On the last working day of 2017, the Ermine pulled up the FTSE100 index and was greeted with the following tribute to irrational exuberance.
What’s a fellow to do? Way back when, I wrote a post inspired by the reported comment by a City gent, to the effect of I don’t know WTF we are doing up here, with the implication that it’ll all end in tears. That was in 2013, with the index about a thousand points lower than now.
I’m still heavy on FTSE100 shares in my HYP, despite efforts to build around them with world index-trackers, which tend to be over half exposed to the US. I used to grouse about that, buying into an overpriced American market, but not so much now. Which brings me to the problem for a net investor, where the hell do you find value?
Ah yes, Bitcoin. It’s the latest craze, tulip bulbs got nothing on this, along with the stories of people making loadsamoney. Trouble is the price curve looks like an exponential ramp, which means if there is value there it’s largely captured by people who were into it over a year ago. Not going there – at least some of what you buy on the stock market is a productive asset, and it’s always nice to see that in an investment, though I will make an exception for gold due to its long history 😉
the fog of war and confounding factors
One confusing factor for Brits is that we voted last year to kick all those foreign sorts out and/or take back control at the cost of our economy, so the value of the pound is down a long way. Which has the effect of making everything else look higher than it really is, so say a fifth of this effect is due to the fact that the numbers on the vertical scale are 80% of what they used to be. In a country with a midget currency, everything looks like the work of kings. So some of this gain isn’t real, although it still makes life more expensive for savers buying their future income streams using the fruits of their toil earned in Great British Pounds, because wages haven’t gone up 20% to compensate. I guess Remoaners often work in the City so they may be getting some salary lift, which seems only fair for having their futures shat on. Most Brits aren’t so lucky as to get wage rises, but at least they got the result they wanted. Continue reading “Time for market timing?”
Here is a message from the CEO describing just how we are going to obfuscate our previously simple offering to you. We will obscure things by bundling some services, charging more for others and complicating the process of comparing our charges with other ISA providers. Of course we are going to make out that we are doing you a favour, but basically we want you to trade a lot more often so as we get more money. Geddit? No, well, what we will do is charge you for two trades a quarter, constraining what you can do, and enticing you to churn more. Oh and we’ll wrap it all up in fluffyness of how we believe in the stuff we’ve been forced to do. Unfortunately, Mr Ermine, you weren’t using any of the funds that we were stealing some of the proceeds from every year, because you identified them as a ripoff. So you get to take the shaft, this time, buster. That OK with you? Because if not you know what you can do but it’ll cost ya. Bwahahahahahaha
Pretty much rinse, repeat – I was happy with TDs costs – basically now’t if you do now’t[ref]ETFs and shares – I got right out of funds in TD when they started charged platform fees to hold them[/ref], and £12.50 per trade. As opposed to £90 p.a. with III, which is reduced if you trade often enough. ‘Cos that’s where money is to be made for III, on the turn, they want to nail you in transaction fees or in annual fees.
End of October I requested a transfer to iWeb, and TD Direct acknowledged this by email on the 1st November.
We’re sorry to hear that you’re looking to move the assets you hold with us today but we’ll work closely with IWEB to ensure your transfer is completed as quickly as possible. If you change your mind and decide you’d prefer to stay with TD Direct Investing, please let us know and we’ll look after this for you.
Moving is a big step
We know that moving your assets is a big decision and we want to make sure you know what to expect during the time it takes IWEB and ourselves to complete this for you. Please take the time to read through the points below so you know what’s involved. We won’t charge you for moving your assets to another provider but it’s worth checking to see whether IWEB will charge transfer or exit fees if you decide to move your assets again in the future.
Things to consider
• Some providers will only accept cash transfers in pound sterling (£). If IWEB will only accept pound sterling (£) you’ll need to convert any cash you hold with us in other currencies before we can move your cash. Foreign Exchange (FX) rates will apply to all currency conversions you carry out.
• Transferring assets can take up to 6 weeks, sometimes longer, depending on the complexity of the investments being transferred but we’ll work closely with IWEB to make sure this happens as quickly as possible.
Since then they have done diddly squat, to the extent that IWeb sent another letter saying they hadn’t heard from TD Direct on the 24th. Which pretty much confirms my initial feelings about III from five years ago – shysters. From this thread on MSE I’m not the only one to be taking the shaft here.
The RDR has been a bastard from my point of view – I was mainly a shares/ETF sort of guy and was quite happy to pay my way in buy/selling costs and for the massed ranks to pay for their free fund buying/selling via the various kickbacks on funds/OEICS. The information was out there that you were being ripped off annually in charges, and if you couldn’t be bothered to learn about it then I figure it’s fair enough. Whereas the shares proposition was always that you pay for activity. Not churning your portfolio was the win there. In other words don’t do this:
Then the RDR came along and said it isn’t fair that the sheeple are being gouged, so we now have this problem of platforms being incentivised to make their punters churn their portfolios to generate some transaction fees, and changing their fee structure to try and catch people out. It’s a little bit like the way regulation of the power market means you have to shift supplier every few years, because all the best prices are aimed at new customers. The FCA come along all self-congratulatory and say that early signs are that the RDR is working, well it sure as hell ain’t working for me. I was quite happy for the fund buyers to pay their hidden platform charges, after all if you don’t want to pay annually then shares and ETFs are your friend 😉
You see the background radiation of the old system in the new charging structures. Platforms made their money on fund kickbacks, so they didn’t charge for buying or holding funds. They didn’t make money on shares, so they charged transaction fees on shares. Now that they don’t make money on fund kickbacks, they charge annual fees just for having funds, and just because they can, they extend this ripoff and charge annual fees for shares. The likes of Hargeaves Lansdown at least have a little bit of shame about that, inasmuch as they cap their annual fees on holding shares at £45, while fees are unlimited on funds until you reach £2 million assets under management. HL would actually be half the price of iii for my ISA, as their charges on shares and ETFs top out at assets of £10,000 under management, but £45 is still too much to charge for inactivity. The one greatest lesson I learned in investing is the power of sitting on my backside. Time in the market is your friend. I don’t want to be paying for it.
