facebook and Google fund global disinformation… – MIT Technology Review

…while also serving up surreal divisive claptrap – The Atlantic

And finally…

“Focus on being productive instead of busy.”
– Tim Ferris, The 4-hour Workweek

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The post Weekend reading: Many shall fall that now are in honor* appeared first on Monevator.

How much should I put in my pension?

The answer to the question “How much should I put in my pension?” is surprisingly simple.

You need enough in your pot to sustainably generate a comfortable retirement income that will last you the rest of your life.

This post enables you to estimate how much pension pot you need to deliver that income.

Once you hit your target number, you can fire your job, and start a brand new life doing whatever you please.

Your pension pot target number depends on knowing how much income you can live on in retirement.

That might sound like an impossible ask. But you can arrive at an estimate using the method explained in our How much do I need retire? post.

With that retirement income target in hand, you need only complete one more step to calculate how much you should put in your pension.

The ‘How much should I put in my pension?’ calculation

Here’s a quick example that’ll show you how much you need in your pension pot.

Imagine that you want a retirement income of £15,000 on top of your State Pension.

The size of pension pot you need to retire is:

£15,000 divided by 0.03 = £500,000


Your required annual income = £15,000 (not including other income sources such as the State Pension.)
Your sustainable withdrawal rate = 3% (or 0.03)

In this example, you can retire once your pension pot hits £500,000.

That target amount should generate £15,000 in inflation-adjusted income for your entire retirement – assuming your pension is invested in global equities and government bonds. More on this below.

Substitute the £15,000 above with the retirement income you need from your pot.
Divide your income figure by 0.03 to discover how big your pension pot should be.
Add your State Pension and any other reliable income sources to tally your total retirement income.

Run this calculation twice if you’re part of a couple.

Account for tax using the tips in last week’s post.

Is that all I need to know?

The calculation really is that simple.

What’s more complicated is explaining why this approach is the best way to estimate how much pension pot you need.

You also need to adjust your numbers for inflation and the tax-free status of your Stocks and Shares ISAs, but that’s mercifully straightforward.

Keeping up with inflation

The example above produces £15,000 income from a pension pot of £500,000 at today’s prices.

If you’re retiring years from now – rather than today – then your numbers must be updated for inflation. Otherwise, you’ll lose purchasing power as prices rise.

All you need do is adjust your number once a year by the UK’s CPIH annual rate of inflation.

For example: let’s say inflation is 2.5% one year from now.

Just multiply your pension pot target figure by 2.5%:

£500,000 x 1.025 = £512,500

You need £512,500 in your pension pot to generate enough retirement income after 2.5% inflation.

Let’s double-check that pot will produce enough inflation-adjusted income:

£512,500 x 0.03 = £15,375

Your 3% withdrawal rate now delivers £15,375 in retirement income.

If you multiply our original £15,000 income figure by the inflation rate of 2.5% you get £15,375.

Hallelujah! The calculation checks out.

Do this once a year and your target number and retirement income will keep pace with CPIH inflation.

Stocks and Shares ISAs

Many people retire with a mix of pensions plus Stocks and Shares ISAs.

Calculate the target figure for your ISAs in exactly the same way as for pension pots.

If you want £5,000 of annual retirement income from your ISAs then divide that figure by the 3% sustainable withdrawal rate to work out your ISA target number:

£5,000 / 0.03 = £166,667

To gauge how much retirement income your ISAs will generate…

Multiply your ISA’s value by the sustainable withdrawal rate:

£166,667 x 0.03 = £5,000

This calculation applies to invested Lifetime ISAs and Stocks and Shares ISAs, but not to cash ISAs.

While we’re here, usually pensions beat ISAs for retirement saving, but not absolutely always.

Our pensions vs ISAs piece illustrates why tax relief and employer contributions mean most people will be better off favouring pensions.

However a clear-cut case for using ISAs in retirement is to shelter your pension’s 25% tax-free lump sum.

By getting your tax-free lump sum reinvested within ISAs as quickly as you can – subject to the ISA annual allowance – you can generate a tax-free income for the rest of your days.

The 25% tax-free lump sum – Incidentally, our 3% withdrawal rate assumes you will reinvest any 25% tax-free lump sum you take from your pension. If you take that money and reinvest it (whether in ISAs or in taxable investment accounts) then it still counts towards your overall retirement income. Money isn’t withdrawn unless you intend to spend it. Apply the 3% sustainable withdrawal rate to all your investments to understand how much annual retirement income they can deliver.

The sustainable withdrawal rate

We’ve used a 3% withdrawal rate to calculate the income your retirement pot can sustain.

This is the percentage you can withdraw from your pension (and other investments) in the first year of retirement.

That amount is your baseline retirement income figure.

You then increase your income figure for annual inflation every year thereafter to pay yourself a consistent retirement salary.

(That means the 3% element is only used in year one.)

But why a 3% withdrawal rate?

Leading retirement researchers have concluded this is the amount you can withdraw while minimising the risk of running out of money during a retirement lasting 40 years or more.

You’ll often hear that higher withdrawal rates than 3% are achievable. Usually that’s because people gloss over the problems of unpredictable future investment returns on retirements.

Happily, the State Pension – and any defined benefit pensions you’re lucky enough to have – don’t suffer from unpredictability to the same degree.

They should both deliver a reliable stream of inflation-proof income throughout your retirement, so long as UK PLC doesn’t go bust.

But few of us can live comfortably on the State Pension. Fewer still are lucky enough to enjoy defined benefit pensions these days.

The problem with pension pots

Most people in the UK now have defined contribution pensions. These do not offer a guaranteed income.

Instead you own a pot of investments in assets such as equities and bonds.

You generate an income from the pot by selling off these assets and spending the proceeds, along with the dividends and interest they pay.

However the income level you can safely spend depends on the investment returns of your assets. Those returns are inherently unpredictable.

If you withdraw too much too soon from your pot, your money could run out before you die.

Yet if future investment returns are strong, you’ll be positioned to withdraw a higher income than the 3% sustainable withdrawal rate suggests.

The retirement dilemma is you could spend too little (bad) or too much (really bad).

Running out of money is worse than not knowing what to do with it all.

Therefore, it’s best to use a lower withdrawal rate which drastically reduces that possibility, without setting you an impossible retirement savings target.

The 3% rate is derived from the worst investment return sequences world markets have suffered in the past 120-odd years.

It further depends on you holding a pretty aggressive asset allocation of 70% global equities and 30% UK government bonds.

If you’ve previously come across ‘the 4% rule’ then it’s worth you understanding why a 4% withdrawal rate may be too optimistic.

To find out more about the sustainable withdrawal rate check out:

Our quick explainer on a suitable sustainable withdrawal rate for UK investors.
How to improve your sustainable withdrawal rate.
Why we chose a 3% sustainable withdrawal rate.

Beware simplistic assumptions

Watch out for media sources or pension income calculators that base your retirement on assumptions like: “Your investments will grow by 5% a year.”

Such simplifications are too risky because they assume your pension pot will grow every year.

But everyone knows that investments can go down, as well as up.

The big mistake the standard calculations make is to use a simple average growth number that ignores losses.

