Another Home-Owner-Ist myth bites the dust. From Citywire:
"People pinning their retirement dreams on downsizing their property will be in for a shock," Tully warns. "A combination of a fall in house prices and annuity rates has dealt a double blow to many, with the average pension pot from downsizing only providing £43.50 a week income. Banking on downsizing to generate sufficient income is a potential retirement disaster unless you have also made provision elsewhere."
Admittedly, Mr Tully is "senior pensions policy manager at Standard Life" so he would say that, wouldn't he. The comments to that article are well worth a quick read. To back these up, there's a fine article on the pointlessness of saving via a formal pension scheme at the BBC:
People in the UK are losing a significant chunk of their private pension through administration fees, a report suggests. Pension income could be expanded by 40% if collective pension schemes were allowed by law, the Royal Society for the encouragement of Arts (RSA) said...
The RSA, which also reports on manufacturing and commerce, said that a typical Dutch person saving the same amount for their private pension as a typical British person could expect a 50% higher income in retirement.
This was the result of lower charges and better returns from a large scheme covering hundreds of thousands of people. There would be lower administration costs because the pension company would not have to report on an individual's fund.
Or, save yourself all the charges and inflexibility - as a rule of thumb, these swallow the entire value of any tax relief - and just invest in stuff directly (preferably via ISAs) rather than have others do it for you. And don't forget to pay off your other debts and mortgage before you bother saving anything more than rainy day money.
A small change of theme
48 minutes ago
44 comments:
Well our pension saving has worked out well, and will obviously continue to do so until the scheme defaults. Which will probably happen after I die but, unfortunately, before my wife does.
I have posted a first time buyers chart over at"
http://ukhousebubble.blogspot.com
As requested.....
"Or, save yourself all the charges and inflexibility......and just invest in stuff directly (preferably via ISAs) rather than have others do it for you."
"Stuff"? What "stuff" and when exactly? Aye, there's the rub....
AC, ta.
SB, "stuff" = whatever the pension insurance company would be investing in on your behalf, be it cash, land and buildings (or shares in REITs, same thing), shares, bonds, gilts, currencies, whatever. By and large, pension insurance companies buy shares, which you can easily buy yourself.
Quite right, MW.
MW - "By and large, pension insurance companies buy shares, which you can easily buy yourself."
Not trying to be smart, but I kinda know that. Timing and individual share allocation as a percentage of the whole aint quite so easy
SB,
If you want details try this blog by Canadian financial planner and ex-MP, Garth Turner, (moral, don't cross the Prime Minister, unless your constituents really love you). He writes on the Canadian housing crash, the pensions crisis, and what to do about it. But he's a highly entertaining writer and so he gets quite a few readers/commenters from Australia and the UK even though a fair bit if his writing is specific to the Canadian situation. However he bases his investing advice on a global economic perspective so a lot of it applies no matter where you live.
Worth checking out for the pictures alone in my opinion.
Derek - thanks - interesting.
All I can say is that I'm not without some experience in this area, and quantifying risk is critical. Amongst many other things, a very good grounding in technical analysis is essential IMHO.
I love it when you rub the noses of the 'my house is an investment' brigade in the cold harsh reality.
Ah, technical analysis and risk. You have to buy his "Money Road" book for that. He doesn't go deep but he gives a basic grounding in it. The reason I mentioned Garth here is just that he is saying very much the same thing as the Standard Life guy, the BBC and Mark are, but goes into a bit more detail about what you should be doing to avoid trouble over the next 10 years. As much as it can be avoided anyway.
Of course if Mark's LVT/CI scheme were put into place immediately, it would sort things out in no time. But since that's unlikely to happen, it's good to have a Plan B.
EK, D, RR, thanks, so it's not just me then.
SB: "Timing and individual share allocation as a percentage of the whole aint quite so easy"
Correct. But the pension fund people are even worse at this than a monkey throwing darts into the FT. The chance of you choosing the least-bad pension fund is even lower than the chance of you choosing the least-bad bundle of thirty or so shares to buy at random.
