Weekend reading: Do it yourself investing

I would struggle to pick my favourite Morgan Housel article – I was already a fan back in his Motley Fool days – but he just posted another.

Urging investors to play their own game, Housel says:

Someone recently asked how my investment views have changed in the last decade.

I said I’m less judgemental about how other people invest than I used to be.

It’s so easy to lump everyone into a category called ‘investors’ and view them as playing on the same field called ‘markets’.

But people play wildly different games.

If you view investing as a single game, then you think every deviation from that game’s rules, strategies, or skills is wrong.

But most of the time you’re just a marathon runner yelling at a powerlifter.

So much of what we consider investing debates and disagreements are actually just people playing different games unintentionally talking over each other.

As Monevator’s resident naughty investor who finds it hard to write freely on his own blog these days, I hear you Morgan.

Of course that’s my choice. I believe most people should be passive investors. So I’m wary of leading the wrong people off the right path.

Still, we’re big fans of do it yourself investing around here. For me that starts with realizing there’s no one right way to be an investor.

Lots of people have insights to share – even if it’s just to reinforce why you’re doing it your way. And soon we’ll bringing you some of these additional perspectives, courtesy of our very successful call for new writers a few weeks ago.

For now, have a great weekend! Only three sleeps to go until we can eat under a strange ceiling, like civilized human beings.

From Monevator

Are bonds a good investment in 2021? – Monevator

Investing for beginners: Risk, returns, time, and diversification – Monevator

From the archive-ator: Seven reasons why you shouldn’t start your own business – Monevator

News

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

OECD calls for higher inheritance tax after pandemic – Guardian

Monzo to offer paid leave after pregnancy loss – Guardian

AirBnB sees surge from staycations and vaccinated boomers – ThisIsMoney

Hostile UK border regime traumatizes visitors from the EU – Guardian

Exodus of EU truckers leaves UK hauliers facing shortages [Search result]FT

Eviction ban to end 1 June: what it means for renters and landlords – Which

Meet the academic who fired up moonshot investing [Search result]FT

Products and services

TSB launches two-year fixed mortgage with a rate below 1% – ThisIsMoney

Why Britons have been buying woodland during the Covid crisis – Guardian

Bitcoin’s waning dominance stirs warnings of crypto market froth – Yahoo

High Street names pledge to keep taking cash at their tills – Which

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

Thematic ETFs are booming in today’s manic market – Axios

Counting the cost of your lockdown subscription services – ThisIsMoney

Homes for sale near theatres, in pictures – Guardian

Comment and opinion

Perspective – Indeedably

UK property is booming, but nobody has noticed [Podcast]Property Hub

Four investing lessons from David Swensen – Of Dollars and Data

Let’s talk about inflation – Pragmatic Capitalism

Trust fund kids are not taking over the world [Search result; disagree]FT

Individual stocks have crashed while the US market soars – AWOCS

Beware of sci-fi portfolios – ETF.com

Ermine’s hybrid rant/review of Die With ZeroSimple Living in Somerset

Women and financial literacy: more uncertain than not knowing [Research]SSRN

Expensive US market mini-special

Various ways in which the US market looks pricey these days – Validea

Howard Marks finds nothing to buy in expensive market – Bloomberg via Yahoo

The US CAPE ratio is very high and it will matter… – The Irrelevant Investor

…which is why it makes sense to take action now – Compound Advisors

Naughty corner: Active antics

Fund managers can be ‘nudged’ into outperformance – Institutional Investor

Our best investments are often down to luck – Humble Dollar

Larry Swedroe: SPAC or SPAM? – Evidence-based Investor

Covid corner

England will ‘flex’ Covid vaccinations to tackle Indian variant, says minister – Guardian

Why getting vaccinated is more popular in the UK than the US – Vox

The NHS Covid legacy: long waits and lives at risk – BBC

Hankering for a hug? A guide to post-lockdown greetings… – Guardian

…and sex – Guardian

Kindle book bargains

What It Takes: Lessons in the Pursuit of Excellence by Stephen Schwarzman – £0.99 on Kindle

Radical Candour by Kim Scott – £0.99 on Kindle

Hired: Six months undercover in low-wage Britain – £0.99 on Kindle

The Future Is Faster Than You Think by Peter Diamandis and Steven Kotler – £0.99 on Kindle

Environmental factors

How cities will fossilize – BBC

The contradiction of mining for a green energy revolution – New York Times

Tesla suspends Bitcoin payments, cites fossil fuel concerns – Coindesk

Gresham House Energy: batteries included – IT Investor

Off our beat

Selling hours – Seth’s blog

Efficiency is the enemy – Farnam Street

Two days a week is perfect for working from home – The Atlantic

The economics of movie product placement – The Hustle

The great online game – Not Boring

College is a ruthless competition divorced from learning – The Atlantic

And finally…

“When you look at the results on an after-fee, after-tax basis, over reasonably long periods of time, there’s almost no chance that you end up beating the index fund.”
– David Swensen, Unconventional Success

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

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The post Weekend reading: Do it yourself investing appeared first on Monevator.

Best bond funds and bond ETFs

Global bond markets are even bigger and deeper than the world’s stock exchanges so how on Earth do you choose the best bond funds or bond ETFs from the bewildering array of products available?

If you’re looking for a bond fund to properly diversify your portfolio beyond equities then we can paint the target quite quickly for UK investors.

High-quality, conventional (often called nominal), government bonds are the best strategic diversifiers for a portfolio with a large amount of equities.

We’ve previously explained the purpose of bonds within a passive investing portfolio.

For UK passive investors, it comes down to investing in UK government bonds (known as gilts) and/or the government bonds of other advanced nations.

We think the best bond fund vehicles are ETFs and index funds because their low fees leave more return in the pockets of investors – as opposed to fat-cat fund managers.

Find out why cost matters so much.

Are bond funds a good investment in 2021? In case you’re wondering.

We’ll explain our choices below, but first let’s run through our picks for best bond ETFs and bond index funds.

Best bond funds and ETFs – UK gilts

Fund/ETF
Cost = OCF (%)
Index
Duration
Yield-to-maturity (YTM)
Credit quality
Domicile

Vanguard UK Gilt ETF
0.07
Bloomberg Barclays Sterling Gilt1

13.1
0.9
AA
Ireland

Vanguard UK Government Bond Index Fund
0.12
Bloomberg Barclays Sterling Gilt2

13
0.9
AA
Ireland

Lyxor Core UK Government Bond ETF
0.07
FTSE Actuaries UK Conventional Gilts All Stocks
11.8

AA
Luxembourg

iShares Core UK Gilts ETF
0.07
FTSE Actuaries UK Conventional Gilts All Stocks
11.7
0.9
AA
Ireland

iShares UK Gilts All Stocks Index Fund
0.11
FTSE Actuaries UK Conventional Gilts All Stocks
11.9
0.8
AA
UK

Invesco UK Gilts ETF B
0.06
Bloomberg Barclays Sterling Gilt
12.4
0.8
AA
Ireland

Source: Fund providers’ data (A dash means data not provided).

These are intermediate gilt ETFs and funds because for most investors intermediates offer a better balance of risk versus reward than long bonds (far more risky) or short bonds (a miserly reward).

Dedicated long or short bond allocations will be right for some, though. You can find a few suggestions in our cheapest trackers guide.

There is little to separate the products in the table, which is as it should be. Competition between index tracker providers is fierce, so most advantages have been eroded away.

You can be confident you’re in the right ballpark so long as you choose a low-cost bond ETF or bond fund, with a good track record among its peers. More on that below.

First, a couple of notes about the bond features picked out in the table.

Duration

Average duration is an approximate guide to how much a bond fund will gain or lose in response to a 1% change in market interest rates. 

For example:

A bond fund with a duration of 12 will lose around 12% of its market value for every 1% rise in its interest rate.
The fund’s price will similarly jump about 12% if its rate drops by 1%.

The higher a bond’s duration, the greater the capital gain or loss as its market interest rate fluctuates.