Let’s detour through a quick illustration of the problem.

Constant growth scenario

This scenario assumes positive returns every year:

Year 1 return: 25%
Year 2 return: 25%

Simple average return: 25+25 = 50 / 2 years = 25%

A £10,000 investment would grow to £15,625 at 25% per year. Very healthy.

Volatile return scenario

This scenario includes losses, just like real investment returns:

Year 1 return: 100% growth
Year 2 return: -50% growth

Simple average return: 100-50 = 50 / 2 years = 25%

£10,000 grows to £20,000, but falls back again to £10,000 in year 2. We made no gain.

Both scenarios showed a 25% simple average return, but one is much worse than the other.

Unfortunately for us, our world looks more like scenario two.

What makes things even worse for retirees is that you’re drawing down your portfolio by spending it over time.

And in fancy terms, as a spender you’re subject to sequence of returns risk.

In simple English – the stock market could slump early in your retirement, meaning you need to withdraw a bigger chunk of an already-dwindling pot. You’d then have less money invested to benefit from any market rebound.

There’s no escaping the fact that sometimes investments inflict large losses. 

Major downturns can permanently damage your retirement prospects, even if declines in the market prove temporary.

Don’t keep it simple

This all makes it dangerous to use simple average investment growth numbers when judging how much pension you need.

The next example reinforces this warning.

Assume you start retirement with a heady £1,000,000 in your pension pot.

You withdraw 5% or £50,000 in income every year:

A constant annual return of 5% means that your pension pot’s growth exactly covers your spending every year. Your wealth never drops below £1,000,000.

This portfolio’s simple average return is 5% over four years.

But as we’ve noted, in the real world investments are volatile. We take losses as well as gains.

The next table shows how losses can knock a big hole in a pension pot early in retirement.

We start with the same £1,000,000 pension pot. But a 50% loss in the first year cuts our pot to £500,000.

Then we withdraw our £50,000 retirement income. Our pot is down to £450,000 by the end of the year:

Our bad luck continues with another 50% loss in year two.

Thankfully the losses are temporary. The market bounces back strongly in the next two years.

Overall, we’ve experienced the same simple average return of 5%.

But our pot looks very different compared to the sunny constant growth scenario.

It’s shrunk to £318,000 instead of sitting pretty at £1,000,000.

The volatility of returns has left us in a far more precarious situation.

Recovering from losses

A major issue is that large losses require much greater gains to recover the lost money:

A 10% loss is recovered by an 11% gain.
But you need a 100% gain to recover from a 50% loss.

The 60% gains in the previous example were nowhere near enough to make us whole after that nightmare two years.

And a steep hill becomes a mountain to climb when you’re forced to sell your investments at low prices to pay your bills in retirement.

This inescapable truth is why the best retirement researchers advocate using a 3% sustainable withdrawal rate.

A 3% rate keeps withdrawals low enough – especially early on – to enable you to ride out historically bad investment returns, should you be unlucky enough to experience them.

Many happy returns

I’ve focused on the downside to show you why it’s important to use a cautious and sustainable withdrawal rate.

But investment volatility can work in your favour, too. A brilliant sequence of returns can boost your portfolio to giddy heights. Here’s hoping!

Ultimately, navigating the “How much should I put in my pension?” dilemma does involve an element of luck. As in poker, you can be dealt a terrible hand or a Royal Flush.

The important thing is to play your cards well and avoid being wiped out.

That’s what a 3% sustainable withdrawal rate helps you to do.

Take it steady,

The Accumulator

PS – If your State Pension and/or defined benefit pensions arrive later in your retirement, then you can increase your sustainable withdrawal rate a little.

This means you’ll work your pension pot harder at the outset, until your other pensions arrive to relieve the pressure later.

This is a complex area but if you want to follow one researcher’s solution then follow the walkthrough in this post. See the ‘Investment fees and the State Pension SWR bonus‘ section.

PPS – If you’re close to retirement, here’s the decumulation strategy I put in place to help me manage my volatile retirement funds.

The post How much should I put in my pension? appeared first on Monevator.

Why you should think about your legacy and write a will

This article on why you should write a will is by The Mr & Mrs from Team Monevator. Check back every Monday for more fresh perspectives from the Team.

Although The Mr & I only stumbled across the Financial Independence movement (FI) as we advanced into middle age, in general we’ve been a pair of early birds. We were quick off the blocks in terms of marriage, mortgage, and starting a family.

Yet as the offspring of older parents, we’ve also been at the coalface of ageing earlier than many friends.

Their parents are still in their 70s. Of our six collective parents and step-parents, only one – a spry 89-year-old – remains alive.

I’m certain that having elderly parents endowed me with melancholy tendencies. In fact I’ve probably given more headspace to contemplating death than I have to my post-FI goals.

And I’m not alone in this morbidity: The Mr regularly updates his funeral playlist!

The Mr: My funeral will be awesome. I’m just sorry I won’t be there.

The Mr & I wrote our first wills at 24 and 23 respectively. Even though back then we’d barely an asset between us.

Planner or pantser?

Planning for death is unusual for a pair of twenty-somethings. The Mr & Mrs are statistical outliers – early birds, again.

Yet I’m still surprised whenever someone I know tells me they know they ‘ought’ to get round to writing a will.

Flying by the seat of your pants – doing things in the nick of time – looks exciting. But it raises the risk of failure.

During the coronavirus pandemic, however, the UK experienced a rise in people writing wills. Forbes reports that the average age for someone writing a will has fallen from 50 in 2019, to just 47 in 2020.

My hunch is that Monevator readers (being a money-savvy lot) are more likely than average to have drawn up a will. Wealth begins to amass even in the early stages of pursuing FI, and pursuing freedom requires planning.

And given the energy and effort we invest into accumulating for our future selves, it’s odd not to pay attention to what happens once you’ve no further need of your funds.

Is there no place, organisation, or person that you would like to benefit?

The Mr: Apparently charities receive over £3bn a year from legacies, so that is something you may want to think about.

Of course, there’s a legal process to wind up the estates of those who die intestate (that is without a will). The Citizen’s Advice Bureau has a breakdown of likely outcomes in different situations.

What is less obvious is the additional time – and money – it can take to track down assets or even beneficiaries in the absence of a clear directive. This adds an extra dollop of uncertainty for the bereaved, and at a time when they may be struggling to cope, both mentally and practically

According to Unbiased, an association for financial advisors, in 2017 up to 31 million UK adults were at risk of dying without leaving a will.

If you’re one of those 31 million, then I would urge you to put ‘write a will’ at the top of your To Do list. (Or else ‘review will’ if it’s been a while since you last revisited it and your circumstances have changed.)

Write a will wherever you are on the path to FI. Get it done regardless of current age, state of health, and life expectancy. Write a will irrespective of whether you live with others, or alone, and with no known relatives.

The Mr: The reality is that none of us know what the future holds. Think of writing a will as reducing the gamble that something happens to your possessions after death that you wouldn’t want.

Too young to die?

We’re all gamblers at heart. We’re betting on living long enough to hit our financial independence numbers and to then reap the benefits.