UPDATE 27 Nov 18:00
III have acknowledged the poke about the transfer and say
Dear [griping mustelid]
Thank you for your secure message in respect to transferring your ISA account to Iweb.
We have received the transfer form – transfer reference nnnnnn and we are due to send a statement of your account to Iweb. Due to a spike of activity in the transfer team, transfers are taken longer than normal to process but I will make them aware you have been in touch so they can expedite this for you.
I can assure you that as we can see you have already requested a transfer out, you will not be expected to pay the fee. If your account is still open in January just email us again at this time and we will waive or refund it.
Should you have any further enquiries, please do not hesitate to get in touch again. Our response time to secure message is usually 1 working day, although in times of high volumes we may take up to 5 working days.
It’s nice that we have a bigger annual tax-free investment allowance in April (20k up from 15,240), but most of the opportunities for saving and investment suck at the moment IMO. Tax-sheltered savings are all very well, but there’s no point in doing that with cash these days, because at current 1-2% interest rates you can save 25k of cash as a higher rate taxpayer and twice that much as an ordinary grunt before you run out of savings interest allowance. And have you tried[ref]MSE has found you 1.75% fixed tops at the time of writing[/ref] to get 2% in a cash ISA lately?
What to buy next year then?
Over to the good old S&S ISA. So I have 20k burning a hole in my pocket next year, what should I go for? Although I do some background steady index investing in one ISA, with about half a year’s contribution I try and aim at what’s beaten up at the moment. I’ve tended to be too early into these – I was saved by Brexit from an early foray into Putin’s Russia, and saved by Brexit again when I was overenthusiastic about emerging markets. Other dogs have come good by their own work, and been Brexit boosted – I can’t remember when I first bought BRWM when it was in the doghouse and topped it up when it continued to be in the doghouse, but it has redeemed itself of its mutthood to be a good team player in my ISA now. I can be happy that I have nothing in the most popular fund lists for 2017, apart from VGLS100, which I have just sold. In indexing, I am a VWRL guy these days, because I have zero cost of carry[ref] VWRL is an ETF, TD don’t charge to carry shares, whereas they charge me to carry VGLS100, and VGLS100 has too much home bias for me as I already have a hefty home bias in the HYP[/ref]. It’s good not having the same stuff as everyone else. I tried that the other way round in the dotcom boom and it didn’t end well at all 😉
Valuations have been high of late, those nice guys at starcapital have a summary of where we stand with CAPE and various other metrics. Donald Trump’s America is the 600lb gorilla here at 43% of global weighting, but I was surprised to see Blighty in there with 5% global, and indeed to see that France is a bigger part of global markets than Germany though less than the UK. What the hell should I buy, if anything? Trumpland is way up there in valuation. And I’m already buying a load of that via a regular Dev World exUK purchase as well as VWRL, I really don’t want any more of it. I have every admiration for American exceptionalism, but you can have too much of a good thing.
The trouble with looking at performance is that Brexit has muddied the waters greatly
Our fellow countrymen voted for a pay cut of 20% so they could take their country back and stop hearing furreners jabbering away talking foreign on the High Street. An awful lot of my ISA is foreign assets, and even the UK based HYP tends to be FTSE100 big fish who earn a lot of money out of the UK. As a result the whole thing, denominated in pounds, is sky-high. It’s sort of like the effect on this picture
It makes it the devil’s own job to tell what’s going on, whether something is up because of its inherent value, or if it is the effect of the devalued pound. Into that fog of war I need to try and invest £20k, or hold it as cash because I deem the stock market overvalued, or some combination of all that. And I’m puzzled. Okay, so when you take last year’s £15k ISA allowance and deflate it by the 20% Brexit Tax then that means 18k of the new allowance represents the same real value as £15k did last year if you’re buying foreign assets, however, the allowance has genuinely increased by about 10% in real terms.
What on earth is a fellow to do?
Perhaps His Trump-ness is really going to drag the US out of the twisted wreckage of the financial crisis, by building walls all over the place, and telling the rest of the world to fuck right off as he Makes America Great Again. At the moment it seems he does policy by diktat and his pronouncements bear more resemblance to religious belief, or at best a random wibble generator powered by haterade, but that is obviously my pusillanimous European[ref]well, European for the next two years anyway[/ref] upbringing blinding me to his multifarious talents.
Talking of making countries Great Again, over here we seem to have a similar sort of random policymaking on the hoof, it’s all about taking back control and a lot less about what the grand future is for Little England after the Scots have scarpered. At least the Donald has a destination, rather than just a method in his madness. All we seem to have is process. Brexit means Brexit because it’s the goddamned Will of the People™. Yes, but WTF does it actually mean?