The market interest rate of a bond is not the base rate set by the Bank Of England. The market interest rate is a product of supply and demand for each individual bond on the bond market. If the Bank Base Rate hiked by 1% that doesn’t mean that every bond will follow suit.

Yield-to-maturity (YTM)

The expected annual return of your bond fund is its current yield-to-maturity. This number will fluctuate as bond prices move but the main takeaway is that there’s nothing between these products, and that high-quality government bond returns are very low these days.

Credit quality

This is a guesstimate of the financial strength of the bond issuer – the UK Government in the case of the funds in our table.

AAA is top-notch while BBB- sets the floor for investment grade. Below that is ‘junk’.

The higher the credit quality rating, the better. It means there’s less chance the issuer will default on payments, according to the bond rating agencies.

Bond rating systems and verdicts vary slightly by agency but the main message is stick to investment grade.

In other words, don’t touch someone else’s junk.

Bond fund credit quality for a fund is the weighted average of all its bonds ratings.

Domicile

Location matters because funds based in the UK are covered by a better investor compensation scheme than those in Ireland or Luxembourg.

It’s highly unlikely that you’ll ever need to worry about this provision, especially given the scale of the fund providers in the table, but it’s a wrinkle worth knowing about.

Brexit has not proven to be an issue with respect to fund domiciles.

Best bond funds and ETFs – UK gilts results check

Source: Trustnet multi-charting tool

Performance wise it’s neck-and-neck between our field of bond funds over three to ten-year timeframes. Don’t compare funds over a one-year time period – that’s too short to tell you anything meaningful. Longer is better.

Important caveat: we’re mainly checking the results to make sure that our candidates are doing a good job. A fraction of a percentage point in performance makes little odds and doesn’t tell us which fund will nose ahead next year or next decade.

That said, while the two Vanguard funds are not the cheapest (by OCF) they have posted marginally better results than their rivals across all periods greater than a year.

As ZXSpectrum48k points out in the comments, this is due to the slightly longer durations of their bond holdings. That will play well during periods of falling interest rates (especially in a recession) whereas the other funds are likely to edge ahead when rates rise.

You’re unlikely to notice that difference (especially as bonds will be the lesser fraction of most portfolios), so any of the picks would be a fine choice.

Note: Fidelity’s Index UK Gilt Fund P is another potential contender but was excluded from this year’s round-up because of its very short track record.

Best bond funds and ETFs – Global hedged to GBP

Fund/ETF
Cost = OCF (%)
Index
Duration
Yield-to-maturity (YTM)
Credit quality
Domicile

iShares Global Government Bond ETF (IGLH)
0.25
FTSE G7 Government Bond Index
8.5
0.6

Ireland

Vanguard Global Bond Index Fund
0.15
Bloomberg Barclays Global Aggregate3

7.5
1
AA-
Ireland

SPDR Bloomberg Barclays Global Aggregate Bond ETF (GLAB)
0.1
Bloomberg Barclays Global Aggregate
7.4
1.1

Ireland

iShares Core Global Aggregate Bond ETF (AGBP)
0.1
Bloomberg Barclays Global Aggregate
7.3
1.1

Ireland

Vanguard Global Aggregate Bond ETF (VAGP)
0.1
Bloomberg Barclays Global Aggregate4

7.5
1
AA-
Ireland

Source: Fund providers’ data (A dash means data not provided).

iShares Global Government Bond ETF is the clear leader in the best bond funds hedged to GBP category.

That’s because it’s the only dedicated government bond fund in our pack.

The other four index trackers are aggregate bond funds. That means they hold corporate bonds and various other bond types too.

This level of diversification means aggregate bond funds are actually less likely to counterbalance the fall of equities than government bonds.

Stock market crash protection is the overriding point of bonds in strategic asset allocation, and so the Global Government Bond ETF tops the table.

The lower risk of high-quality government bonds shows up in the yield-to-maturity numbers in the table.

The aggregate bond funds have higher yields because investors demand more return to take on the risk of holding them.

In my view, a greater capacity to soften the blow in a crisis is worth the higher cost and lower reward of holding government bonds.

We’ve previously seen how well the iShares Global Government Bond ETF performed versus the iShares Global Aggregate Bond ETF during the coronavirus crash

Why aggregate bond funds at all?

There isn’t much choice when it comes to global government bonds hedged to GBP, which is why the aggregate bond funds make the table.

They all hold north of 50% in high-quality government bonds and their holdings are investment grade.

If you prefer to trade-off some crash protection for a little extra yield then these products make sense.

Do check their holdings and credit ratings though, so you know what you’re dealing with. Especially as none of the fund managers bar Vanguard have bothered to publish an average credit quality score.

Best bond funds and ETFs – Global results check

Source: Trustnet multi-charting tool

Again, the main objective in comparing results here is to make sure there isn’t a weird outlier on the shortlist and to see if any fund is consistently dragged down by hidden costs.

This check already caused me to cross off Xtrackers Global Government Bond ETF because it was bedeviled by volatility, according to Trustnet’s data.

Vanguard’s Global Bond Index fund leads the aggregates on our table by virtue of its long track record and strong showing over three years.

Note, the iShares Global Government Bond ETF lags the pack over three years – which is exactly what you’d expect for a low-risk fund compared to aggregate bonds holding corporate debt.

Currency hedging to GBP

Diversifying across global government bonds came into vogue in the aftermath of the Great Recession as many countries lost their cherished AAA credit ratings – the UK among them.

As government debt continues to balloon, many investors prefer not relying on the full faith and credit of their home country.

If you opt for global bonds then make sure you pick a fund that hedges its return to the pound. That removes currency risk from the defensive side of your portfolio, if you’re a UK-based investor.

While currency risk may sometimes be viewed as a positive, diversifying factor for equities, the same is not true for government bonds.

Currency exchange rate fluctuations add volatility to your returns when the role of government bonds in your portfolio is to lower it.

Some investors leave their global bonds unhedged. Betting on exchange rates is an advanced move, though. It’s only justifiable if you really know what you’re doing.

So, given the diversification benefits of global government bonds why would you go for a 100% gilts tracker?

Mainly because the gilt trackers are one-third less costly to own, offer more yield, and promise marginally more crash protection.

Don’t sweat the small stuff

From a big picture perspective, any of the index trackers gracing these best bond funds (and bond ETFs) tables tick the right boxes.

I’ve touched on the important details but even those differences will likely prove marginal to your results over many years of passive investing.

The most important investing decision is to diversify between equities and government bonds in the first place.

Choose a competitive bond index fund or ETF as the main brace of your defensive asset allocation and you’ll be on the right course.

For inflation-linked bonds and other asset classes check out our cheapest trackers guide.
For best global equity trackers suggestions.

Take it steady,

The Accumulator

Float Adjusted
Float Adjusted
Float Adjusted and Scaled Index in GBP
Float Adjusted and Scaled Index in GBP

The post Best bond funds and bond ETFs appeared first on Monevator.

Are you childish about money? The origins of our money mindsets

Covid restrictions were easing, and I was mildly thrilled to be in the garden of some dear friends – a couple I’ve known for decades.

Thanks to lockdown building works, their house had grown since I’d last seen them. So had their twin boys.

But my friends still had some personal growth to do.

They’ve always bickered. They were bickering again and to be honest that was also comforting.

But it seemed a shame.

My friends were past the hard slog phase of their life. Yet they didn’t seem ready to enjoy the sunny uplands.

Happy holidays?

“Finally we can get away after 12 months in this house and I don’t want to be arguing about spending £50 on a few croissants at the hotel,” he said.

“It’s not a hotel – it’s a horse farm!” she protested. “And it won’t be croissants – it’ll be a bowl of cornflakes.”

“She’s annoyed because we’re going to Wales. And she’s too tight to understand the value of giving the boys an experience like learning to ride.”

“I’m not annoyed. But it’s going to be raining and it’s going to cost £3,000 for five days and you wouldn’t let me even look for a cheaper place to stay.”

“She’s annoyed because we’re not flying to Portugal. Even though we would spend more if we did!”

“I just want to get value for my money. Not rain in Wales.”