Why else would we sacrifice present resources for the promise of future rewards?

Pandemic aside, the odds are good. Figures from the Office of National Statistics show that:

UK life expectancy at birth (2017-2019) was 79.4 years (males) and 83.1 years (females).

Life expectancy for those already aged 65 years rises to 83.8 years (males) and 86.1 years (females).

But any deck of cards contains jokers.

For example, the same statisticians calculated that 1% of children born in England and Wales in 2019 will lose their mother before reaching their sixteenth birthday. Figures for fathers were harder to extrapolate, but were estimated to be even higher, at around 2%.

Long-ish odds, and yet I shouldn’t want to call them.

My mother died before I left school or met The Mr. For all her dreams of traveling on the Trans-Siberian Express or learning to play the piano, she never got close to retirement.

Anyone in their 40s or upwards will have some contemporaries who, sadly, did not live out the usual lifespan.

The Mr & I plan to end our days in a tidy manner. We don’t want to burden our kids or the state. Our financial planning assumes that we reach a ripe old age – let’s go for an aspirational 90 years – without a marriage bust-up, dependent adult children, or more than three years of expensive end-of-life care each.

Future forward

Drafting a will is not just a mechanism for disbursing your assets once you no longer need them. It is a part of your legacy to a world without you.

Even though life has a habit of disrupting the best-laid plans, The Mr & I hope to leave behind a positive legacy.

Something that doesn’t seem unfair, sow discord or cause distress. Instead, something that reflects our lives and lived values.

Something that looks to the future.

The final chapter

Neither The Mr nor I are qualified to give legal advice. But we have seen several wills that have proven distressing.

The Mr: One relative left a will that seemed to be saying they didn’t much care what happened after they died. That was hurtful for their children.

One tip when writing that first will is to set aside time to consider what you’d want to happen to your belongings should you die in the next week, month, or year.

Use the time to consider what end of life treatment you’d undergo, and whether to consent to being an organ donor. (Among the rash of recently published medical memoirs, there’s an excellent account that guides readers through the sorts of decisions they will need to make, somewhere towards the end: 33 Meditations on Death by David Jarrett.)

You would do well too to adopt the medical maxim: first, do no harm.

More tips for when you write a will

1. Last words

Your will is likely to be your final communication with family and others who knew you. Try to avoid it leaving an unpleasant aftertaste.

Think about the tone and language adopted. Whilst some technical terms are required, there’s nothing to stop you adopting a warm tone or plain English where possible. Even if the will says exactly what has been anticipated, it’s unsettling to read an overly-formal, fussy legal document when the deceased was an untidy, fun-loving friend.

If you don’t want to deviate from standard wording, here’s a suggestion: write a letter of farewell.

Write short positive letters to children or significant others that recall good times spent together and thoughts for their future. Try to be magnanimous. Most kids (even middle-aged ones) want reassurance in the wake of death.

Keep these letters with your will. Update them as and when needed.

2. Transparency

One of the advantages of planning your legacy earlier rather than later is that time is on your side. You are not making decisions under the duress of a terminal illness. Your thinking is not impaired by dementia and other age-related diseases.

Use the opportunity of drafting your will to discuss its implications with anyone who might reasonably expect to be a beneficiary.

Transparency is easier in straightforward situations. When The Mr & I updated our wills in 2018, we showed our kids the documents. It sounds a bit ghoulish, but they were reassured that we’d named guardians in the event of both of us dying, understood that we intended to leave bequests to charity and, most importantly as far as they were concerned, that there was adequate provision for re-homing any family pets (not named).

But what if your situation is complicated?

Perhaps you consider your adult step-children to be more deserving than your own children? Or you’ve decided to leave everything to your oldest son because he has a disabled child? Or your relatives are all sufficiently well-off and there are better causes you’d prefer to help?

If you want to do something off the beaten track, communicate and start to manage expectations. You may discover that things are not as you supposed or that your relatives approve of your chosen charities.

In these situations, seek legal advice in drawing up your will. Any one of the scenarios sketched above could lead to a contested will and, according to a recent Financial Times report, inheritance disputes are on the rise.

Don’t risk your legacy festering into a family rift.

3. Stuff matters

I wish my mother had known about a Letter of Wishes. At my mother’s funeral, a number of her relatives asked me for a meaningful memento. A few roamed around the house until my father put a stop to it.

A Letter of Wishes does not have the legal force of a will. At its simplest, if you think Auntie Jean should have that vase then note it down. The publication Which? has clear advice on drawing up a Letter of Wishes

Another alternative is a Living Will. This distributes cherished items to relatives, friends, or organisations who could use them while you are alive.

When an elderly relative of The Mr – let’s call her Doris – downsized, she asked children, grandchildren, nephews, and nieces what items of hers they would like. There was astonishingly little overlap.

Everyone got at least one thing they actually wanted and Doris herself got to see many of her things appreciated in new homes.

Just do it: write a will!

Despite dealing with death, your will is a living document. It needs drafting and, once drafted, needs revisiting.

There are costs to consider. There are free templates online and some will writing services are very inexpensive. However, for most of us it’s worth a few hundred pounds to get it drawn up by a qualified, regulated solicitor.

The Law Society recommends using someone carrying its ‘Wills & Inheritance Quality’ accreditation. A solicitor will generally also deal with storing the will with the government’s HM Courts and Tribunals Service, which is a handy backup in case it goes missing or there is a dispute about the final version.

The Mr: They can also help with inheritance tax planning, but that’s a subject for another post, written by someone with the right expertise.

Last words: plan for death so that you can get on with the business of living.

See all The Mr & Mrs’ articles in their dedicated archive.

The post Why you should think about your legacy and write a will appeared first on Monevator.

Weekend reading: The cheerful way out of debt

What caught my eye this week.

While I’ve made the case for running a big interest-only mortgage in recent years, overall I still loathe debt.

The first thing I tell almost anyone who asks me about their finances? Get rid of the non-mortgage debt.

It’s always surprising to me how much debt some people have. Especially those earning a reasonable salary.

Sure, you can make a case for not paying off student loans, or even for financing a car versus buying new. (But better not to buy new!1)

Generally though, debt drags you down. It turns compound interest into your enemy. Debt is mentally dispiriting, too.

Celebrate good – and bad – times

Perhaps my perma-downer on the Big D is why an article celebrating being in debt at The Money Principle caught my attention.

Of course the author, Maria Nevada, urges you to ‘demolish’ debt ASAP.

But rather than bemoaning the state of your finances that made such emergency action necessary, Maria suggests you think positively about how this episode will enhance your life story:

Things started to happen once I pulled away from the misery debt brings and found reasons to celebrate it.

I felt empowered, not downtrodden.

I felt hope, not despair.

Paying off our debt became the meaning of my life, not its destroyer.

Do you wish to pay off your debt and live the life you want?

You can do it. But you must resist the pull of negativity and focus on the reasons to celebrate your debt. Learn to celebrate your debt, not in the new age ‘I love everything about me and my life’ way, but as a set of opportunities you may never get again.

Do read the full article – especially if you’re facing a debt challenge.