For most people, ignoring valuations and drinking the regular passive investment Kool-Aid is fine for this year. Tax year 2017/18 is just going to be another of the many years in your slow and steady journey to retirement nirvana. For just one year out of 30 or 40 it doesn’t matter than much to you if you buy over valued Stuff, you have years enough ahead and some other year will be like 2009, so you’ll do okay on average. Even for me, 20k is not a large part of my ISA, because I have most of my saving years behind me, but it is likely to be the last when I can fill an ISA.
Half of it will come from unwrapped holdings, because the writing is very clearly on the wall for holders of unwrapped holdings, basically you’re toast. For that portion, buying currently overpriced index funds isn’t so bad, after all what I will sell was also overpriced and Brexit-Boosted, it’s not like I actually earned all that money in the distant past when I was a wage slave. But it would be a dreadful shame to put my last 10k of real 20% devalued Great Brexitted Pounds into a sky-high market. Valuation matters IMO, and stinks at the moment. I guess about 30% of the number in the total box of my ISAs isn’t real and needs to go before it comes to reasonable value. The over a third nominal boost in my unit price last year is ‘king absolutely ridiculous, even if I knock off the lift due to the Brexit dumabass levy. Equity prices need to come down.
It’s not like there’s a shortage of good reasons for a Minsky moment, but the tragedy is while I know it’s coming, but never know exactly when. I might take time out on that 10k half this year until this time next year, however. It’s an error I can afford to make, assuming the Minsky moment doesn’t happen and I get to write this article again this time next year. It’s my last significant burst for the ISA, and hell, I want the markets to be down in the dumps for that, or at least like January 2016.
Young ‘uns know this already, but there are a lot of older folk who swear by share certificates and shouldn’t. My Dad was one – wouldn’t touch this newfangled nominee account rubbish when it was introduced[ref]he was a canny old boy in many ways – when he retired in the mid 1980s and the company retirement FA suggested he used unit trusts for diversification the FA got sent off with a flea in his ear because the fees on the suggested unit trusts in those days were absolutely huge. But he didn’t get PEPs or ISAs later on[/ref]. The trouble with certificates[ref]There are some advantages – your cost of carry is zero, and you are less likely to turn over your portfolio because of the aggravation[/ref] is you eschew any kind of tax wrapper, which seem to be nominee only. There’s a bit more pressure on these refuseniks now because the taxman is coming for your dividends in a big way. Once upon a time, if you had dividend income that wasn’t greater that the higher-rate tax threshold[ref] if you had no other income[/ref] you could get it all tax-free. Well, last year they pulled that down to £5k a year. And from roughly this time next year it’s coming down to £2000, all due to the Budget.They are clearly after unwrapped dividend income, largely to stamp out the practice of self-employed directors paying themselves a token wage and then a massive amount in dividends. It’s worth noting that the tax on dividend income is still much lower than the tax on actually selling your time for money to an employer, 7.5% (update – I misrepresented the total here – PJ’s comment sets the record right on the need to account for corporation tax too in the case of the self-employed, though not the dividend-income shareholders) as opposed to 20%, but it’s a book-keeping nightmare for people who hold individual share certificates or people who hold unwrapped equity holdings on many platforms[ref]if you hold loads of shares on one or two platforms each platform gives you a consolidated tax certificate for the dividends across your entire portfolio which makes the job of reporting the dividend total a lot easier[/ref].
Most dividend yields aren’t usually much more than 5%, so this means that you are sort of okay with up to ~£40,000 worth of shares, but why take the risk? Get your shares into an ISA[ref]If ISAs aren’t enough to contain your vast wealth then I guess you are probably rich enough to use offshore tax havens and find suitable advice ;)[/ref] – and you have until 5th April to take action this year to bed-and-ISA some of these suckers. But be warned of capital gains tax, so don’t crystallise gains of more than £11k a year. If you need more than that you can do other stuff, like use your SIPP and you can also give shares to your spouse, but whatever you do do it, and do it now and early next year.
I had a CGT gain that it’s taken me the last few years to run out into an ISA. Next tax year is my last crack at that sort of game, after which all my equity holdings will be in ISAs or SIPPs. I will still retain the empty unwrapped account if it doesn’t cost me anything. After all, you never know, we may be due for another market crash, and if I start thinking along these lines, and can raise the cash, and have the cojones, I may be grateful for more than £20k equity purchasing capacity that year. Then I will take the time to chunter that into the ISA over the following years.
From a capital gains point of view, even if you want to maximise your ISA savings, you may be better off crystallising the existing gain in unwrapped holdings of Company X and investing 20k of the same shares in Company X in your ISA, even if it means you buy 20k worth of some different shares of Company Y unwrapped[ref]Or you leave it a month before you rebuy Company X[/ref], because that resets the CGT clock on the unwrapped holdings. Some platforms give you a better deal on costs if you bed and ISA – TD, who I used, is one of them. But if you have share certificates then don’t putz about with that for this tax year – you usually have to get your share certificates into a nominee unwrapped account and then do the Bed and ISA from that. It’s very likely you just haven’t got enough time for the Crest forms to go through in time for this tax year end.
You have three tax year end periods before you get hit with this – 2016/17, 2017/18 (after which the cut to 2k will happen, due in 2019) and 2018/19, so get with it.