“Well I paid for it anyway! I want the boys to burn off some energy, and we can easily afford it. This place is great – friends told us about it. Why spend hours bickering about £50 on breakfast?”

“I just believe we can get the same experience for half the price,” she said. “Maybe somewhere warm, too.”

“Get this…” he sighed. “She wants us to drive there – to Wales, for seven hours – because the hotel is a few miles from the station and I said we’d just get a taxi. She’s complaining taxis are a waste of money. As if seven hours driving isn’t a waste of time.”

“It’s not a hotel – it’s a horse farm. And I don’t want to be the mug that turns up from London in my Hunter wellies with banknotes falling from every pocket. I am not that dumb bitch!”

That silenced us all for a moment.

Meet their money mindsets

So, you think you have a handle on this pair?

London is expensive. Raising children, too, and they have twins. A double helping of expenses moving through their budget like an anaconda swallowing a turkey.

Money is tight. One of them thinks this is best addressed by a staycation. The other by saving on avoidable expenses like paid-for breakfast and taxis.

We can see both sides, right?

But here’s the twist: money isn’t tight for this couple.

Both of my friends – who are not married and have always kept their finances separate – are now (multi) millionaires in their own right.

True, being a millionaire isn’t what it used to be.

But clearly they can afford a mini-break in (lovely, incidentally) Snowdonia.

“Why is she squabbling over this? Can you talk some sense into her? She listens to you. I don’t want to be faffing over fifty quid for the rest of my life when I could be enjoying myself. We have – what – 30 years left? Maybe 20 good ones. You know us well enough for me to say this… We could afford to take the same holiday every week for the rest of our lives. Every single week!”

It didn’t seem like the best time to bring up sustainable withdrawal rates.

“He seems to think having money means it’s perfectly okay to be taken advantage of. Well I don’t. I’ve shopped around for cheaper flights and better deals all my life. Why should I stop now? It’s careless.”

Aha!

Now we were getting to the bottom of it.

How they made it

Some context before we get to the money shot.

He has always had money. Born into relative privilege – public schools, annual skiing holidays, aggressively spendthrift friends in his 20s – he was also unfortunate enough to inherit early.

She had a far harder upbringing. Messy home life. University the escape route. By her own admission she was fortunate to join the small company she did 15 years ago. But she worked most weekends to stay at the top.

Last year her company was acquired. Years of stock grants paid out.

So on paper they now have roughly the same net worth.

The snag is that what their net worth represents to them (and how they obtained it) means that they see money (and how to use it) very differently.

His and hers

He has never had to worry about money. He has had other hardships (as I said both parents died young) but solvency has never been his concern.

He’s seen money used as a tool since childhood. His family speculates, invests, wins and loses, and celebrates freely when things go right.

And while I wouldn’t want to suggest he was on the shortlist for the Bullingdon Club, he has certainly moved in circles where to spend money without any visible care is a virtue, rather than a vice.

Her childhood was much more threadbare.

But it’s not just that she now wants value for money for financial reasons.

It’s that saving money, shopping around, getting deals, not being that ‘dumb bitch’ as she put it – these things have defined her.

He is a product of his upbringing, though maybe harder for many of us around here to identify with. Fretting about £50 is demeaning. It spoils things. Begrudging spending on friends and family is somehow unloving.

For her the price of avoiding being a slave to money is eternal vigilance.

For him that very vigilance is being a slave to money!

Their different life experiences – and these resultant money mindsets – are animating how they interact with money today, and fueling their conflict.

Money is child’s play

Perhaps ironically, the older I get the more I see how such childhood experiences shape our later attitudes.

This is universal. It’s nothing to be ashamed of.

But it’s worth figuring out how your money mindset was formed in order to avoid some of these problems.

Perhaps your parents had a scarcity mindset? They never risked changing jobs or rocking the boat at work. Only saved in cash – nothing riskier like shares. Urged you to get and keep a stable job.

Or maybe one parent was a sometime successful creative? Lurching from feast to famine. Ending up with riches – but before then vanishing from your life for five crucial years when things were going badly?

Did you live in a big house from the day you left the hospital because your grandmother inherited a fortune?

Or maybe your family has never had money. Nobody went to university, either. All this seems like science-fiction to you. But you have come across the concept of financial freedom and you’re wondering if you can have it, too.

All these different experiences will shape how you think about money. And often in contrary ways! We rebel as much as we follow an archetype.

The key is understanding where you came from, and how much is still relevant to your life today.

Our money mindsets must move on

In picking her battles over small amounts of money when she now has bags of it, my friend is a bit like a Japanese World War 2 soldier stuck on a Pacific Island in the 1970s.

Still fighting a war that in their minds never ended.

I know a couple of self-made people from modest upbringings who hate their work now but they just will not stop. They say they don’t want their kids to ‘suffer’ like they did (and their parents did) by having to worry.

They intend to leave their kids a small fortune to solve this.

What they don’t realize is that with their private school education, top-flight university degrees, and a decade of bringing similarly well-off friends back to the family home at weekends, their children are in a thoroughly different place to them already.

Indeed if they really want to worry about their (blamelessly) entitled kids’ relationship with money – sort of futile, I suspect – they should start thinking about very different problems altogether.

But you can hardly fault the motivation.

At the other end of the spectrum, in my professional life I’ve also seen people make a lot of money and become obnoxious. Leave partners, laugh at those who cashed out with less, grow awful goatee beards. They try to be something they’re not – at least until the hedonic adaption kicks in.

Thankfully it seems to be just a phase they go through.

In these cases it’s hard not to see the geek who was laughed at in school still trying to show the world they’re worthy of respect.

A spending plan

I’m no psychologist and I’ve struggled with this money mindset stuff myself.

For example I wrote about how as soon as I earned more than my father, I took my foot of the gas.

I don’t think earning a fortune is the be-all. But I do think that was a dumb reason not to earn more.

Then there is my internal debate over frugality versus simply being a tightwad.

Still, I don’t let my own issues and failings hold me back from giving my friends my unqualified advice.

I explained to my friends that I thought they were each acting out their childish beliefs. No offence!

And I suggested they create a joint ‘rest and recreation’ account that they funded with significant cash inflows every month. Approaching five-figures between them.

Family adventures could be funded from this account, which they can easily afford indefinitely.

They were not to squabble over spending this money. That was the whole point. At the same time they should be alert to their transferring the bickering to another aspect of their financial lives.

(They are looking to buy a new house soon. And I know in that battle I will be solidly backing her view instead…)

Mini-me, mini-you

My friends’ issue may seem like a high-quality problem to have.

Most of us could do with more money. We are best-advised to book holidays months in advance so that we get more value from looking forward to the experience, stretching our spending further.

In contrast my friends need to stop shrinking the dividend from their quality time. They are doing this by turning every indulgence into an argument.

But wherever we are ourselves, the takeaway lesson is universal.

Your inner child is still trying to pull the purse strings. If you don’t notice how then you will be doomed to misunderstand money all your life.

Can you see a little you telling you what to do? Share your money mindsets in the comments below

The post Are you childish about money? The origins of our money mindsets appeared first on Monevator.

Weekend reading: Meet Mr Average

What caught my eye this week.

Have you ever described yourself as just another average kind of personal finance blog-reading mostly passive occasionally active FIRE-obsessed crypto skeptic?

Well Indeedably did us all a favour this week by collating the data on what Mr Average really looks like:

“Average” varies by locale, so let’s consider the English version, as told by the statistics.

A white 40-year-old man. Married to a white 38-year-old woman. With two school-aged children.

Living in a commuter town somewhere in middle England. Home is a three-bedroom, 720 square foot, house worth £249,000. £96,000 remains outstanding on the mortgage.

Their pensions, investments, savings, cars, and other possessions are worth a combined £133,600.

Giving them a total net worth of £286,600.

Their household annual income was £38,550 before tax, resulting in a disposable income of £29,900.

This means they house, clothe, feed, and entertain the whole family on £81 per day.

It’s invariably interesting to see how one compares to these sorts of statistics.