The only way out of debt is up

After 14 years writing Monevator I’m finally appreciating how big a role stories play in motivating most people about money – and everything else for that matter.

I came to financial independence via a compound interest calculator. This anonymous site was partly founded on the back of that.

But I’m unusual. Most people want to see a human face, and to hear a story. They want abstract concepts about money turned into a narrative, and an arc.

For an example, look no further than the great job my co-blogger has done on charting his path to early retirement and beyond.

I’ve a close friend who has long struggled to turn monthly budgeting and half-arsed saving into a financial plan.

That’s despite – or maybe because of – plenty of lectures from me over the years.

But recently I happened to tell her about how I met The Accumulator, and how different he was in those days.

TA was a high-spender, and in hock. Extremely different from today.

My friend was visibly intrigued. A couple of days later she emailed me about online investing platforms.

I’ve never found a way out of debt

Some readers will feel that ‘celebrating’ debt is at best a mental delusion, and at worst a cop-out.

I hear you. But then I’ve never been in debt, and I’ve always had savings – right back from when I took my first paper round as an 11-year old.

Yeah – go me!

But really, who is more likely to inspire somebody who is up against it right now?

A person who could save without ever really thinking about it? Or someone who strove and found ways to turn their finances around?

I think the answer is obvious.

So three cheers for wherever you start your journey to being good with money!

And have a great weekend everyone.

From Monevator

Survival of the fittest when it comes to ESG returns – Monevator

How much do I need to retire? – Monevator

From the archive-ator: Don’t waste money buying expensive gifts – Monevator


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!2

UK prices soar at fastest rate for almost 10 years… – BBC

…with used car prices up 27% on a year ago – ThisIsMoney

…and rents rising at quickest pace in 13 years – BBC

Higher interest rates could weigh on housing market, says Nationwide – Guardian

HMRC chief insists new data grab will bring taxpayer benefits [Search result]FT

Banks will have to repay transfer scam victims under new law – Which

British Land to turn empty shopping centres into online delivery hubs – Guardian

Calculating ‘safe’ withdrawal rates for the years ahead [US but relevant]Morningstar

Products and services

RCI bank launches ‘green’ 14-day notice account paying 0.55% – ThisIsMoney

Six ways banking apps can help you stay on top of bills and services – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

Tired of being snooped on as you work from home? Try a ‘mouse jiggler’ – Amazon

Want to be a DIY Venture Capitalist? Sign-up via my link and we can both get £50 towards our budding empires – Seedrs

Homes for sale priced near the UK’s £270,000 average, in pictures – Guardian

Comment and opinion

Everyone’s a renter – A Teachable Moment

America is booming, but inflation is pissing off Americans – Ben Carlson

Cashflow is everything – Meaningful Money

Crypto in the classroom: Lucy Kellaway on the kids’ new craze [Search result]FT

Three tips from a side-hustling couple who make $3m a year – CNBC

Do you have too much stuff but not enough space? – One Frugal Girl

Wrestling for money – Humble Dollar

The UK’s boom-less recovery – David Smith

The stock market is not the economy – Compound Advisors

Spending – Indeedably

Frugal versus cheap – The Frug

Deviation mini-special

Larry Swedroe: Tactical allocation has not beaten index investing – T.E.B.I.

It’s hard to argue for high active share funds – Morningstar

Factor investing deep dive [Video/podcast]Alpha Architect

Naughty corner: Active antics

Portfolio turnover isn’t a sin – Albert Bridge Capital

Case study: buying and selling SThree – UK Dividend Stocks

The rise of ‘media-first’ professional investors – Neckar’s Insecurity Analysis

The case for UK equity income investment trusts – ThisIsMoney

Should you invest in a start-up? [Search result]FT

Investing lessons from a 1906 classic – Novel Investor

Covid corner

Booster jabs to be added to England’s Covid pass for travel – Guardian

Austria to impose mandatory vaccinations from February – CNBC

‘Child of Delta’ spreads faster but is less symptomatic – CNBC and Independent

Kindle book bargains

Talking to My Daughter: A Brief History of Capitalism by Yanis Varoufakis – £0.99 on Kindle

Exponential: How Accelerating Technology Is Leaving Us Behind by Azeem Azhar – £0.99 on Kindle

Happy Sexy Millionaire: Unexpected Truths about Fulfillment, Love, and Success by Steven Bartlett – £0.99 on Kindle

Environmental factors

The planet has a human poop problem – Slate

Investing in UK energy storage – DIY Investor

Off our beat

No more side quests – Josh Brown

How to quit your job well and without regrets… – Fast Company

…or how to have staying power if you don’t want to quit – Guardian

Singapore’s tech-utopia is a surveillance state nightmare – Rest of World

Abandoned former USSR sites, in pictures – Guardian

And finally…

“Don’t look for the needle in the haystack. Just buy the haystack!”
– John C. Bogle, The Little Book of Common Sense Investing

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

At least that’s usually true, when a global pandemic hasn’t sent secondhand prices soaring.
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 cheerful way out of debt appeared first on Monevator.

How much do I need to retire?

Just “How much do I need to retire?” The answer to that question tells you whether your pension is on track, and when you can finally call it a day.

Everybody’s circumstances are different, so we’ll guide you through a straightforward process to find your number.

The two retirement riddles we need to solve are:

How much retirement income do you need to fund the lifestyle you want? (We’ll cover that in this post).

What size pension pot will deliver that income? (That’s in the next post).

Your response to the first question unlocks the answer to the second.

How much do you need to retire?

The amount you need to retire is the annual income that can comfortably pay your bills and life’s extras – once you’re no longer earning.

Thankfully that figure needn’t match your current pay.

Many expenses fall away in retirement. You’ll probably pay less in taxes too, and you won’t need to fund your pension anymore.

How much you need to retire is obviously a personal number. Inevitably it takes a bit of guesswork to visualise the life you’ll lead in the future.

Step one: track your expenses

The best place to start is with your current expenses. They already include many of the expenditures you’ll pay for in retirement. We’ll delete the costs that won’t apply later.

If you already track your expenses then most of the work is done.

If not, tot up your current spending using a budget planner. This tool helps you remember all the expenses you’d prefer to forget – dentist’s bills and the like.

Do this step as accurately as you can. Excavate your credit card and bank statements to fill in the budget planner.

It’s good practice to record your monthly expenses for a year at least.

If you’re happy with a lower resolution snapshot that’s fine. It’s better for your numbers to be mostly right than to skip this stage entirely.

Step two: remove pre-retirement lifestyle expenses

Now for the fun bit: offloading all the expenses that won’t bother your budget in retirement.

Create a retirement duplicate of your expenses’ planner. Then strike out all the costs you won’t have to pay later in life.

For example you can nix:

Commuting costs, such as petrol, train fares, et cetera
Work clothes
Professional fees
Networking lunches and drinks
Other work expenses – Costa Coffee pick-me-ups, baby shower gifts, billionaire shortbread buckets to get the team through another Wednesday.
Mortgage payments (assuming the mortgage will be paid off when you retire. Sadly becoming less common in the UK.)