Listen to what’s written between the lines
The chancellor is quite right, in that the self-employed white van folk have been playing merry hell[ref] they get less too, they don’t accrue entitlement to contributions based Jobseeker’s Allowance[/ref] with the tax and NI system compared to PAYE employees. Last year I paid a whopping £150 to buy a year’s worth of State Pension accrual – that’s something that used to cost me thousands of pounds a year as a PAYE grunt. It’s easy to attack that sort of loophole, which is why the next tax year is the last year I will get such a good deal. I am chuffed that it is my 35th year out of 35 needed and I shall pay my £150 Class 2 NI contributions with alacrity for one last time for tax year 2016/17.
But the self-employed also take the piss in another way, and that is the ‘company director’ who pays himself a pittance wage with the majority in dividends. These were the guys who were targeted by last year’s dividend tax allowance of £5000, but the tax paid is only 7.5% relative to he PAYE grunt’s 32%. As a higher rate tax payer you’re up to 32.5%, which is still a better deal when I was paying 41% (nowadays 42%) tax on PAYE when I was younger and hadn’t discovered what pension savings are there for.
But there’s another bunch of NI mickey-takers out there, and yes, there’s a mustelid of white pelt in there too. These are the people living on a pension. There is no NI to pay on a pension, and somehow what with all the talk of fairness and the fact that Britain’s true tax rate is about 32% for basic rate taxpayers rather than the headline 20% I can see that changing in not very many years hence. First they came for the self-employed…
There’s probably a lot more tax win to be had among the self-employed. Not the ‘self-employed’ Deliveroo drivers on zero hours contracts, it’s the “company directors” paying themselves and their wives in dividends. You gotta follow the money, and that 7.5% dividend tax level starts to sound far too low for future years, too. The Deliveroo guys don’t pay themselves in dividends, it’s the well-heeled self-employed that are in the Chancellor’s gunsights here.
Saving equities in the uncrystallised part of my SIPP is a small way to fight back?
One of the ideas I thought if I wanted to hold non ISA shareholdings is – what if I hold them in the uncrystallised part of my SIPP? Say I hold £1000 of Megacorp paying 10%. So I put 1000 into my SIPP and the taxman makes this up to £1250. Megacorp pays me 10%, ie £125. I drift this £125 off to my crystallised pot. Because I will always be a BRT taxpayer soon because of other income, I get to pay 20% tax, ie £25, ending up with £100. Bugger. But on the other hand, without going through this I’d have only got 10% of £1000, which is, drum roll… £100.
Now if I’d held that in my unwrapped trading account, and accumulated enough to pay tax on it then I get to lose 7.5%, ie end up with £92 from Megacorp p.a. I don’t have a huge need for my SIPP once my main pension starts paying out. I will save my £2880 p.a. to get my 25% boost from the taxman up to £3600. On 75% which I get to pay 20% tax, boo, hiss, but it’s still worth it, because £720-£540=£180, which is a 6.25% guaranteed ROI for two months of a year, and where the hell else are you going to get that on cash these days?
But if for some reason I had money coming out of my ears and a 20k ISA limit was not enough, I could get a £2880 increase on that by misusing my SIPP. People who are working can do better than that, provided they become basic rate taxpayers in drawdown. Beats holding it all unwrapped and no need to sweat capital gains. If Megacorp goes up 100% I get to pay tax on the price if I sell, but hell, I bought 25% more of it at the lower price because of the taxman’s bung. The uncrystallised portion of my SIPP looks like an interesting place to hold equities after my ISA compared to an unwrapped trading account. On the downside, the potential 32% tax and NI merger could gut the value of doing that.
The big problem, of course, is that it’s hard to do. We all have to do the old run for the hills thing some time, and I’ve BTDT – more than ten years ago. The mistake is doing it a second time. Either get out and stay out, or if you do get in again then listen to what Mr Market is telling you about yourself. There’s nothing wrong with paying for learning, well, as long as it doesn’t wipe you out for a decade like houses can, but that’s a different story. Shares are safer and more dangerous at the same time. The trouble with houses is you borrow money to buy them, which means you make out like bandits when things go up, which is most of the time. Get that wrong and you get shellacked big time. But shares, well, you shouldn’t be borrowing money to buy shares.[ref]I am actually considering doing exactly that, so this is definitely a do as I say not do as I do, but I have some good reason. Don’t they all say that, eh?[/ref]
The trouble with the stock market and the retail investor like you and I, is that we get massively interested in the stock market when there’s recent proof that people have made loads of money from shares. So we buy. Then, when things go pear-shaped, we head for the hills, and exactly that has been happening. To the tune of 450million sods, indeed. Some of us sell, then go rinse, repeat.
Laith Kalaf of Hargeaves Lansdown put it well
“There is no shortage of bad news now, but, if you invest when everything is smelling of roses, the chances are you are paying a premium for the comfort of doing so,”
Quite. I’ve been grizzling about too much smelling of roses, so I spent a fair amount of last year buying gold. Unlike some of HL’s investors I didn’t sell shares to buy gold, I simply couldn’t think of much of fair value, after dabbling in some EMs. This year has been more interesting, with a hit on the FTSE100 and a hit in my second ISA (which is more suited to funds) on a Global ex-UK fund approved of by The Accumulator no less, though I found it independently when looking to repeat what I used to do in my pension AVC fund – invest in a 50:50 Global:FTSE100 fund. I can’t buy that in an ISA, so a mix of VUKE and the L&G International ExUK will have to do. The original plan was to track these, buying 1k of one in one ISA and 1k in the other, but I will probably focus on the L&G fund, because I have more money as cash in that account – a straight transfer of a Cash ISA I had from 2009 as part of an emergency fund I need much less of now, as I will start getting a pension income as of next tax year.