Unless one is looking at the average age from the wrong side of 45. Then it’s more like an Edvard Munch painting lit by Saturday morning’s PC screen.

Arm wrestling Mr Average

I’d never skip reading Indeedably’s posts in full. Even the bit in this one where he questions:

Pseudonymously written blog posts, whose content is regularly interrupted by confidence undermining random advertisements for haemorrhoid cream, lottery tickets, and Mongolian throat singing lessons?

Ouch! All I can say in our defense is that Internet advertising is mostly personalized to the reader’s own browsing habits…

Ahem.

How much like Mrs or Mr Average are you feeling these days? And do you aspire to retire to a life less ordinary – or something more mundane?

Let us know how Middle of the Road you are in the comments below.

Have a great weekend all!

From Monevator

Best bond funds and bond ETFs – Monevator

Are you childish about money? The origins of our money mindsets – Monevator

From the archive-ator: Too big to scale – Monevator

News

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

House prices boom, at least outside of London… – Reuters

…and Nationwide predicts the price growth will continue – Guardian

Long hours are killing 745,000 people a year, global study finds – BBC

UK-listed firms fall to ‘pandemic plundering’ as bosses profit – ThisIsMoney

Leonard Blavatnik named UK’s richest person with £23bn fortune – BBC

San Francisco tech firms sit on record amounts of empty space – CNBC

Crash rules everything around me – A Wealth of Common Sense

Products and services

“Custom indexing unlocks lots of benefits” [Podcast]Morningstar

Comparing the cost of UK holiday destinations – ThisIsMoney

Natwest to allow personalized bank transfer caps to beat scammers – Which

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

More Britons pursue a holiday home in Portugal – ThisIsMoney

Houses with outbuildings for sale, in pictures – Guardian

Comment and opinion

Larry Swedroe: the endowment effect – The Evidence-based Investor

Three reasons not to worry about hyperinflation right now – MathBabe

Merryn S-W: are ageing populations really bad for the economy? [Search result]FT

Good retirement savers are lousy spenders – Leisure Freak

The black box economy – Vox

Lessons from the Great Crypto Crash of May 2021 – The Escape Artist

Profits beat prophets in today’s market – Bloomberg

The spectacular failure of the endowment model – Advisor Perspectives

Twin certainties – Humble Dollar

Naughty corner: Active antics

Fund managers are betting on a boom and inflation – MarketWatch

High-yield spreads are the best single macro indicator – Verdad

Mishits – Enso Finance

S&P 500 CAPE ratio says US market is in an epic bubble – UK Value Investor

A diverse portfolio is a strong portfolio – The Evidence-based Investor

Covid corner

Tests for travel: how to get a green light to go abroad – Guardian

What has gone wrong in Singapore and Taiwan? – BBC

Covid R number inches up across England – Evening Standard

Emptying the nest. Again – New York Times

Kindle book bargains

Lab Rats: Why Modern Work Makes People Miserable by Dan Lyons – £0.99 on Kindle

What It Takes: Lessons in the Pursuit of Excellence by Stephen Schwarzman – £0.99 on Kindle

Hired: Six months undercover in low-wage Britain – £0.99 on Kindle

The Future Is Faster Than You Think by Peter Diamandis and Steven Kotler – £0.99 on Kindle

Environmental factors

Low emission zones do work – Guardian

IEA: no new oil, gas, or coal if we’re to hit net zero by 2050 – DIY Investor

The biggest climate stress test so far – Klement on Investing

“It’s a dirty currency”: Bitcoin’s growing energy problem [Search result]FT

Climate crisis to put millions of UK homes at risk of subsiding – Guardian

It’s hard to poison a feral pig – Undark

Off our beat

Life satisfaction is better for older people, even when they get sick – Klement on Investing

When all moments have equal value – Raptitude

Daniel Kahneman: “Clearly AI is going to win”Guardian

All hail King Pokémon! – Input

The optimal amount of hassle – Morgan Housel

The blandness of TikTok’s biggest stars – Vox

Fungi and urban planning – The London Review of Books

And finally…

“In most of our decisions, we are not betting against another person. Rather, we are betting against all the future versions of ourselves that we are not choosing.”
– Annie Duke, Thinking In Bets

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The post Weekend reading: Meet Mr Average appeared first on Monevator.

How to earn free cash by switching bank account

This piece on why you should consider switching bank account is by The Treasurer from Team Monevator. Check back every Monday for more new perspectives on personal finance and investing from the Team.

Sounds almost too good to be true, doesn’t it? Getting paid a wad of notes to do very little, without a smidgeon of risk.

Yet earning free cash for switching bank account has been ‘a thing’ for over a decade.

Married people are more likely to get a divorce than switch bank account. It’s unsurprising then that retail banks work hand over fist to attract new customers. They hope that once you switch and pay in your monthly salary, your future self won’t bother switching again until the day you die.

Plus, once you’re a customer of theirs they can then turn on the ‘hard sell’. They can promote substandard products – packaged accounts with benefits you’ll never use, or an overly-expensive life insurance policy. They may even get a mortgage application out of you.

Customer apathy is big business in the personal finance world. It can deliver much more than enough to cover any initial switching bribe.

Yet it’s possible to play the banks at their own game, by switching bank account for the sole reason of grabbing the cash incentives.

Switching bank account for fun and profit

Without trawling through years of bank statements, I can’t put an exact figure on what I’ve earned over the years from my bank account switching.

It’s certainly north of £1,000.

First Direct, HSBC, Lloyds, Halifax, NatWest… You name the bank and there’s a fair chance I’ve exploited them.

My biggest bonus was from Clydesdale Bank back in 2017, when it offered an eye-watering £250. At the time I was working with financially astute colleagues. Between us, we would have opened at least 20 accounts.

As none of us kept the account after bagging the free cash, our office must have cost Clydesdale a cool £5,000. Plus a lot of plastic!

Admittedly, there were some hoops to jump through to get the offer, such as having to pay in a set amount over three months. But nothing too taxing. (We’ll discuss how to get past these hoops below).

Once I’d ditched my shiny but sub-par Clydesdale account, I moved my faithless custom to the kind folks at NatWest. I bagged another £125 for my troubles.

I’ve done this time after time, for years. I’ve even scored the same bonuses more than once.

While you almost always have to be a new customer to qualify for a bonus, some banks are more lenient than others when deciding who is and isn’t a ‘new customer’. (Halifax scores highly in this regard.)

Top tips when switching bank account

Let’s assume you haven’t considered switching before and you want to get involved. While it’s an easy hobby, there are a few things worth knowing about.

Tip 1: Open a ‘Mule’ Account

My first tip is to open a separate bank account that you have no intention of using other than to hop to another bank account. In other words, retain your existing bank account and open another for the purposes of making your first switch. In personal finance circles, this is known as a ‘mule’ account.

Take your pick, but avoid choosing an account that pays – or has paid – a switching bonus in the past. This is because once you’ve been its customer, it will be far harder to squeeze a bonus out of that bank in the near-future.

Barclays is my top pick for a mule account. It has never offered a bank switching bonus to my knowledge. Digital banks that enable you to open an account immediately through an app, such as Starling or Monzo, will also suffice. Fintech startups have so far avoided the temptation of directly paying cash to attract new customers.

Tip 2: Learn how to get past those hoops

Once your mule account is set-up, you need to understand that some (not all) banks require you to comply with set criteria to qualify for their bonus.

Often this means paying in a certain amount within one to three months. This one is easily circumvented by paying in the cash and then immediately withdrawing it. I have never yet seen a rule that requires the cash to be kept in the account for any particular length of time after it’s deposited.

A more annoying ‘hoop’ is a requirement to have a number of ‘active’ direct debits – usually two – paid out from the account. This isn’t your ‘real’ bank account, so it poses a problem, right?

Well this again can be circumvented by being creative.

If you’re keen to share some of your easily-gotten switching gains, there are a number of charities that will accept direct debits of as little as £1.

If you don’t want to go down the charity route, look into a savings account. Some enable you to fund your account via a direct debit. Try Scottish Widows or the Post Office. Like this you effectively pay yourself.