Insurance bought to replace your employment earnings, such as income protection, critical illness, life cover, and mortgage payment protection.
Child-related expenditures – namely the cost of bringing up the kids before they fly the nest.

Other expenditures won’t disappear but they will change.

You’ll still want clothes and haircuts. But you can save a packet when you don’t need them to be office glam standard.

Perhaps you’ll replace your car less often – or spend less on repairs and servicing – when you’re not piling on the work miles.

Discount these sorts of expenses in blocks such as 25% or even 50%. You only need a rough estimate.

Make conservative reductions to be on the safe side.

Step three: add retirement lifestyle expenses

A fresh stage of life means new spending priorities. You may want to increase your outlay on:


Have fun dreaming about how you’ll live when your time is your own.

If you’re really struggling, the Pensions And Lifetime Savings Association has funded research that visualises a trio of retirement budgets using a bronze, silver, and gold framework.

For example, the ‘moderate’ £30,600 couple’s budget includes two weeks holiday in Europe and a long weekend staycation per year.

Your own parents will be a good reference point for health. After all, they’re more like us than we might care to admit. (A temperamental early model, naturally. You 1.0 before the kinks were ironed out.)

Insurance companies inquire about our family history for a reason. Try asking your parents what they spend on health per year.

Elsewhere, your social and entertainment spend may well include lines for retirement pleasures like spoiling the grandkids and catching up with friends.

We’ll take a deeper dive into the spending insights revealed by retirement research in a later post.

Monevator Minefield Warning #1: Retirement research doesn’t tackle the cost of adult social care. In other words, how much might you need to cover care at home or in a home? This is a huge unknown that every government has failed to tackle for 15 years or more. Your future liability is a lottery but there is useful information out there. We’ll cover this issue in a follow-up post. In the current environment, long-term care is likely to cost you something but there are options that don’t involve the ‘leaving your spouse homeless’ nightmare.

Step four: allow for depreciation

Some big-ticket expenses only show up once in a blue moon. They can too easily be overlooked in the steps above.

Hopefully your retirement will last for decades, so your income needs to account for replacing items like the car, boiler, TV, and white goods.

There’s house maintenance, too.

You can estimate an annual allowance to cover these costs. Applying depreciation to the stuff you own is one way to do it.

Step five: subtract other retirement income like the State Pension ­

Income from other sources takes the pressure off your private pension.

The State Pension is the main alternative income stream for most retirees.

You can deduct the State Pension and any other income you can reliably expect from non-investment sources from the total spending estimate generated by steps one to four.

The remaining sum is the retirement income you need to generate from your private pension and any stocks and shares ISAs.

Subtract your significant other’s State Pension too if you’re calculating a budget for two.

(Add up your retirement income as two individuals first. Then combine your numbers as a grand total at the end. We do this because you’ll adjust for tax as individuals in step seven.)

Your State Pension forecast reveals how much money you can expect to come your way courtesy of UK PLC. The State Pension can be a solid wodge, provided you max out your National Insurance record.

Other retirement income sources may include:

Defined benefit pensions
Property rental income
State benefits
Passive income – trust payments, royalties, and so on

Only include income streams you’re confident of receiving throughout your retirement.

Part-time work or a side hustle can do a lot of heavy lifting, especially early in retirement. But it’s not reliable enough to be a key part of your plan. Such work can dry up, or you may suffer ill-health or just decide you don’t want to do it anymore.

Treat any uncertain income as a bonus or back-up instead. The same goes for inheritance money.

Only deduct the amount of income you’ll receive from other sources after tax. Otherwise, you’ll deduct an unrealistic amount of income from your total so far. See the tax section below.

What if your State Pension will only kick in later than your intended retirement date? Well, you might temporarily draw more from your private pension and other investment pots like ISAs to bridge the shortfall.

However, this approach comes with its own risks and uncertainties. It also means you’ll have less to take from your depleted investment pots after the State Pension finally arrives. I’ll point you in the right direction in my next post.

Step six: build in a safety margin

You’ve probably noticed that answering the question: “How much do I need to retire?” involves a lot of guesswork.

That doesn’t make retirement income planning pointless. It’s better to be roughly right than precisely wrong!

A better answer to the precision problem is to add a safety margin. This shock-absorber protects you against undershooting your retirement target.

There are a few ways to build such a buffer:

Underestimate how much you can subtract from pre-retirement expenses.
Overestimate how much extra you’ll need for retirement expenses.
Round up your total number by another 10% or 15%.

In practice, actual retirees cut their cloth just like they did when they earned.

Their pension is effectively their salary. If a bigger than expected bill comes in, they cut back in other areas for a while.

So your retirement spending needs flexibility.

If your budget includes plenty of optional extras, this automatically gives you room to tighten your belt when necessary by putting them on pause.

Downsizing, reverse mortgages, and annuities are all tools that can provide financial reinforcements later. You needn’t worry about them now.

There’s also time to adjust before retirement. Delaying hanging up your boots for a year or two can make a big difference.

The important thing is to have a number that will guide you towards retirement. This can tell if you’re on track as you get closer to your destination.

Step seven: adjust for tax

Your total number so far is net retirement income. That is to say it’s the annual amount you’ll need to retire after paying tax.

Sadly, there’s no escaping tax in retirement so we need to cover that, too.

Use a good tax calculator to work out your before-tax gross income.

First, tick the No NIC box (National Insurance Contributions).
Check the calculator is set to your particular country in the UK.
Pop your net income total into the Gross Income Every [Year] field.
Increase this figure by your best guess of your annual tax bill.
Keep adjusting this gross amount until the Net Earnings field (circled) is close to the net income amount you want.

Hey Presto! The Gross Income figure is now the amount of total income you need when you retire.

It’s expressed as an annual retirement income at today’s prices.

We’ll deal with inflation shortly.

Customising your tax number

Do this calculation twice if you’re part of a couple.

It is pretty likely for example that your pension pots are unequal and one person will bear more of the tax burden. We’ll explain how much you can expect each pension pot to deliver in the next post.

Your State Pension and private pensions are taxable (except for the 25% tax-free lump sum).

If you deducted your gross State Pension from your net retirement income in step five then we need to adjust the Tax Free Allowances setting in the calculator.

This prevents you from double-counting your income-tax-free Personal Allowance.

(Your State Pension only counts as tax-free in step five because it uses up some of your Personal Allowance.)

Adjust your Tax Free Allowance down in the UK Tax Calculator like this:

Type your gross State Pension income into the Allowances/Deductions Field as a minus figure. For example: -9000.

The tax calculator deducts that amount from its Tax Free Allowances field to show you’ve already counted some of your Personal Allowance.

You can see that I’ve adjusted for a £9000 annual State Pension income in the tax calculator picture above.

What about ISAs in retirement?

ISA income isn’t taxed at all.1

We need to remove income that’ll be generated from ISAs from your tax calculation, as you don’t pay tax on that.

So temporarily deduct your ISA income estimate from your net retirement income figure. Then add the ISA income back into your total after you’ve calculated your Gross income.

This stops you inflating your gross income figure with tax you don’t have to pay.

(How much income can your ISAs produce? That’s also in the next post!)