MW - "The chance of you choosing the least-bad pension fund is even lower than the chance of you choosing the least-bad bundle of thirty or so shares to buy at random"
Doesn't sound exactly like a recipe for success to me. Managing money is a hard-enough skill to master, even for so-called professionals. Amateurs stand virtually no chance, so in more ways than one, that leaves the average man-in-the-street at a real loss when it comes to share-trading.
SB: "Managing money is a hard-enough skill to master, even for so-called professionals. Amateurs stand virtually no chance,.."
That is where you are wrong. Remember that 'fund managers' are just well-paid amateurs who all follow the latest fad - few of them saw the dot com bubble popping or foresaw the credit crunch; all of them are now flogging gold as if it were running out or something.
If shares are your thing, just keep buying what seems the best value and hope for the best. And if they all look wildly overpriced, go back into cash.
SB et al. Don't even think about trying to be as 'clever as a professional fund manager' because they aren't. And don't even try to be clever about market timing. Don't even try to be clever about 'risk' (whatever that means). Just concentrate on very simple basics. You can even buy a passive fund if you like which will charge you very little indeed to give you some excellent diversification. I reckon to get unds at a TER of about 0.4% or lower with no entry or exit costs.
You're all trying far too hard!
MW et al. Ever read Intelligent Investor by Benjamin Graham (the bloke that taught Warren Buffet)? Worth a read.
And another thing. I do this for a living, and the biggest costs I have are the time I spend (a) educating clients, (b) dealing with the dysfunctional industry bureaucracy (to be fair, getting a bit better) and (c) acting as an intermediary between clients and the FSA in the matter of their extortionate 'fees' aka trading taxes and general time wasting.
L, nope. I make it up as I go along (I once had to explain to a bank manager what a currency forward contract is, I had to explain BTL mortgages to a bank manager etc).
Right now I am clueless, I guess short selling gold once the bubble bursts might be a good thing to do.
MW - this is perhaps where we differ.
The trick (and it aint easy) is in knowing which fund managers think they're smart and get to stay in their jobs cos they outperform their peers by a percent or 2 for a while, and those who plough their own furrow regardless of intermediate performance cos they've got a formula that's worked more often than it's failed.
I've seen a lot over the decades and I'm afraid "hoping for the best" just doesn't cut it.
Anyway, nice chatting!
SB, I used to do unit trust tax returns for a living, and I have learned a few things:
1. They all invest in the same shares (or other unit trusts).
2. The charges are horrendous. Even a 0.4% TER takes away ten per cent of your long run average return.
3. They set up funds at random with a slightly different weighting to all the others. Inevitably, in any year, half will beat the index and half won't. They then close down the funds that didn't and open new ones and transfer stuff across.
4. By simple maths, all UT managers can, after a number of years, claim to have some funds under management which have beaten the index in every year out of the last five or the last ten.
5. By simple maths, if enough kids toss enough coins and call it, there will be one kid in the world who has called it correctly for three hundred times in a row. That is no evidence that he will call it right the 301st time.
Lola - well I was a portfolio manager for a few decades or so (I think I read Graham about 40 years ago - famous, but didn't leave too much of an impression - probably my fault). I never thought I was clever, but for me knowing the technical "risk" in an investment was paramount. This was an excuse for a lack of real, thorough knowledge of the businesses in which I invested, but it worked for me and my clients, who left me alone to get on with it, and if getting on with it meant being in cash cos I didn't know what was going on, so be it.
These days I'd guess my experience wouldn't be good enough. I worked with and mentored a very bright young guy who now runs the Fairholme Fund, and there's no doubt that for better or worse, he's an example of managing money the right way - the way I'd like to have done it but didn't have the ability.
MW - as I implied to Lola, you have to do your homework and get to know who runs money in a way that dovetails with whatever makes you comfortable. Plumping for any old manager will indeed likely be as hopeless as trying to do it yourself.