Alternatively, Small Direct Debit will set up a direct debit for you for the princely sum of £1 a year. However, do check the bank switching T&Cs1 to see whether it requires the direct debit to be monthly. (Note: I haven’t used this last company so please do your own research.)

Tip 3: Get your head around the myths

Finally, let’s consider some common fearmongering.

Credit score impact: You may be worried that continuous bank switching will harm your credit score. It’s a legitimate concern – reducing your future credit worthiness probably isn’t worth a few hundred quid. So it’s worth knowing that when you apply for a bank account, you’ll undergo a standard credit check. That isn’t the same as the one required if you were trying to obtain credit.

Plus, the search gets wiped after a year. Unless you’re planning to obtain a mortgage or hoping to access significant credit over the next six months or so, opening a handful of bank accounts shouldn’t do any harm.

While it’s rare, you may be rejected for a new bank account. To reduce the chances of this happening, turn down any offer of an overdraft facility.

The hassle factor: The other big myth about bank switching is that it’s too much hassle. But as long as you take the time to read the T&Cs and satisfy the switching criteria, it’s pretty straightforward.

The Current Account Switching Service ensures that once you’ve agreed a switching date with your new provider – usually a date within a week or so – your switch will take no more than seven days to complete. Any payments, direct debits, or standing orders will be moved automatically, which is handy for future switches. And your new provider takes on full liability for any mistakes.

Get your profit antennas twitching

I hope you’re all now itching to get switching!

Currently switching bank account offers are a bit thin on the ground, but I’ll be coming back to Monevator soon to highlight the best deals available.

In the meantime, please do share any you find in the comments below.

In time you will be able to see all The Treasurer’s articles in his dedicated archive.

Terms and conditions.

The post How to earn free cash by switching bank account appeared first on Monevator.

Our updated guide to help you find the best online broker

Okay, UK investors, after taking the pain of creating a whopping great comparison guide to the UK’s leading online brokers, we’ve once again returned to the battlefield to fully update it.

Eating a bag of rusty nails water would have been more fun, but it would not have produced a quick and easy overview of all the main execution-only investment services.

Fund supermarkets, platforms, discount brokers, call ’em what you will – we’ve stripped ’em down to their undies for you to eyeball over a cup of tea and your favourite tranquilizers.

Who’s the best broker?

It’s impossible to say. There are too many subtle differences in the offers. The UK’s brokers occupy more niches than the mammal family, and while I know which one is best for me, I can’t know which one is right for you.

What I have done is laser focus the comparison onto the most important factor in play: Cost.

An execution-only broker is not on this Earth to hold anyone’s hand. Yes, we want their website to work, we’d prefer them to not screw us over, go bust or send us to the seventh circle of call centre hell… These things we take for granted.

So customer service metrics are not included in this table. It’s purely a bare-knuckle contest of brute cost for services rendered.

Why should investors flay costs as if they were the tattooed agents of darkness? Because if – as the FCA predicted – you will see an annual after-inflation return of 2.5% on your portfolio for the next decade, then the last thing you need is to leak another 1% in portfolio management charges.

This makes picking the best value broker a key battleground for all investors.

Using the table

I’ve decided the main UK brokers fall into three main camps. These are:

Fixed fee brokers – Charge one price for platform services regardless of the size of your assets. In other words, they might charge you £100 per year whether your portfolio is worth £1,000 or £1 million. Generally, if you’ve got more than £25,000 stashed away then you definitely want to look at this end of the market. Bear in mind that fixed fee doesn’t mean you won’t also be tapped up for dealing monies and a laundry list of other charges.

Percentage fee brokers – This is where the wealthy need to be careful. These guys charge a percentage of your assets, say 0.3% per year. For a portfolio of £1,000 that would amount to a fee of £3. On £1 million you’d be paying £3,000. Small investors should generally use percentage fee brokers, but even surprisingly moderate rollers are better off with fixed fees. Many percentage fee brokers use fee caps and tiered charges to limit the damage but the price advantage still favours the fixed fee outfits in most cases.

Share dealing platforms – Platforms that suit investors who want to deal solely in shares and ETFs. Sites like X-O and friends fill this brief.

Choosing the right broker needn’t be any more painful than ensuring it offers the investments you want and then running a few numbers on your portfolio.

The final point you need to know is that this table’s vitality relies on crowd-sourcing. I review the whole thing every three months, but it can be permanently up-to-date if you contact us or leave a comment every time you find an inaccuracy, fresh information, or a platform you think should be added.

Thanks to your efforts as much as ours, our broker comparison table has become an invaluable resource for UK investors.

Take it steady,

The Accumulator

The post Our updated guide to help you find the best online broker appeared first on Monevator.

Weekend reading: A tale of two markets – US versus UK shares

What caught my eye this week.

Every time a US financial pundit talks about the long bull market or sky-high equity valuations, remind yourself they’re almost invariably talking about US shares.

The US comprises roughly three-fifths of the global equity market by value. Handy for North American home bias fans.

And of course the global tracker funds that passive investors are well advised to use will therefore be very exposed to the US market, too.

Finally, where the US leads, others tend to follow – directionally if not in lockstep.

So the dearness or otherwise of US shares matters.

Still, it’s interesting to compare Uncle Sam’s rip-roaring equity-ganza with our own domestic damp squib.

US versus UK shares in terms of returns

The latest edition of the Barclays Equity Gilt Study summarizes returns from the US and UK markets in its usual tables.

Here’s the returns from US assets:

Click to enlarge the US returns

And here’s the returns from the UK:

Click to pump up Britannia

Over the past 20 years US shares have delivered real returns of 5.5%. That compares to just 1.7% for their UK counterparts.

And in the last year covered, US shares clocked up over 19% in gains.

Whereas UK shares delivered worse than 10% in negative returns.

The old switcheroo

If you wonder why US shares are all the rage after seeing these numbers, you need a new hobby.

And if you don’t appreciate at a glance why the tech-heavy US index pulled ahead during a stay-at-home pandemic, you’ve got some reading to do.

However I believe it’d be a huge mistake – as so many seem to do – to think US shares will continue to outperform anything like so heavily, for decades to come, while the UK market slides into irrelevance.

These things have a habit of correcting themselves. I expect over a very long period US shares will still put up higher returns – for various structural reasons – but I’d be surprised if the UK doesn’t have the edge over the next 20 years.

Unfortunately, that’s a hunch, not a scientific fact. Over the long-term starting valuations matter, but they don’t explain all of subsequent returns.

And in the short run, anything could happen.

Still, if you’re one of the vanishing breed of stock pickers who hunts your quarry on the London Stock Exchange, you might breathe a little easier.

Also if I was a passive investor in the Vanguard UK LifeStrategy funds that slightly overweight UK equities, I’d not lose a moment of sleep over it.

If there was ever a time to be a mildly (tilted, never all-in or all-out) nationalistic UK investor, it would seem to be now.

Have a great long weekend everyone!