Do the same for your 25% tax-free lump sum if you think you can tax shelter it quickly enough. That’s possibly doable with a flexible annual ISA allowance of £20,000 per person, depending on how big your pension pot is.

Incidentally, pensions beat ISAs as a retirement savings vehicle for most people. A mix of both works, with pensions doing the heavy lifting.

Monevator Minefield Warning #2: It’s fair to assume that tax rates will have changed by your retirement date. But we cannot see into the future. So our best model for the tax burden tomorrow can only be the tax burden today. Add an extra percentage if you fear things will get worse. For example, you could tick the NICs box, assume your ISAs will be taxed, or suppose that the tax-free lump sum is eliminated. This all simulates increased tax in the future without having to know the unknowable right now.

Accounting for inflation

This process all tells you how much you need to retire on at today’s prices.

That’s fine because you can easily adjust this number for inflation.

Simply check the annual inflation rate once a year or so.

The picture below shows how the official rate looks on the Office For National Statistics website:

Multiply your retirement income figure by the CPIH inflation rate every year.

For example:

Your retirement income number is £25,000 per year.
One year later, the annual CPIH inflation rate is 2.9% (as in the graphic above).
Your retirement income number adjusted for inflation is now:
£25,000 x 1.029 = £25,725

In other words, your pension pot must generate £25,725 income per year to keep pace with current prices.

Next year, multiply your latest retirement figure (e.g. £25,725) by that year’s inflation rate. And so on.

Yes it’s a faff. But this annual calculation ensures your income estimate keeps up with official inflation.

You should multiply your investment contributions and target pot size by inflation every year, too.

It’s the same calculation as above and helps prevent your forecasts being boiled away by the slow pressure cooker of inflation.

You can go even further and calculate your personal inflation rate. But there comes a point when life is too short, even for retirement planning.

The State Pension is up-weighted every year by at least the annual inflation rate. Small mercies!

Can I really know how much I need to retire?

As long as you treat the process as an ongoing estimate then this method answers the nagging question: “how much do I need to retire?”

Admittedly, it all takes a fair bit of work if you’re starting from scratch. But once you’ve done it, you’ve got a target to aim for.

Complete the process and you’ll drastically reduce one of life’s big uncertainties.

Adjust your number as you go, and it will help you keep your retirement on track for years to come.

Which in turn will be an enormous tick off your To Do list.

Oh, and please don’t be put off by the unknowns.

Your best educated guess will be good enough, because retirement planning cannot be precise.

We’ll walk through how to translate the amount you need to retire into, “how much pension pot do I need to retire?” in the very next post.

Take it steady,

The Accumulator

You already paid tax on the money you put into your ISA.

The post How much do I need to retire? appeared first on Monevator.

Why making monthly payments on a repayment mortgage is a form of saving

People get muddled when they think about their own home in financial terms. This extends to a repayment mortgage used to buy a property.

Mental accounting – also known as ‘bucketing’ – is what causes this discombobulation.

Fact is we tend to think about the value of money differently, depending on where it comes from and where it ends up.

Mental accounting involves putting money into different mental accounts – or buckets – as a crutch in our financial thinking.

Bucket or bouquet?

For example, a 40-something friend tells you they have “no savings”.

Worried, you make plans to run the London Marathon dressed as a muppet on their behalf.

But then you discover they’ve been paying into a pension for 20 years.

Your friend discounts this substantial pension asset, probably because it can’t be accessed for another couple of decades.

Ignoring a pension like this is a mental shortcut. And to be fair it’s true that your friend can’t get cash from their pension if the boiler blows up.

It might also be easier for them to mentally treat pension contributions from their salary as more like a tax than savings. Filing such payments under the same ‘Inevitable’ label as taxes may help them stay committed.

Perhaps the thought that they have no savings could motivate them to build an emergency fund, too.

But still, the statement dramatically misrepresents their true financial position.

If they genuinely had no savings they’d be on-course to rely solely on a state pension in retirement. They’d be well-advised to take action – yesterday.

Or maybe someone decides to work out how to split their saving between their ISAs and pension – perhaps with an eye on early retirement.

When they do their sums their pension assets will suddenly appear in a ‘Live and Very Real’ bucket in all their glory. Previously they were clouded in a mental fog of their own creation.

The property puzzle

My favourite example of dodgy mental accounting is how even financially literate people think the home they own is somehow not an asset or an investment.

You can strive for hours to illustrate with logic and counterfactuals that their home is most definitely an asset AND an investment.

But this is a mental wall that Fred Dibnah would struggle to blast through.

Again, such self-delusion can be helpful.

Maybe because they don’t think of it as an asset, most people don’t trade their property or fret about small price moves. That helps their own home become the best single investment the typical person ever makes.

That’s the case even though their thinking is wrong! Oh the irony.

Admittedly the situation with a repayment mortgage is a bit more subtle.

Save your repayment mortgage

I was reminded of the confusion about repayment mortgages by comments on The Treasurer’s recent article on the savings rate.

Many – perhaps most – people tend to think of a repayment mortgage as a monthly expense.

They know they will own their home outright at the end of the mortgage term. (Weirdly even then most won’t consider it an asset. Harrumph!)

But along the way they see mortgage repayments as an expense that they mentally bucket just as they would rent.

They therefore don’t consider their repayment mortgage to contribute to their savings rate.

However repaying a mortgage is a very different proposition to paying rent, at least from the perspective of the person living in the house (as opposed to any landlord in the mix).

That’s because your monthly repayment mortgage direct debit consists of two parts.

One part sees you pay interest you owe to the bank for lending you the money (via your repayment mortgage) to buy a home in the first place.
The other part involves paying off some of the outstanding loan. These are the payments that will eventually reduce your mortgage debt to zero, and see you own the property outright.

The following graphic from our repayment calculator breaks down these two parts of a repayment mortgage:

This shows a £100,000 repayment mortgage charging 3% paid down over 25 years.

You can see how in the early years you’re paying off more interest than capital. Towards the end though, capital repayment – effectively savings – makes up most of the payment to your bank.

Cutting the expense account

Strip out the mental accounting, and the two components of your monthly mortgage payment are two different kinds of money transfer:

The interest payments are an expense. They are the cost of having a mortgage.
The capital repayments that reduce your outstanding mortgage are savings. They reduce your debt and increase your net worth.

Incidentally, to nip another bit of mental accounting in the bud, the market value of your house as prices fluctuate has nothing to do with any of this.

Your house is an asset and an investment that is worth whatever someone will pay for it.

This is true however you financed it – with cash, an interest-only mortgage, a repayment mortgage, or by blackmailing the previous owner with saucy photos extracted in a sting operation involving a sex worker with a knack for hidden cameras.

Your repayment mortgage in contrast is a debt that you are paying off over time. Nothing more and nothing less.

Same difference

Still not convinced? Let’s illustrate further by thinking about someone like me who has an interest-only mortgage, rather than a repayment job.

As the name indicates, every month with my interest-only I pay interest (only…) to the bank.

I am not repaying any of the outstanding loan.

Don’t worry, my bank is well aware of this! The deal is I’ll repay all the debt I owe in a couple of decades time. Until then, I simply pay the interest.