The heft at the end of this chart is not so much that the stock market has decided to go gangbusters. No. That, dear fellow UK reader, is the great sucking sound of the pound falling relative to everything else. It makes sense to shovel as much money out of the country or into hard assets as possible, and preferably by last month. It was some of the rationale behind the gold buying last year, but now that Mr Market has taken a bit of a swoon, productive foreign assets are also of interest. The UK stock market is looking less bad than it should do at the moment because though denominated in pounds it also contains a fair amount of foreign assets, though all that mining and oil is probably still tracking down in price measured against foreign dev world currencies.
Braver souls than I trade forex. The trouble with that is it’s still holding cash, it’s sort of like holding gold, and the trouble with owning an asset like that that is not only do you have transaction and holding costs, but when the hell do you decide to sell and buy rotten-looking assets? It’s the old retail investor dilemma again, you have to make yourself do it.
So I take heart with that sucking sound of retail investors beating it. It means it’s time to keep on buying and ramp up 🙂
Now I happen to be in trouble now on that front, because there’s another investment opportunity for me, which is a cash investment, into the SIPP holding my AVCs. I will toss my entire earnings for this year into that, to maximise my tax-free PCLS (if we still have one after the Budget). Ideally after March 16th’s budget, because I am hoping for a flat-rate 25% tax bung replacing the existing 20%. I will therefore flatten myself into this, because I have coasted for three and a half years on savings and these are almost all out. I don’t want to spring cash from my ISA because now is the time to invest, and I don’t want to liquidate my NS&I ILSCs because you can’t reload them and no other cash-like savings beats inflation these days without fiddling about with a zillion accounts, which I can’t be bothered to do.
So I will borrow money on credit cards at 2% p.a. to invest in bigging up my PCLS. Because I can eat paying 2% if there’s a 20% tax-free bung in it. Although I am looking forward to getting a hold of my pension savings in the new tax year, because I don’t like carrying debt. So I will be adding to the statistics of Britain as a nation of spendthrifts going bananas on their credit cards.
However, unlike my fellow-countrymen who are spending this on consumer goods and holidays in the sun, I will be buying cold, hard, cash with this – not at the usual rate of -2% but at +18%. I think Mr Micawber would let me off. As for the others rushing for the exits – if you can’t buy in, at least sit on your hands FFS, guys!
After a bit of cheer I was starting to wonder if the buying opportunity last month was a flash in the pan, but no, general squiffiness means an Ermine sticks a paw into the back pocket and buys another lump of VUKE in the ISA. I aim to do that once a month, to average into the unknown future shape of this bear market. I like to do it on days when the headlines are saying things like Shares dive as fears mount for health of global banking although this morning also looks good with Stock market rout intensifies amid fears central banks are ‘out of ammunition’. In moods of general jitteriness I’m not aiming to be smart, but I am aiming to be out there, buying something. There’s just so much out getting better value, and the £1k a month limit acts as a brake to spread myself out in a measured fashion rather than do the kid in a sweet shop grab all in one go scenario.
Investment Trust discounts seem to be showing up too. I don’t buy ITs at a premium, and the premium/discount mechanism seems to amplify market sentiment, free money on offer when others are fearful. Last month I pitched for some CTY.L that I was sore about missing out on in 2009 after I read this on should you swap your shares for an IT on a discount. At the time I didn’t have any shares but the sound of the discount was nice, so I bought MRCH, then focused on building up a cash ISA firewall against getting canned and shoved money with both hands into AVCs, using a Global:FTSE100 50:50 fund which was one of the three choices available.
Now that AVC move was good, because the Global part hedged me well against a 25% fall in the pound that also occurred, so it impressed upon me that one of the side functions of shareholdings is to hedge against governments torching the value of the currency, by say printing shitloads of it… That is the trouble with money, it is a relative scale, and it moves around all the time
So although I am not particularly discriminating in terms of buying at the moment, if I had access to that L&G fund I’d probably use that
which performed thusly relative to the FTSE100. Sadly iii doesn’t go back far enough to show the deep joy that buying this from before March 2009 onwards was, I liquidated in March 2012 and stayed in cash, so obviously I kissed goodbye to another 30% lift in this AVC fund. However, I believed at the time that I would have to call on this very soon after leaving work. As it was this wasn’t true, but I will call on that money this year. You shouldn’t have money in the stock market you will need to use in the next five years, I’m easy with walking away from the 30% uplift. It’s not like I didn’t get any uplift in my ISA between 2012 and now, one should always leave a little behind in the markets for the other guy, otherwise you get greedy 😉
I don’t think I can buy that fund outside a pension, perhaps even outside the Firm’s AVC scheme which I am out of now. There is a L&G fund BKF0 (ISIN GB00B2Q6HW61) which sort of does the International ex-UK half of that, and this will go up roughly by the fall of the pound, times of course the performance of the underlying assets. 57% North America equities, oy vey, I haven’t wanted to buy into the overpriced US market for the last few years, although I did in a Dev World ex-UK fund I held unwrapped. And very nicely that overheated market did for me. I can’t sell that unwrapped fund because I am up against the CGT limit for this year, but in April, assuming it’s still worth ‘owt I may do that, shove the wedge into my new Charles Stanley ISA and buy some of this L&G international, to get out of the pound and lean against the UK bias of my TD ISA which holds my HYP, which is largely big UK based fish.