From Monevator

Our updated guide to help you find the best online broker – Monevator

How to earn free cash by switching bank account – Monevator

From the archive-ator: Three lessons about charity and money from Martin Lewis – Monevator

News

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

FCA to ban car and home insurance ‘loyalty penalty’ in January – Which

Value of UK house sales to leap 46% this year as boom continues – Guardian

Axing ground rents on new build properties a step closer – ThisIsMoney

Hedge funds surpass $4 trillion in assets – Institutional Investor

Sandwell Bitcoin mine found stealing electricity – BBC

Members club Soho House gives leg up to entrepreneurs – ThisIsMoney

What are the odds? – Indeedably

Products and services

Premium bond plutocrats: 50% held by 4.3% of savers – ThisIsMoney

Nationwide launches £1m draw for all customers – Your Money

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

New flexible train tickets to go on sale from 21 June – Which

Meet the man who decides which town gets an ATM – ThisIsMoney

Homes for sale near docks, in pictures – Guardian

Comment and opinion

The future of UK inheritance tax [Search result]FT

Am I old or am I onto something? – Klement on Investing

Staying wealthy – Humble Dollar

Four lessons from the crypto crash – A Wealth of Common Sense

How to do long-term – Morgan Housel

Getting to your first one million – Banker on FIRE

Teeth are deeply socially divisive – Guardian

This couple retired in their 30s – CNBC

Tempo – Enso Finance

I’m retired and I don’t want to travel [Few weeks old] – via Medium

Value and momentum factors: combine or separate? [Nerdy]Alpha Architect

US market valuations mini-special, again

Low interest rates don’t justify today’s high [US] valuations – Compound Advisers

Talking bubbles with Jeremy Grantham [Search result]FT

Don’t count on another roaring ’20s stock market… – Bloomberg

…still, the odds favour equities over bonds – Morningstar

Naughty corner: Active antics

ARK and the downsides [for active funds] of an ETF structure – Validea

How I misapplied my trader mindset to investing – Party at the Moontower

Portfolio construction in venture capital – Factor Research

Calculating a buy and sell price for Dunelm – UK Value Investor

Bill Ackman’s SPAC deal remains elusive – Institutional Investor

Covid corner

Scientists claim to have solved vaccine blood clot puzzle [Search result] – FT

Johnson & Johnson single-shot vaccine approved for the UK – Guardian

Glasgow: the City that has been locked down for nine months – BBC

Wuhan lab staff sought hospital care before Covid-19 outbreak disclosed – Reuters

Expert who helped change No 10 Covid policy in first wave warns over risk of easing – Guardian

Kindle book bargains

Lab Rats: Why Modern Work Makes People Miserable by Dan Lyons – £0.99 on Kindle

The Unexpected Joy of Being Sober: Discovering a happy, healthy, wealthy alcohol-free life by Catherine Gray – £0.99 on Kindle

What It Takes: Lessons in the Pursuit of Excellence by Stephen Schwarzman – £0.99 on Kindle

The Future Is Faster Than You Think by Peter Diamandis and Steven Kotler – £0.99 on Kindle

Environmental factors

Clean energy stocks are as crowded as tech before dotcom crash, says MSCI [Search result]FT

Bitcoin and the planet: has anything changed? – WisdomTree

The Dutch people versus Royal Dutch Shell – DIY Investor

Off our beat

Data centres, crypto miners, and gamers are all competing for semiconductors [Podcast]OddLots

How to age without apology or regret – Roger Reid via Medium

Don’t let employees pick their working from home days – Harvard Business Review

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

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Learning Cantonese and learning investing? Same difference

This article on learning Cantonese and investing comes courtesy of Budgets and Beverages from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

‘Yam Yam Tsaa?’

‘Hawa, hawa’.

This has become my favourite phrase when I visit my in-laws. Phonetically written, it means ‘Cup of tea?’ with my response being ‘Yes. Yes.’

They’re Chinese you see, and they speak Cantonese. I don’t. But as I’m on a constant search for where the next hot beverage is going to come from, I had to learn the essentials.

And learning the essentials has led me to trying to learn the language completely, enrolling on a ten-week beginner Cantonese course.

(Spoiler alert: It’s a really hard language to learn.)

Learning Cantonese and investing

Slowly and surely, I’m beginning to pick things up.

Every Thursday evening, I arrive at my Cantonese class (online of course) and I listen, read and practice. In really basic terms, I’m starting to see progress.

The same can also be said about my investing portfolio.

I’m in the early days with that, too.

On reflection, it appears Cantonese isn’t the only language I’m trying to learn.

The world of personal finance is completely new to me. There’s new phrases to learn, new voices to listen to, and new ideas to understand.

Six months ago, I had no idea about compound interest, low-cost broad-based index funds, or the world of financial independence.

But on one miserable afternoon in Manchester, with a hot cup of tea my only source of any warmth, I googled ‘how to retire early?’

And I plunged so deep into the rabbit hole of financial independence, that my beverage went cold.

Just kidding. I’d never allow that to happen.

The world of financial independence

Just like with Cantonese, I began to listen, read, and learn.

And just like with Cantonese, I quickly began to realise there is plenty of information to take on board with investing.

So I went back to basics and started with the essentials.

For me, that was reading JL Collins’ book The Simple Path To Wealth. Original right?

But it worked. I began to understand the basic concept of index investing, ETFs, and the power of ‘buy and hold.’ The last being a useful lesson to learn during a global pandemic.

Enthused, excited, and energised, I wanted to learn more. And herein lies my next lesson learnt.

Ask for help

As you’ve probably gathered, my partner is Chinese. She speaks Cantonese fluently and communicates with her family in this language, even in my company. No exceptions are made on my behalf.

Side note, this was also the case when I went to Hong Kong a couple of years ago. After many months apart, my partner and her extended family caught up on each other’s lives, whilst I hoovered up as much dim sum as possible. That and green tea of course. By the end of the trip, I weighed a lot more but I was VERY refreshed.

Anyway, I digress.

Despite hearing Cantonese in my life daily, I never asked for help. I’d shut myself away, trying to learn it secretly, whilst dreaming of the day I suddenly interrupted my partner’s family conversation by joining in with Cantonese.

Their faces would be a picture! Oh how we’d laugh!

Realistically, this was never going to happen.

Until I asked for help. I not only invested in myself with an educational course, but I told my partner and her family about my intentions. Surprise, surprise, I’ve learnt more in four weeks than I did in the previous four years of sporadically and secretly trying to learn it on my own.

Again, the same can be said about investing.

With my Vanguard account open and my first deposit made, I imagined the moment of handing in my notice and walking into my new future.

‘Where are you going to?’

‘Nowhere, I’m retiring early.’

What a moment that would be!

Except, in the first month, my index fund went down. And down. And down again. Had I withdrawn, I’d have lost a decent sum of money. With ‘buy and hold!’ ringing in my ears, I left it alone. Thank goodness I did.

But it was a lesson. I needed to learn more.

So I asked for help.

That came via books, podcasts, and reading blogs. Genuinely, a lot of the help I got was from this website. And they haven’t even paid me to say that. Although they have sent me a box of PG Tips, so read into that what you wish.

There’s plenty of help out there, in a medium that serves you best.

As a helping hand, this is a good place to start.

Small steps lead to momentum

The thing is, asking for help initially has led me to learning more, meeting new people and now, writing my first blog for Monevator.

Honestly, it feels a bit surreal.

Six months ago, I had no idea about any of this. Now, I’m fortunate enough to be writing about something that I feel really passionate about.

No longer am I interested in keeping it a secret either. I want to play my part in helping others start their journey too.

Although here’s the disclaimer: I’m still learning the essentials.

The lightbulb moment

Even that can feel like a pretty big place to start. But the point is starting. Because once you start learning, it’s hard to find the brakes.

Dave Ramsey (a big player in the financial independence world) speaks about snowball momentum when it comes to paying off debt.

The idea that you pay off your smallest debt first, and once complete, you move those payments to the next largest debt, before rolling that into your next debt, and so on and so forth. With each debt paid off, your debt-clearing payments will become bigger, so the next debt gets paid off faster. You’ll gain momentum and see progress.

For me, this concept doesn’t only apply to debt.

Whether it was paying for my course or reading my first personal finance book, I got the ball rolling. Now momentum is gathering pace.

Why? Because I’ve had my lightbulb moment. In fact, I’ve had a fair few of them. That moment when something clicks, when you understand it, when you feel yourself gain knowledge. It’s a wonderful release of endorphins.

Last month, I heard my partner chatting to her dad and I understood a handful of words. It was a brilliantly reassuring moment. Sure, it was a half-hour conversation, but let’s not run before we can walk.

I also recently introduced my sister to low-cost broad based index funds. When she asked me why she couldn’t just put her life savings into Costa, Starbucks, and Pret a Manger (I’m not the only beverage-addict in the family), I explained the importance of diversification and why it’s vital to have an equity/bonds balance that suits her tolerance for risk and volatility.

I’ve just re-read that last sentence. It’s laughable that I can even put those words in that order. Six months ago, I had no idea about any of that. But this emphasises my point.