For the sake of argument, let’s simplify and imagine I have a £100,000 interest-only mortgage as well as £10,000 in a cash savings account.

My situation:

Cash savings: £10,000
Interest-only mortgage: -£100,000
Balance: -£90,000

Now let’s imagine Monevator wins a prize for Most Waffley But Charming Financial Blog of the Year. Along with the bronze gong that I ship to my co-blogger because I hate clutter, I get £10,000 sent to my current account.

Let’s say I have just two choices as to what to do with this £10,000. (I’m too boring sensible to spend it on bubbly and financially loose playmates).

I could put the £10,000 into my savings account.

Alternatively, I could make a one-off payment to my bank to reduce my outstanding mortgage.

In the first scenario, I add £10,000 to savings:

Cash savings: £20,000
Interest-only mortgage: -£100,000
Balance: -£80,000

In the second scenario, I make a £10,000 payment to reduce my mortgage:

Cash savings: £10,000
Interest-only mortgage: -£90,000
Balance: -£80,000

As you can see can see, in both instances I end up with a negative balance of £80,000.

Indeed you can think of an outstanding mortgage as a savings account that starts deeply in a hole. As you save money by repaying your mortgage, you move this ‘negative savings account’ towards breakeven.

Save as you go with a repayment mortgage

How you think about a repayment mortgage is not just pedantry. It can sway the financial decisions you make.

For example, if you think of a repayment mortgage balance as another form of savings account, then you can compare the interest rates between it and your conventional cash savings accounts.

Say your mortgage charges 2.5% and your cash savings pay 0.5%.

You don’t need a calculator to see that on those numbers you’re better off paying down your mortgage with any spare cash allocated towards savings.

On the other hand, a mortgage repayment locks your money away. (Unless you have an accessible offset mortgage, which makes explicit the link between savings and mortgage repayments).

Remembering this you might not make a mortgage repayment with that cash windfall, because you want to bolster your emergency fund instead.

Of course, this being Monevator many of you will be thinking you’d invest any spare cash into the stock market.

And of course that’s an option – but it’s a different kind of saving.

Like your own property (and as opposed to your mortgage), an index fund, say, is an asset and investment. Treat it accordingly.

Happy saving!

The post Why making monthly payments on a repayment mortgage is a form of saving appeared first on Monevator.

How to improve the 60/40 portfolio

Part one of this two-part series explored why the future expected returns of the 60/40 portfolio are unlikely to match the last ten years.

In a nutshell, negative real bond yields plus richly valued US equity markets imply weak capital growth ahead.

Past experience shows expected returns predictions are more reliable than some chancer with crystal balls telling you that a dark, handsome stranger lies in your future. But not by as much as you’d think.

Still, a deluge of fiscal stimulus and near-zero interest rates has created a sticky financial quagmire. As a result, returns could be muted for a while.

In the face of all this, you can better position your 60/40 portfolio. But there are no magic bullets.

The alternatives come with consequences.

I’ll take you through the non-magic bullets you can fire in a moment.

First though, let’s talk about what not to do.

Don’t buy it

Improving expected returns typically means taking more risk. That’s the trade-off ignored by most of the 60/40 portfolio articles dominating Google.

Here’s a selection of their suggestions for your portfolio:

Big tobacco
Russian equities
Private equity
Hedge funds
Music royalties
Currency trading
Junk bonds
Chinese government bonds

The correlation between these ideas? They offer hope and are difficult to falsify. So let’s be clear. This is rampantly speculative stuff from the Donald Trump School of Medicine.

These articles are mostly generated by active managers and / or journalists. Their stock in trade is the turnover of ideas, not their quality.

60/40 portfolio: guiding principles

Recall that the 60/40 portfolio’s asset allocation aims to:

Control risk and cost.
Be simple to understand and operate.
Work for investors with little interest in the market’s machinations.

None of those principles apply to the schemes I listed above. Mostly they’re complexity masquerading as strategy:

Each ‘idea’ increases your exposure to risk and cost.
They typically involve chancing your arm in opaque markets, which shortens your odds of being the sucker at the table.
Little to no evidence is given to explain why these options are a good choice.

Sure, a couple of those suggestions may outperform a 60/40 portfolio in the next ten years.

But which ones?

In contrast, the following articles deploy evidence and data to expose how directionless some of those ideas are:

The track record of hedge funds.
Same again for private equity.
Why narrow investment bets are a crapshoot.
How recurring ideas like infrastructure, timber, and clean energy under-performed the broader market in the past decade.

As for Russian equities – they have been abysmal since at least 2007.

Moreover, autocratic leaders like Vlad Putin and Xi Jinping derive credibility from painting the West as an adversary.

Good luck landing outsized future cashflows as a foreign owner of Russian or Chinese securities.

Ditch bonds

The other ‘big idea’ you hear a lot these days is to drop bonds.

That’s because owning a large holding of government bonds right now is like riding a bicycle with a slow puncture.

But getting rid of them – or even switching up to a 80/20 portfolio? That ignores why government bonds are a mainstay of the 60/40 portfolio.

Holding bonds was never about earning big returns. The point of bonds is to lower the risk of you selling out when stocks crash.

Bailing can permanently damage your returns.

Yet this danger of cracking under pressure is not well understood, especially given how a bull market buries memories.

Panic is an insidious threat because we underestimate it.

Markets can be more brutal than most of us have experienced.

That’s why bonds are still a good investment, even today.

Some commentators state bonds can no longer protect your portfolio, but that’s not true.

These pieces show you why bonds retain some protective power, even at negative rates:

How bond prices work.
What bond convexity is and why it matters.

Alright, that’s enough about what not to do. Now for some practical suggestions for 60/40 portfolio investors.

Can you take more risk in your 60/40 portfolio?

The risk of investing in volatile asset classes means the answer to our malaise isn’t: “throw your bonds overboard.”

However, can you live with fewer bonds and more equities?

Can you handle a 70/30 portfolio, for example?

The answer will be very personal.

I’ve previously compiled the best advice I’ve found on risk tolerance to help you explore this issue.

One option is to try an industry-standard, online risk tolerance questionnaire. The idea is to discover the riskiest allocation you can comfortably deal with.

The big debate is whether such questionnaires work. The finance industry has used them for ages. But clearly they’re an imperfect measure.

So only increase your equity allocation cautiously and thoughtfully.

More risk, more reward?

Beyond incrementally revisiting your asset allocation, I wouldn’t recommend making changes on the risky, growth side of your portfolio.

That’s because the other options increase your exposure to investment risk and/or the risk of being ripped off.

For instance, long ago I invested in risk factors. The promise was outperformance in exchange for more risk.

Of course, I knew there was a chance my factor bets would disappoint.

Guess what?

I got the risk but not the reward.

Oh, and let’s shoot another white elephant in the room while we’re here.

SPIVA’s research shows that active management is no solution either.

Remember, all the active money in the market – added together with all the passive index funds – is what makes up the market.

That means active management is a zero sum game because when one active fund wins another loses. Or more accurately: when one actively invested dollar or pound beats the market, another must do worse.

Active funds in aggregate can only deliver the market return – minus their higher fees.