SB - Yes, agreed about 'risk' - but you've made my point for me. You know what risk you were looking at, most of the standard ideas about 'risk' bandied about by financial planners/insurers/regulators etc are nonsense.
SB. and Do Your Own Research is the watchword.
MW I too know that 0.4% TER takes away 10% or whatever. The RSA article was quoting 3%. Average TER on a UK Euity fund is about 1.67%. Plus TER's on passive funds are reducing all the time. I reckon they'll be at nil to 0.25% in not a very long time. The bond funds we use are at 0.15% or less now. Some people are prepared to pay a modest cost for no hassle. i.e. not having to think too much, or prefer going to the beach. It's only a relatively small number of people (like us?) who get off on this stuff.
SB - just looked up Fairholme Funds. Are you from the Land of the Free and the Home of the Brave? If so you are responsible for the index industry. People like Vanguard, Dimensional, and the other big one whose name momentarily escapes me. Outfits like these have made a living out of reaising that mean reversion exists and trying not to beat it. Considering that asset allocation is repsonsible for about 90% of the volatility of returns, one would really decide not to bother with stock selection and just concentrate on asset allocation. And working like that one can keep the end user costs down.
Sorry to impugn your intelligence - but the majority of the fund managers I have met are well, bullshitters, or are just plain deluded about their own skill.
Lola - Scottish actually, and in fact I worked with Bruce as part of a team in London managing US portfolios. From memory he was over here for at least 10 years before going back to start Fairholme.
I think we're agreed that you have to pick your manager with real care - forget stock-picking, just concentrate on manager-picking.
SB - yes, sort of. Manager Picking for us means not picking 'fund manager' - i.e. stock picker, but picking an asset allocator. Then you have to decide whether you want to run a dynamic asset allocation strategy (should I be in cash or stocks say?) or a passive asset allocation strategy (what level of volatility can I tolerate; what expected return am I seeking?). And all that can be done at low cost. Not as low a cost as DIY (or DI as MW) admittedly, but nevertheless at a much lower cost than the average retail fund, and with all the flexibility you want, legislative restictions aside, e.g. pensions rules.
My stock tips for a SIPP would be:
Vodafone, Sainsbury, RSA, Exxon Mobil, Chevron and a Russia ETF.
Lola, if they can do it for 0.15% for a tracker, then that is probably worth not having the hassle. Or you could just buy FTSE futures and stay in cash...
MW. Yep, they can. Average TER accross all funds, including EM Smaller cos (generally very costly to access) is about 0.43%. Short dated bond funds are at about 0.15%. You can use these funds to asset allocate among basic asset classes and within aset classes, i.e. smaller cos, value stocks, North American Small, EM Small etc etc.
I, and my particular cohort of advisers having been pushing hard for serious reductions in TERs by using passive funds. In my experience the big cost in in educating clients - which is my time. Hence I am the 'expensive' bit. Better I get paid than the fund manager, especially as most add no real alpha at all. All we set out to do is to preserve value and capture the market rates of return at the lowest possible cost.
Lola "Better I get paid than the fund manager, especially as most add no real alpha at all."
"Most" must mean there are some who do...so surely it's better to seek them out. After all, being passive is still making a decision on how to manage/apportion the money.
Maybe "passive" is a bit of a cop-out really.....
SB. Been there tried that. Doesn't work. No manager is consistently better than the market, the beta. Amend that. One or two are - ish, but generally the price of accessing them is not worth it, it absorbs all the alpha. I've been round and round this over many years, and I keep coming back to simple asset allocation at the least possible cost.
Picking managers is impossible. Look at Duffield and New Star.
Using 'passive' funds is not at all a cop out. These are specialist sector funds that track sectors of the market, short dated bonds say, or UK Smaller Co's; and they use smart trading strategies to minimise dealing costs. But they don't use expensive managers using 'skill' to pick stocks. They pick stocks on the basis of its economic characteristics (small, value etc etc) using a screening process.