You don’t need to make a big statement. You don’t need to set unrealistic targets. The beauty about learning how to manage your money is that there is no finish line. And that’s not a bad thing. You can go as far down this road as you wish, at your own pace, having as many lightbulb moments as you want. Just make sure you get off the start line.

I’m not going to be fluent in Cantonese by the end of this year. I won’t be fluent by this time next year. My children will probably be able to speak it better than me.

But I know, that as long as I keep reading, listening and practicing, then I’ll get better and I’ll gain more knowledge.

The same applies to my financial independence journey.

The world of financial independence is huge. But please don’t be overwhelmed. Together, we can just start by learning the essentials – and flick on some lights as we go.

As long as we flick the kettle on, too. Although I have no idea how to say that in Cantonese!

In time you will be able to see all Budgets and Beverages’ articles in his dedicated archive.

The post Learning Cantonese and learning investing? Same difference appeared first on Monevator.

Managing an investment portfolio: how to keep it on track

This post is for anyone who wants to manage their own investment portfolio and needs to know how to keep it running smoothly. I’m going to explain how to perform an annual check-up using industry best practice and ideas from some of the best investment educators in the business.

Maintaining your portfolio is easy once you know how. It shouldn’t take more than a few hours, once a year.

This advice also applies if you’ve chosen the default options in a workplace pension scheme and want to know if it’s on track.

Like servicing your car, a little investment maintenance goes a long way.

Here’s a brief summary of the topics we’ll cover on our portfolio management checklist:

Risk control – straightforward techniques to help you manage risk.

Performance check – are you on target?

Inflation adjustment – keeping up with the cost of living.

Value for money check – are your funds and investment platform competitive?

Major life changes review – how a bolt-from-the-blue might change the plan.

Risk control

Before we can control risk, we need to know what risks are really worth worrying about. The main investing risks people fear are:

Being wiped out. That is, losing all your money.
Not having enough to live on in the future.
Selling for a large loss.

Losing all your money is a disaster. But it’s a low probability if you invest in a global tracker fund and a high-quality government bond fund.

With a portfolio this diversified, the only thing that’ll wipe you out is a global end-of-capitalism catastrophe. This type of portfolio is not dependent on the fate of a single firm, industry, or even country. Rest easy on that score.

Not having enough to live on is dealt with by investing in growth assets like equities and making sure you put enough money into your pot. This risk is covered in the performance check section of this article.

Selling at a large loss is the main risk that lies in wait – like piano-wire strung across your future. This risk is harder to control and widely underestimated. It can overwhelm you with little warning.

There are two versions of this nightmare scenario:

Failure to recover

The failure to recover scenario happens when a large pension portfolio is heavily invested in risky assets like equities – and then a stock market crash strikes on the eve of retirement.

The portfolio suffers a major loss. The market bumps along the bottom for years. You’re forced to live on less because anemic equity returns fail to resurrect the portfolio.

The investment portfolio management techniques laid out below can help you to guard against this risk.

Panic sell

The stock market drops violently. The fear of losing everything swamps your mind. You panic and sell. The red line continues as you sit in cash, too frightened to buy back in the face of bad economic news.

The green line shows that the market decline did continue after you sold. But a rally began shortly after, and eventually traced a U-shaped recovery. Equities recovered their losses and more, given enough time. But the red path shows how your loss was locked in.

These calamities befall unwary investors around the world during every stock market crash. Nobody thinks it will happen to them, like that Twilight Zone episode about the box.

Three risk control techniques enable you to tame these risks without hobbling the equity growth you need:

Monitoring your risk tolerance in a downturn
Rebalancing
Lifestyling

Monitoring your risk tolerance

How much stock market risk can you handle? No-one knows until they’ve watched a crash vaporise pounds from their portfolio.

Your portfolio may have defaulted into an industry-standard mix of 60% equities, 40% bonds. This is the Goldilocks zone – neither too hot, nor too cold.

Or, perhaps you chose your allocation to risky equities using a classic rule-of-thumb like:

110 minus your age = your equities allocation (the rest is in bonds)

Both are reasonable starting points, but the gut test is a bear market. Your response to a mauling tells you whether your asset allocation is too risky for you.

The wealth manager and investing educator William Bernstein offers a way to readjust using this table in his superb book The Investor’s Manifesto:

Risk tolerance
Equity allocation adjustment

Very high
+20%

High
+10%

Moderate
0%

Low
-10%

Very low
-20%

Choose a government bond fund for the non-equity part of your portfolio.

Your risk tolerance is:

Very low if during the last bear market you suffered sleepless nights, felt sick, or panicked. Subtract 20% from your equity allocation. Now you’ll hold more in bonds for extra crash protection, but must expect lower growth.

Low if the downturn caused you mental pain. Subtract 10% from your equity allocation.

Moderate if you felt worried but held your nerve without losing sleep. No change to your allocation.

High if you rebalanced into tumbling equities during the bear market. Add 10% to your equity allocation.

Very high if you’re frustrated the market didn’t slide further, enabling you to scoop up more equities on the cheap. Add 20% to your equity allocation.

Beware, this table is a rule-of-thumb only. I find it helps to use market tremors to re-calibrate my risk levels before I’m hit by something seismic.

Use it at your own risk.

Rebalancing

Rebalancing is a portfolio management technique to prevent your asset allocation from drifting into dangerous territory. This might happen when equity markets go on a tear – soaring to the sound of popping champagne corks in the City.

The dark cloud in the silver lining is that rising valuations can silently shift your equity allocation. You might easily go from, say, a desired 60% in equities to an actual allocation of 70% or more.

Rising equities sounds fine until the market crashes back to Earth with terrifying speed and savagery. The nosedive takes your portfolio with it, because you hold proportionally less bond protection than you used to.

Annual rebalancing counters this risk by nudging your allocation back into line. It’s like when you touch the steering wheel of your car to prevent it veering out of its lane.

By selling some of your outperforming assets once a year and buying laggards you:

Realign your asset allocation with your chosen risk level.

‘Sell high and buy low’ – looking to profit from the tendency of underperformers to bounce back. (Or mean-revert, in the jargon).

We’ve explained before how annual rebalancing is done. It’s simple.

Easier still if you rebalance with new money.

If you’re invested in a multi-asset fund like Vanguard LifeStrategy then your portfolio is automatically rebalanced for you.

Auto-rebalancing only applies to such multi-asset funds. For example, a fund that holds equities and bonds in the same investing vehicle.

You can email your fund provider to find out how they rebalance.

It’s fine to rebalance once a year.

Lifestyling

Lifestyling is a brilliant way to head off the failure-to-recover scenario, wherein a portfolio is poleaxed by a crash just as you’re on the home straight to retirement.

You can also use the same principle to manage an investment portfolio earmarked for a non-retirement objective, such as a uni fund for your kids.

Retirement lifestyling

The standard advice for young investors is to choose an aggressive equity allocation, perhaps as high as 80%.

That’s a pro-growth strategy. It’s predicated on the idea that as a young person you can shrug off a market meltdown because:

You don’t have much skin in the game. If a small portfolio halves in value, you’re unlikely to panic. The loss is dwarfed by your future investment contributions.

The bulk of your working life is ahead of you. You can afford to wait for the market to recover and buy equities cheap in the meantime.

This is the theory of human capital underpinning that ‘110 minus your age’ rule-of-thumb.1

The logical consequence is you should be in 45% equities, 55% bonds as you turn 65.

Lifestyling using this rule means you sell 1% of your equities and buy 1% extra in bonds, every year, to manage the transition.

You can do it at the same time as you rebalance. This way all of your portfolio maintenance is done in a one-er.

This subtle drip-drip of wealth from equity stalactite to bond stalagmite transforms your portfolio. Instead of a petrifying dagger ready to drop from the ceiling, your portfolio de-risks into a mighty tower of wealth anchored by a floor of shock resistant assets.

However, the ‘110 minus your age’ wisdom was devised when bond return prospects were better than today.

Stay on target

A more modern incarnation of this idea is a Target Date fund. Like the lifestyling heuristic, Target Date funds gradually shift your asset allocation from equities to bonds as you age.