The bond trade-off

Is there more you can do with your defensive asset allocation?


Today’s government bond environment feels like a Tarantino-style Mexican standoff:

Long bonds are your most potent protector against a deflationary recession.
But they could inflict equity-scale losses if inflation runs wild.

Index-linked bonds are your best defence against galloping inflation.
However they won’t do much in a recession. And their yields are more negative than conventional bonds.

Short bonds are as much use as a concrete zeppelin in a recession.
But they’ll do okay-ish if the issue is inflation.

Cash should be part of your mix, but it isn’t a panacea.

Which way do you turn?

Many fear the return of 1970’s stagflation will financially embarrass us like a kipper tie of woe. Meanwhile, the next recession is a ‘when’ not an ‘if’.

We need a portfolio for all weathers.

An intermediate gilt ETF holds short and long UK government bonds. It’s a muddy compromise that offers decent downside protection in a recession.

And owning some inflation-resistant, index-linked government bonds is de rigueur – even though they are expensive.

I discussed some linker options in this post. (Another global index-linked bond ETF (hedged to GBP) has come onto the market since.)

Fiddling around the edges

Higher-yielding bonds like corporate bonds and emerging bonds are not an alternative to high-quality government bonds in a 60/40 portfolio.

Emerging market bonds behave more like equity. You don’t need them. 

Investment-grade corporate bonds offer a little more yield in exchange for less protection than high-quality government bonds.

You’ll probably see owning US Treasury bonds mentioned, too. It’s a decent idea that could offer a smidge of extra return. But it only works under specific conditions. And the risks need to be understood.

You’ll have noticed by now that every ‘if’ comes with a ‘but’.

I prefer to keep things simple:

Equities for growth.
Index-linked bonds for inflation protection.
Cash for short-term needs.
An intermediate bond fund to cushion stock market falls.

However, I’ve been tipped off about a bond allocation that might work more effectively in the current conditions.

It’s an advanced strategy that requires a good understanding of bonds.

Long bond duration risk management

One logical response to a low yield world is to make like American politics and move to the extremes.

That means replacing intermediate and short bonds with long bonds plus cash.

This barbell approach hopes to capitalise on:

The slightly higher yields of long bonds.
Their better track record in recessions, relative to other bonds.
The low duration risk of cash. This offsets the vulnerability of long bonds to rising market interest rates.

Here’s an example:

Desperate Daniella holds 100% of her bond allocation in an intermediate gilts fund with a duration1 of 10.

She replaces that fund with:

50% Cash (duration 0)
50% Long gilt fund (duration 20)

Daniella’s reallocation still leaves her with a weighted duration risk of 10:

Duration 0 x 50% = 0
Duration 20 x 50% = 10

The long bond duration risk is dampened by the cash.

This is not a free lunch. It gives you greater exposure to the longer end of the yield curve. That could be hard to live with should that part of the curve steepen in response to, say, spiraling inflation.

The idea comes from Monevator reader and hedge fund quant, ZXSpectrum48k. I’ll refer you to some of his comments on the topic:

First comment
Second comment
Third comment
Fourth comment

What about gold in the 60/40 portfolio?

From a strategic perspective, the best thing going for gold is its zero correlation with equity and bonds.

Gold randomly does its thing like Michael Gove in a nightclub – spasming erratically regardless of the drumbeat moving other assets.

Gold did amazingly well in the stagflationary 1970s. Back then equities and bonds got hammered. However, one-off historical factors were in play. The US Government had stopped fixing the gold price and legalised private ownership.

The yellow stuff smashed it during the Global Financial Crisis, too. But gold cushioned portfolios less successfully than gilts in the coronavirus crash.

And gold lost 80% between 1980 and 2000.

So no, gold isn’t a no-brainer. You still have to use your nugget. (Alright, that was just gratuitous – Ed).

Some model portfolio allocations like the Permanent Portfolio and the Golden Butterfly include a generous dollop of gold. How clever that looks depends mightily on the timeframe you pick.

Meanwhile, gold’s long-term return hovers right around zero. It’s crock-luck as to whether gold will work for you. The hope is it comes good when everything else fails.

For me, this boils down to a 5-10% allocation in a multi-layered defence.

Where does that leave the 60/40 portfolio?

We live in interesting times. Diversification remains the right approach.

The all-weather portfolio below is positioned for uncertainty, without sacrificing the principles that first made the 60/40 such a godsend.

60% Global equities (growth)
10% High-quality intermediate government bonds (recession resistant)
10% High-quality index-linked government bonds (inflation resistant)
10% Cash (liquidity and optionality)
10% Gold (extra diversification)

This asset allocation maintains the 60/40 portfolio’s balance of growth and risk. Granted, it adds complication. But every asset has a clear strategic role.

That makes more sense than knee-jerking into private equity and uranium.

Remember the 60/40 portfolio was never a get-rich-quick scheme. It gained traction because it was good enough. 

For more:

How to protect your portfolio in a crisis.
More on defensive asset allocation.
An easy way to move to a 70-30 portfolio.

High-quality government bonds means gilts or a developed market government bond fund hedged to the pound.

Taking control with a 60/40 portfolio

The more effective countermeasures you can take are technically simple but emotionally difficult.

You can’t control future asset returns. But you can control these mission-critical factors:

Contribute more money to offset lower growth expectations.
Increase your time horizon to benefit from compounding.
Lower your financial target to make it easier to hit. That ultimately means living on less, if we’re talking retirement.

To see what a difference this makes, run your numbers in a calculator like Dinky Town’s Retirement Income Calculator.

Adjust contributions, income target, and time horizon to suit your circumstances. 

See how things look under a range of expected return scenarios. Try plugging in optimistic, pessimistic, and middling predictions.

For example, these expected return forecasts come from Vanguard:

Optimistic: 4% (75th percentile)
Mid-ground: 2.6% (Median outcome)
Pessimistic: 1.2% (25th percentile)

Those are 10-year annualised expected returns for three alternative universes.

To turn those into real returns, I’ve subtracted an average annual inflation guesstimate of 2% from Vanguard’s nominal figures.2

Put the expected returns into the calculator’s rate of return field via the Investment returns, taxes, and inflation dropdown.

Periods of lower (higher) returns tend to be followed by higher (lower) returns. Accordingly, you can hope for improved growth beyond the next ten years. The Dinky Town calculator lets you play with that, too.

The three most powerful changes you can make are putting more money in, waiting a little longer, and lowering your income bar. 

They also save you from meddling with your 60/40 portfolio if that suits your risk tolerance. 

Not-so-great expectations

Multiple crises over the past 15 years have trapped us in an escape room with no easy way out.

I wish there was a clear answer to this puzzle but there isn’t.

Taking action now means short-term pain for long-term gain.

On the other hand, what if the next decade exceeds expectations?

Hallelujah! We’ll be better off than we thought – living on more or retiring earlier.

In conclusion: fingers crossed.

Take it steady,

The Accumulator

Duration is a measure of sensitivity to interest rate changes.
Real returns subtract inflation from your investment results. They’re therefore a more accurate portrayal of your capital growth in relation to purchasing power.

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