I also have two Cash ISA contributions from years back transferred into Charles Stanley. So maybe it’s time to start getting out of the pound. It has a nice 8% loss YTD, when I’m buying something generic like that I do like to see the previous owners losing money, because it means I don’t pay that on buying it. With individual shares you can go wrong with that principle, but it’s safer with broad index funds. I went with Charles Stanley because I am trying to break up my ISA holdings because of the government guarantee and in the interests of diversifying against platform counterparty risk, although this means I will have several accounts, which is always a pain to manage as an integrated whole. TD are very cheap to hold shares on, no annual fees on the account or for shares, Charles Stanley are cheap to hold funds with for small total amounts, and I will try and stay below £50,000 on there. So I will do funds on Charles Stanley, ETFs and shares on TD.
Other ways of hedging the pound
I bought a lot of gold last year in my ISA, because I couldn’t really bring myself to buy the in my view overpriced UK stock market or the US. Of course the cheap EMs that I bought in 2015 got cheaper but that’s life 😉 That gold seems to be reacting to the fall in the pound by going up a fair way. I don’t really feel terribly good about having 10% of the ISA in gold, but it’s working for me at the moment. It is, of course, possible to hedge the pound using spread-betting and FX, but that is a harsh mistress full of tiny changes in points bought/shorted making humdingers of changes in the total amount at risk, and these vary shockingly day to day. What I’d really like to do is buy SDRs from the IMF because what I really want to do is hedge the pound against a bunch of currencies, but I guess the Ermine economy is too small by a few squillion pounds to get a seat at the IMF. An ISA letting me hold the cash part in SDRs would be nice 😉
Simulating SDRs by averaging forex holdings is tough, there are high carrying costs with spreadbetting FX. Well, paying anything to carry cash is bad news, because it is generally a wasting asset, not a productive asset. I’m already sore about screwing up and buying PHAU in my TD ISA, although the gold has gone up I failed to spot this is denominated in USD so I ate FX costs buying and no doubt will take the same hit on selling. In fairness the rise in the value of the gold will pay me handsomely for my trouble, but nevertheless it is a drag on performance I missed. Doing anything with FX is just like that, too many people with a hand in the till on every transaction.
Overall, since I want to be a net buyer into a bear market hedging the pound then buying a global ex UK index denominated in pounds isn’t such a bad way to do it. I shall leave arcane forex shenanigans to the truly wealthy, like people bumping up against the lifetime allowance and the brave, like ERG. I haven’t got brains or balls enough for raw forex. Sometimes you gotta know when to hold ’em and when to fold ’em. Buying foreign productive assets to shovel money out of the UK I can relate to.
It’s also worth noting that the contents of the FTSE aren’t totally GBP assets, a lot of these big fish make their money outside the UK. Mind you, at the moment making money isn’t something some of these FTSE100 firms are doing in a big way!
Why is it all going titsup again?
God knows. If it were just the markets that wouldn’t be so bad, that’s just what markets do, they have regular hissy fits. It’s their job, it is how they transfer capital from the timid to the brave 😉 But other things aren’t right. Moneyweek and the Torygraph say it’s all debt, I don’t think that we took the hit from the first credit crunch enough. In the past we used to take the hit of recessions straight between the eyes – Paul Volcker in the mid 1970s, Thatcher in 1979. The price of those interventions was some very serious economic pain – I had the bad luck to graduate into the very deep recession of 1982 that Thatcher’s medicine invoked, and was unemployed for six months at the start of my career. Since the dotcom bust we just aren’t prepared to take that sort of hit, which seems to smear everything out by driving the crap underground, for it to pop up in unexpected places. The oil price just ain’t right, and we aren’t going to stop using oil in the next 10 years; the exploration investment that isn’t happening now we are going to rue bitterly in 10 years’ time, although we will hopefully use renewables for a larger proportion of our global energy consumption than currently used.
Where is the bit that says buy UK residential property, BTL etc?
I have had the experience of selling a house for nearly half the purchase price and endlessly pissing money into the mortgage for that hole. Every other bastard believes that house prices in the UK only go up, I know that this is not true from personal experience. The Ermine Does. Not. Do. Res. Property. I don’t care how great it is, why it will only go up, and up, and up. Quite frankly, I don’t give a damn. It’s worth owning the roof over my head, and after that it’s enough with the madness of crowds that is British res property. So often you hear punters say the stock market is a casino – well at least the chips are productive assets. Even being a total momentum-chasing asshole in the dot-com boom and bust I lost less money absolutely and proportionally to the capital invested than on housing.[ref]because I have been in it for 28 years overall I am past the breakeven point on housing even taking the hit into account, because of subsequent rises. The stock market has been considerably kinder to me than British residential housing. Plus the trouble with thinking you are rich when your house rises is value is that you have to move out of it to realise that money, and observation shows old people don’t like to do that until they absolutely have to. The people who may benefit from the rise in value are your children when they come back from the crematorium, but you pushing up house prices means they couldn’t afford to buy earlier in their life. Funnily enough it’s always people with kids who go on about how great it is their house increased in value so they can leave it to the fruit of their loins, if I were the kids I’d slap ’em around the chops with a wet fish because that sort of thing is part of the problem, not part of the solution IMO. But British residential property is not my circus, not my monkeys.[/ref]
Why do I want to shift out of the pound?