Really, you just absolutely must control costs. It is far easier to knock 1% p.a. off the costs than add 1% p.a. to performance. Assuming a real return of say 6% p.a. that means a manager would have to achieve 15% greater return just to stay level with my 1% lower cost fund. That's not a tenable proposition
Lola - a genuine thanks for that - I half-expected I'd goad you into mild apoplexy...
Anyway, I hear what you say. I understand where you're coming from and I respect it. However, I'm minded of Tony Dye and what happened to him in the late '90s...it's a great shame he's no longer with us.
I guess with my background I just have trouble accepting passivity.
For example, back in the 70's, I bought 4 shares with all the (little) money I had when the FT index was around 160. My logic was that things looked so bad that it didn't matter what happened to the money. By a pure fluke it was close to the bottom and a month later i'd made over 100%. If i'd held on for a year, I think I'd have made 400%, but who cares! I'd made my money and could afford to take it off the table and wait - a bit like Tony Dye really. I don't see why one can't leave things well alone for meaningful periods of time and then choose one's moment to make risk-evaluated investments.
I remember Tony Dye too. His experiences confirm my opinions - that it is notoriously difficult to time markets. Dye was right, the stock market was over-valued in the years leading up to 2000. His problem was that he misread the political situation and Greeenspan et al's desperate inflationary attempt to stop the crash, which in the end just made it worse. Vindication came too late for Dye and P&D.
So, the moral really is don't try to time markets. Just let human action and freedom work its magic in wealth creation over time - at the lowest possible cost.
People don't think it through. Equities work best as a forever holding. They'll produce a growing income over time. The reason I am in business is to grow the share value of my business. This will happen if I can ensure a good free cash flow. If I get a good free cash flow I can pay myself a dividend. If I pay myself a bigger dividend next year my share price will rise and so on.
Mind you, a lot of the rise in equities since WW2 ish can be explained by inflation - defined in the Misian manner as a function of the destruction of the value of money.
Nevertheless this just confirms that equities should be viewed as an income play, not a growth play - over time. And if you don't want to DYOR buy them through a fund which will also give you excelllent diversification.
Just make sure you don't pay too much for the privilidge.
Lola - you're right about inflation, but when you say
"Equities work best as a forever
holding"
..I think it would be more accurate to say(and I hope you don't feel I'm nit-picking) "Equities have worked best as a forever holding". After all, the past is not an infallible guide to the future and there have been many periods in the last 50 years when the FT(SE) Index did very little for many many years at a time. Perhaps the future will be a time of equity repudiation - especially if China has a meaningful setback.
SB - No, I stick by my 'equities work best (not THE best) as a forever holding'. Since trading by the underlying businesses produces income for the owners, forever. Even when markets are flat in capital terms dividends are still paid, and often increase. Sooner or later the 'market' realises that these income streams have improved, and rush to buy the stocks and, guess what, their prices go up.
On the other hand, if the bloody stupid governments would stop creating inflation (in the misian sense) then I would be nearly as happy with bonds, because capitalism delivers more for less every day, aka prices fall over time and the purchasing power of the bond income stream would rise. But then of course issuers would refinance their bond issues more often, so the gain wouldn't be that much.
"trading by the underlying businesses produces income for the owners, forever."
Hmmm - assuming the businesses are still around, and adjusted adequately to changing circumstances. How many of the original FT 30 index stocks are still part of the FTSE I wonder...although I guess a boring index-tracker would deal with that and overpay for the index-replacement stock when it's index-listed (& after having stuck with the crappy one all the way down until it was replaced).
"Even when markets are flat in capital terms dividends are still paid, and often increase."
I seem to recall periods when many were cut....
SB, yes, dividend income goes down a bit in severe recessions (by a fifth?) but this is no comparison to the way share prices go up and down, and they bounce back soon enough.