Vanguard’s version – a Target Retirement fund – keeps investors 80% in equities until age 43. The fund then automatically descalates your risk by lifestyling down over time to 50% in bonds by age 68.

If you mimicked this path by lifestyling equities to bonds at 1% per year from age 40, you’d be 60% equities by age 60.

This pattern acknowledges the muted growth prospects of a low interest rate world.

(It also assumes a classic retirement age of around 65 to 68. You’d de-risk earlier if you’re on track for Financial Independence Retire Early.)

Don’t ignore your own risk tolerance if you’re young yet 80% equities makes you uncomfortable.

Go lower if you need to, or aren’t sure how much you can handle.

That said, people who choose Target Retirement funds typically leave them on auto-pilot.

Blissful unawareness of market quakes makes it much easier for Vanguard to hold people at 80%.

I believe Target Date funds are a brilliant idea. If you don’t fancy managing an investment portfolio at all, they’re a godsend.

But personally I think Vanguard’s Target Retirement fund weights bonds too heavily later in life. Its equity allocation is only 30% by age 75. That’s a decision for another decade, though.

You can always weight your portfolio differently nearer the time.

Lifestyling for non-retirement objectives

You’ve seen those industry warnings about equities being unsuitable for objectives fewer than five years away.

Equity volatility means you never know how much your shares will be worth tomorrow. So if you want to save for a specific amount on a specific date, equities are not reliable.

Retirements can be delayed – or you can live on less. But perhaps you’re investing to send the kids to college in 18 years time, or to pay off the mortgage in 25 years? (Ballsy!)

Holding 50% – or arguably even 20% – in equities is madness as you glide into land, if you haven’t got any other way of avoiding an undershoot.

Larry Swedroe is another renowned wealth manager dedicated to educating investors. He came up with a rule-of-thumb for managing this risk in his book The Only Guide You’ll Ever Need for the Right Financial Plan:

Investment horizon (years)
Max equity allocation

0-3
0%

4
10%

5
20%

6
30%

7
40%

8
50%

9
60%

10
70%

11-14
80%

15-19
90%

20+
100%

Notice how Swedroe puts the portfolio on a steep descent out of risky equities inside ten years from the target date. This speaks to the unpredictability of equities.

Over the long-term, equities are the best asset for growth. But anything can happen in the space of a few years.

Remember this is an informed rule-of-thumb. Treat those equity allocations as a maximum. Dial them back more if you can, and keep the rest in bonds and cash.

Performance check

How do you know if your investments are doing well? Should you switch funds that haven’t performed well in the last year? What about that co-worker who keeps banging on about the killing he’s making in crypto?

First things first: your portfolio is likely heavily exposed to the stock market. So your annual performance will turn on the fortune of the market that year, for better or worse.

The evidence shows you can’t avoid that truth but you can turn it to your advantage.

It’s a myth that you can identify a brilliant fund manager or stocks to beat the market over the long-term. What looks like over-performance is often a lucky streak. Or it costs so much in fees that you end up worse off.

The antidote is a passive investing strategy that uses a diversified portfolio of low-cost index tracker funds to cream off the profit from the market.

Global stock markets rise over the long-term so you should do very well as your profits compound.

The counter-intuitive truth is that you don’t need to worry about your portfolio’s performance day-to-day – or even annually.

But the short-term is a crapshoot.

The market has a roughly 50:50 chance of a loss on any single day. It’s likely to be down one year in three. But it recovers, and over 20 years equities are favourite to outperform every other asset class.

So for the best peace of mind don’t check your portfolio more than annually. Don’t download a mobile portfolio app. The longer you leave it alone, the better your chance of seeing good news when you check-in.

Ignore short-term fluctuations, because you can no more control the market than King Canute can command the sea.

As for that annoying co-worker, he’ll slink back under his rock next time his dogecoin is slaughtered by a careless Elon Musk Tweet.

Factors you can control

The factors that decide your fate and that lie within your control are:

How much you invest
For how many years you invest
Your target income
Investing costs

The magic formula is:

Invest more to enjoy a bigger income in retirement and/or shorten your timeframe.
Invest longer to enjoy a bigger income and/or lower your investment contributions.
Lower your target income to invest less and/or shorten your timeframe.
Lower your costs to improve every outcome.

You can see how this works by playing with the excellent retirement calculator at Hargreaves Lansdown. It enables you to feed in your personal numbers and check whether you’re on track to retire.

Think the income you’re headed for is tight? Then watch how your fortunes change if you increase your contributions or delay your retirement.

Perform this check annually and you’ll have a firm grip on whether your pot and contributions are big enough, based on current projections.

Don’t mess with the calculator’s 5% estimated annual growth rate. But you can lower the annual management charge to 0.5% (via ‘advanced options’, tucked down bottom right on the results page) if you choose keenly-priced tracker funds and a competitive platform.

Find out more about using a pension calculator to stay on track.
Our financial independence plan article will help you work out how much retirement income and pot you’ll need.

Inflation adjustment

Just as inflation nibbles away at your wages, it also gnaws away at your pension.

Up-weight your investment contributions in line with inflation every year to help your portfolio keep up with prices.

You can find the UK’s official inflation figures at the ONS.

CPI-H is the headline rate. It takes housing costs into account.
RPI is almost always higher. Using this may put you ahead of the game.

Some Monevator mavens use their personal inflation rate or average UK earnings as potentially better gauges of the cost-of-living.

Calculate your inflation-adjusted contribution as per this example:

Current monthly contribution: £500

Annual inflation rate: 3%

£500 x 1.03 = £515 new monthly contribution adjusted for the past 12 months of inflation.

You should increase your target income and target retirement pot number in exactly the same way.

Value for money check

As long as you’ve chosen a price competitive portfolio of index trackers then you don’t need to worry about switching investment funds. Switching for performance-related reasons is like changing toothpaste brand in the hope of better results on the dating scene.

But it’s worth checking that your trackers still offer good value versus their rivals every few years.

Check using our comparison of:

The best global equity trackers

The best bond trackers

Other asset classes

Investing platforms/brokers also charge fees. Make sure they’re not milking you, either. Our broker comparison table shows your options.

We’ve previously outlined how to find the best value platform for you.

There’s no need to perform this check annually. Every three years is enough to stay in touch with the price league-leaders.

Don’t sweat tiny changes in cost, either.

A fee differential of 0.1% on £10,000 is just £10. That would cost you £50 a year on a £50,000 portfolio if, for example, your fund’s Ongoing Charge Figure (OCF) is 0.25% instead of 0.15%.

Tax loss harvesting

If you own investments outside of your ISA or SIPP then you can reduce your capital gains tax bill by offsetting trading losses before the April 5th deadline.

Major life changes review

Marriage, children, career change, redundancy, divorce, ill-health, death, inheritance…Such milestones of life may trigger a reassessment of your investment portfolio and your risk tolerance.

For example, an inheritance may transform your fortunes. Perhaps you can reduce your equity exposure. You need less growth, so you can take less risk.

On the other hand, an even bigger windfall can catapult you so far ahead that you can take even more risk! If you’ve already got more money than you can spend, it doesn’t matter how your equities perform.

It’s nice to dream but major life changes could be the perfect time to seek financial advice.

Managing an investment portfolio checklist

Here’s a run through of the techniques we’ve explored in this article:

Monitoring risk tolerance
Frequency: After every major downturn of 20%+

Rebalancing
Frequency: Annually

Lifestyling
Frequency: Annually

Performance check
Frequency: Annually

Inflation adjustment
Frequency: Annually

Value for money check
Frequency: Every three years

Tax loss harvesting (not possible within ISA/SIPP)
Frequency: Annually

Major life changes review
Frequency: As and when

I wish you good fortune in managing your investment portfolio. It’s entirely doable to go the DIY route provided you stick to the investing essentials and ignore the get rich quick sirens of YouTube. You don’t need specialist knowledge, skills, or a huge amount of time.

I’ve never regretted managing my own portfolio.

Let us know how you get on.

Take it steady,

The Accumulator

Or 100 minus your age, or 120 minus your age, or whichever version you subscribe to.

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