One word. Brexit…
There may be a teeny bit of noise and hum associated with that, whichever way the referendum goes. And hell, finally the US stock market which seems to dominate ex-UK funds is getting less overpriced. So the stars are kind of aligning to make this the flavour of the first part of this year for me. Of course, this being the stock market it could all go titsup and the sky may fall and it all turns into endless pouring rain. In which case, well ,what the hell, perhaps let’s take a tip from the guys at Powerswitch and spin this doomer anthem from the last financial crash.
I wrote the first half of this in November last year under the heading “Valuation matters” when I was bored with the stock market, but couldn’t really take it anywhere. Things have improved in the two and a half months since, so I thought I’ll run the post.
Ermine approach to bear markets
There are two big problems with bear markets. One is the general noise and hum of people like RBS yelling sell everything. The other problem is that bear markets are usually shorter than bull markets, but steeper. So not only do you have a shorter time to get into the suckers, but it feels bad too.
past investment performance provides no guide to future performance
I do have a fair lump of money to move out of cash, even while leaving my SIPP as it is. But what to do with a bear market, eh? I will do roughly what worked the last couple of times.
Once upon a time, in the late 1990s, I got more and more interested in the stock market as prices rose, ‘cos I looked at the virtual bottom line and thought that it was real. Whereas now I get more and more lethargic as valuations rise, I cast about and struggle to find anything of interest to buy, and occasionally carp about it. Whereas a decent market crash would interest me again…
Let’s take a look at the enemy. Total Return values for the FTSE100 are only available back to 2012, but I got my FT All-Share TR from here, apparently derived from the ONS.
The overall trend is up. And yet this is a game of two halves – whatever happened after the dotcom bust seems to have taken a bite out of the annual rise of the FT all-share total return, and given us bigger and more protracted retrenchments. Perhaps the change in annual rise is because inflation was generally lower in the second half period, but there’s no way of getting away from the fact that the retrenchments in TR are deeper and span longer periods. There’s real money to be lost here for significant periods of time.
Whether this is the result of structural changes to the economy, or perhaps the massed ranks of index investors beginning to kill the golden goose is something I am not clever enough to say. Perhaps it’s as simple as the increased financialisation of the economy, in the end somebody has to be paying for all those salaries in London. FirevLondon put it well
Financial services is, er, where the money is. Pay levels here significantly exceed almost all other sectors when you benchmark for responsibility, experience, lifestyle, etc. The point is that these jobs are not easy to get and are not everybody’s cup of tea.
Just like people working in sweet shops don’t want for sweets, I guess people working in money don’t want for money. The kink in the chart may be as simple as the fact that these pay levels as well as soaring CEO pay have to be looted from the real economy because financialisation is an extractive rather than productive business, looks like shareholders have been getting a bum deal for the last 16 years as well as being shaken down twice. Or is that three times, including now 😉 Whatever it is due to, there’s a good case to support the thesis that it’s all different now, but the trouble is that it isn’t all better now.
If we are going to be carrying the deadweight load of all these spivs and CEO salaries on our backs, we really want to be buying in the suckouts, since the cost of the future income stream is cheaper, cos, well, the price of entry is on sale.
People made a lot about the last bull market being one of the longest on record, which is all fine and dandy, but if the price of longer bull runs is greater humdingers of bear markets that knock you back the odd decade then it still isn’t great news for steady buy and hold. The view post 2000 on the FTAS total return hasn’t been worth the climb compared to the 20 years before it. The slightly lower slope could be explained by lower inflation, but the multi-year suckouts are longer and deeper.
My aim is to long-term hold, and use the dividend income. So I am buying a future income stream, and I want prices to be low when I buy. They haven’t been low for the last few years, that’s the trouble with bull markets, they hang around too long and outstay their welcome, particularly that last one. I’m glad to see the back of it. All it’s been good for the last couple of years is to shift unwrapped assets into an ISA wrapper, rather than put much new money into the markets.
Buying into bearishness with index funds
I have stood next to the open goal of bear markets before, tapping a bit of wedge into it at the same time as buying that Cash ISA, That Cash ISA is still the same one as I bought in March and April 2009, when I also bought the other half as a S&S ISA in April and started hitting AVCs. Cash has lost value in real terms whereas the S&S ISA and the SIPP paid me handsomely.
There are similarities to 2008 in that the stock market and the pound are tanking. The combination of these gave both my AVC funds and my ISA a good heft. This bear ain’t really got into it’s stride IMO, which is just as well for me. I have about 3k worth of ISA allowance left plus about two grand of cash in there. This year in an aberration of common sense I adopted the nice little quarterly regular drip-feeding approach of a good index investor, largely because I couldn’t really get excited about much, but figured I can’t just sit on cash. So for the last two quarters I’ve been buying gold, and in the first quarter I did some racy stuff like buy into Russia, EMs and oil, all of which have tanked faster than the unwrapped assets I sold. I’m taking the Zombie approach to the busted value of the last enterprise, at least the gold is up a smidgen.