SB - firstly I don't use traditional index trackers. The funds I use are passive funds that are not compelled to buy stocks just to get back in line with the index, any index. They trade smarter than that. And if you use a fund that may hold upwards of 300 stocks, who gives a stuff whether company A goes out of business or not? It will only be at most 1 or 2 percent of the fund. Par example we had BP in the funds when it had its little Gulf of Mexico moment and the impact on the fund was negligible.
And as I think MW is saying, the dividend stream is more stable than the capital values. True. And although divdends do decline in severe recessions, only at times of epic catastrophe do they fail (Germany in 1923 possibly). I think that with globalisation we are more immune to that type of total failure, although synchronous currency failure in thr EU, US and here could set it off. Anyway that'd be the death of money and us, the much maligned market' would soon invent a new money to use. whatever the politicians and bankers do. real businesses will keep trading, because they have to. trade is above everything else the most civilising force on the planet. You do not shoot your customers.
Business is what drives wealth creation,a nd entrepreneurs drive the most wealth creating businesses, which brings us back to joint stock companies.
Me? I am seeking VC finance to grow my business. I lack the capital to do it all myself. My presentation focuses on how I will grow shareholder, aka owners, value for my investors. Crucial to this is the ability to create a free cashflow in order to pay a rising dividend stream.
Why am I unique? I'm not.
In passing something else I have noticed happening is the determination of people with wealth to do-monetise that wealth. They are realising that cash money is looking a bit dodgy and are buying up real stuff, commodities, farmland, property and ....stocks. That is ownership of real businesses.
Well I admit I'm out of touch - things have changed a lot in the last 12 years. But what hasn't changed is my scepticism that when people say something is the only way - however much they've studied it - then I rebel, cos such people can't think of everything, hence the "who-could've-knowed?" line when lo-and-behold, the unthought-of occurs.
I still think China seems to be an accident waiting to happen - Ambrose's article the other day was scary - and even the gold price is starting to get to levels that may just be ahead of reality - and Chinese forced selling could be the catalyst for a meaningful reaction here, as well as a serious retrenchment in markets globally.
I'm not saying the picture aint complicated....or perhaps I'm saying it's so complicated that putting blind faith in stocks could be as misadvised as now buying gold/farmland/antiques/wotever. There are times when it pays to do nothing (especially when one doesn't really understand wny one should be doing something NOW). This may well be one of those times.
Whoa - I believe in the spontaneous order of the free market - I do not believe that I am 'right'. Or that the way that I do what I do is the only way. In fact I want other businesses to offer different things. It's the differences that makes competition work. Which is what is so stupid about the FSA's assumption of universal wisdom and that its way is the only way.
However I can vigourously defend my way of doing things 'cos I've thought about it and it works for me and my clients. Tomorrow I'll think of another innovation that may change everything again.
Lola - sorry - I wasn't attacking you directly, but the syndrome of the "right" way.
If what you do works for you and your clients, then fair enough. And as long as you're open and never rest on yor laurels, then so much the better.
By the way, it's not just Ambrose sounding alarm-bells on China. Michael Pettis is in China has a very well-regarded blog that's saying something similar but perhaps a tad less sensationalist.
SB I've been speaking to people who 'assist' successful Chinese nationals in exporting their wealth out of China. They're doing good business.
"Pension income could be expanded by 40% if collective pension schemes were allowed by law, the Royal Society for the encouragement of Arts (RSA) said..."
WTF, dude? Since when have pensions been an Art? (Yes, I know that canny investment of your pension is a bit of an art, but that's not what the Royal Society is all about, is it?)
"Banking on downsizing to generate sufficient income is a potential retirement disaster unless you have also made provision elsewhere."
Not really, you could always sell your large house and buy two small ones (whose value will have fallen by the same proportion as your large one), live in one and rent the other out. Yes, being a landlord isn't money for nothing, but what else are you going to do with your time?
B, another good point, well made (assuming you actually own a large house to start with). The same applies to LVT - the rental profit from the one you rent out would go towards paying the LVT on the one you live in.
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