However, in a decent general bear market, you don’t actually have to be clever at what you buy. What you have to do is be buying. There’s a hell of a lot to be said for indexing into a bear market. You can sort out the asset allocation later when the rubble has stopped bouncing.
What does a bear market look like, and how do you know one?
A bear market is a fall back of 20% against recent highs, apparently. How do you know one – I spent too much time a while ago trying to formulate a black box determination of a bear market from the price signal. A bear market is not just about the price. It is also about how people feel. You know a bear market from the number of pundits screaming that everything is doomed – indeed I’d go as far as to say a bear market is much more about how people feel about the market that the price signal the market is giving, it’s the sizzle, not the steak.
The trouble is that the depth and duration of the retrenchment is unknowable at the start. Is this like 2008/9? Is it like the dotcom bust? The 1930’s? Is it the final denouement of capitalism culminating in a war of all against all, or maybe a modest wobble like 2011?
This unknowability means I don’t want to be buying all in one go, a good bear market happens across a year or more, the 2011 wobble was a few months ISTR, but the trouble is you can’t know where the bottom is. So I want to be getting in steadily over a few months, perhaps a year. The five grand for the ISA is easy enough to do, buy £1000 of VUKE and do it again over the next few of months. VUKE because it’s the FTSE100 that’s getting much of the stick at the moment. As well as that I have about 8k left in a cash ISA, which I can now deploy into the stock market. Unfortunately, having tried with Charles Stanley, it appears that I can’t actually open a S&S ISA by transferring in a seven-year old cash ISA without opening a new ISA for this year, which I can’t do1. I could, of course, transfer the cash ISA into my TD Direct ISA which I already contributed to this year, but I don’t want that any bigger, I need another two S&S ISAs to bring the value of my shares ISA down to the FSCS compensation levels. This gets more relevant in times of market turmoil, MF Global is the poster child for what can go wrong here…
So I guess I am stuffed until April on moving that cash ISA, which probably isn’t so bad. If this is a big one, the bear market will be just getting its boots on by then, I should imagine we will still all be thinking it’s financial Armageddon. In time for the new ISA year 😉 I am pretty sure that buying VUKE now will look like a terrible idea by then. As will buying it in February. And March, May and June. But I can’t know, and that’s why sometimes you have to hold your nose and buy into bear markets anyway. It’s a dirty job, but somebody has to do it. I can’t call the bottom of a bear market. But I don’t have to, all I need is get in while the sale is still on.
It’s a lot more interesting than steadily socking away a few hundred pounds a month into an index fund in a bull market, even if the interesting is the same sort of interesting as living in interesting times. It’s the drama of bear markets that I like, well, and the fact that valuations get so much better. Despite everybody saying valuation doesn’t matter and you can’t time markets etc I can recognise a hissy fit when I see it. 2009 was good. 2011 had its moments. Perhaps 2016 will be up there as well. Of course, it is entirely possible that that kink in the long run TR of the FTSE100 is indicative of a deeper malaise – after all the suckouts seem to be deeper than they used to be and getting deeper, and despite the great celebrations when the FTSE100 crawled above the peak sixteen years ago it still seems to be walking wounded. I’m happier buying it at 57002 than 7000-something, although I am sure it will test 4500 sometime this year. I wonder if this will also be the year the Greeks default just to double down 😉 Let’s hear it from iii’s Rebecca O’Keefe
With every upturn being followed by deeper falls, investors are increasingly wary as it becomes more and more difficult to determine what might happen next.
We know the rough outline what’s going to happen next. Shit is going to go down, and keep going down. Until it doesn’t go down any more. The dotcom bust went down for three years straight, most of the other bear markets were two years or less. You shouldn’t have money in markets you will need in the next five years, so it’s likely you’ll be at least a year or two into the bull that follows the bear before the five years is up. Buy, not all in one go, and forget about it for five years. If the suckout lasts longer, well, you got different problems, bud.
If there is a deeper problem of returns then the value of some numbers on my TD Direct/CS screens which would be visible on the internet if we had any power and broadband while the zombies fight in the streets aren’t going to be a big problem for me, compared to the marauding zombies and preppers like some Cormac McCarthy novel. But if that doesn’t happen then we will still be using oil in ten years time and I’ll wager we’ll be paying more than $30 a barrel for it. People will probably still be buying things made out of stuff that somebody is going to have to dig out of the ground. We probably won’t have given up eating and Facetweeting. I can’t be bothered to try and work out who will be providing this. That is the nice thing about bear markets. They are absolutely made for the mindlessness of index investing, because a synchronised gloom grips people and they flog everything off cheap. You don’t have to be smart about what you’re buying. Just buy something reasonably diversified.
I’m not a fan of steady index investing across time. But I am a fan of indexing into market swoons, and then sitting on the spoils of war. Later on I will buy some individual shares/ITs once I feel there is an upturn, which of course will only be detected after the event. But on the way in, it needs to be like a slow-motion supermarket sweep contest, repeated regularly and paced out over months.
It’s never a good feeling to buy into something that’s tanking. And to do it month after month. I know what that felt like in 2009. But compared to the feeling when you look back afterwards, well, that isn’t so bad.
Pound cost averaging into a bear market isn’t smart and its not clever. But it’ll work, I’m happy to take the punt because I’ve been here before. Which is why I started buying yesterday.
I have since asked them, and they have given me explicit dispensation for that ↩
that should probably be 5200 by the time I post this ↩