The FT has a staggering article this morning that reveals just how divided this country really is. It is published under the title:
The article is bizarre. Referring throughout to a client of a financial adviser called Nigel, it assumes that a stock market crash has happened. This, however, is not true. One is clearly foreseeable because all stock markets at record highs have crashed eventually. But the current market has not. The advice is, then, wrong. This is because if assumes there is nothing that can be done about a crash when quite clearly at present liquidation of a portfolio to turn it into cash might make sense.
But that option is ignored in the article because, as it notes:
When Nigel came to see me during the 2009 market crash, I asked him three questions:
1. Do you have enough cash held on deposit to meet your spending needs for the next two to three years?
2. Do you believe in capitalism and its ability to create wealth over the long term?
3. Is your time horizon for your investment portfolio more than 25 years?
Nigel answered yes to all three questions. I therefore suggested that he stop worrying about what he couldn't control – the stock market – and instead focus on what he could – his emotions – and leave his portfolio alone.
Just ask yourself, how many people do you know with a share portfolio and enough cash to cover the next three year's spending? I suspect the answer is none.
Now ask yourself another question. It is whether Nigel could afford to pay a but more tax? Labour thinks so. So too do I. Nigel may not agree. But Nigel's daft enough to consult an investment advisor who suggests holding onto a portfolio when markers are at record highs because he 'believes in capitalism'. I would suggest Nigel is not of entirely sound judgement.
I am sure that the FT was not planning to make the case for Labour's tax increases. But they've done so, nonetheless.
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AS you say – there is another world out there that’s for sure.
Richard
I think you have this one wrong.
The FT’s advice is sensible. Yes, the market is at a high and will go down at some point. It will also likely go back up. Knowing when that happens would make you rich. Let’s assume we don’t know – I certainly don’t. Don’t forget if the market wasn’t volatile, every day would be a record high.
So if you have a share portfolio, and take an income from it, then it is sensible to keep a couple of years’ income in cash, a few more in low volatility assets such as bonds, and the long term stuff in equities. Just like the FT said.
Who has a share portfolio and (should have) enough cash to cover three years’ spending? Well, anyone with a self invested pension fund. Millions of us.
So liquidation of the share portfolio (more likely low cost trackers) would only make sense if you needed the money in the short term. Just like the FT has said, in fact. And taking the advice doesn’t, in itself, support the idea that people with a portfolio (or pension savings as it is more often known) should pay more tax.
Paul
A self invested pension fund is not cash to cover current expenses
And anyone who can see markets hovering around peaks know’s there is one direction of travel
I have lived by my own advice
>A self invested pension fund is not cash to cover current expenses
Well, it certainly is when you’re retired. Not everyone takes an annuity, and therefore you need to liquidate your investments to provide the cash to live on. And I think it’s that which the FT’s advice relates to. Whatever income you expect from your pension fund, have a few years of that in cash.
If retirement is a long way off, then keep the money invested. And be as diversified as you can. Trying to guess market timings is a mugs game.
Paul
Are you an investment advisor by any chance?
>Are you an investment advisor by any chance?
Good grief no. I manage my own pension and rule number one of that is to give as little as possible to the financial industry.
I wish you luck
But I also think you’re hopelessly wrong
“And anyone who can see markets hovering around peaks know’s there is one direction of travel
I have lived by my own advice”
You should employ ‘stop losses’ old chap.
If you get nervous when a share hits a high, instruct your broker to sell if it drops 5%. That way profits you hold can be mostly locked in but rising prices can be ridden, sliding your stop loss up behind it. Take Boohoo.com. One of my biggest holdings now. Hit a high early in 2015. Did I sell? No way Jose! Since then it’s increased in value x5! Seems to have a hit a new high every couple of weeks. I think they sell clothes or something but they’ve more than sorted out my pension worries!
As they always say, though, past performance and all that but with my stop loss in place that doesn’t matter.
Have to say I’m glad I never followed your investment strategy, would have meant downsizing the house and all sorts of financial worries! Still, everyone must be free to make their own investment mistakes. That’s democracy.
Take care
C
You assume I have a broker
You assume I believe in capitalism
And I am more than happy with my decisions
I used to tolerate the FT because they have some good commentators and their interest in making money at least makes them interested in the way the world works, but I can no longer cope with an ethos that is only about the return on capital. I care about what people do and making a return on capital is not doing anything.
Aristotle got there first
But you’re right
Know what you mean. I hang on in there on the basis of ‘know thine enemy’.
>I wish you luck
>But I also think you’re hopelessly wrong
Well, thanks. But why? In essence my strategy is:
– keep costs as low as possible
– diversify as much as possible
– insulate from market movements by having a (large) buffer of cash and less volatile funds. In essence the most important thing is not to lose it, rather than to maximise returns.
You seem to be proposing selling everything because you think the market is at a peak. But that means that you have to get both the selling point right and more importantly, the point at which you buy back right. My way is to sell enough to ride out the fluctuations. I don’t have to be as smart as you. My investments are long term ones, rather than playing the roulette wheel.
With my approach I benefit from long term market growth, albeit at a slightly lower rate because of the lower risk strategy. Your way seems to be riskier in the long term because if you call the timing wrong, you lose significant amounts of growth you would have otherwise had. The risk in my approach seems to me to be long term stagnation. But given the diversification, that would have to be across all markets and I guess we all have other problems in that case.
Paul
“how many people do you know with a share portfolio and enough cash to cover the next three year’s spending?”
What happens if you have a highly unstable income flow (e.g. a consultant) & thus need a cash-cushion? – working on the basis that if there is a prolonged period of no work throwing yourself on the erm… tender mercies of the gov’ is pointless.
What happens if you don’t buy into the pension industry approach (=please give us your money & we will produce a very very average result) and perfer DiY (focused on stock markets). I’m not suggesting this is a typical route, but it could be rationale for those that have to live this reality. & using investment advisors? why not use a bookie? certainly cheaper.
I have long kept a reserve for the reason you give
But three years
That’s one hell of a buffer
I have extremely expensive habits 🙂
Well Thatcher’s prediction that we would be a ‘share-holding nation’ didn’t materialise as wealth got more concentrated. I think the figure for the percentage of shareholders in the populace :
“UK individuals owned an estimated 12% of quoted UK shares by value at the end of 2014, an increase from the historic low of 10% in 2010 and 2012” (ONS).
Brilliant blog, Richard.
Thank you
I am in my seventies and trying to understand Labour’s proposals for taxing those over £80,000 a year. I have some gentle, kindly, not very well off friends who fear sounding ‘envious’ – about another’s earnings. Also many UK people don’t understand the terminology. What does a 50% tax on over £80,000 income mean? I know someone for example who thought it mean they would have £40,000 taken away from them in tax if they earned that. Can you give an example of what someone over £80,000 – say £85,000 would have to pay as extra under these proposals? And could you say what anyone earning £10,000 over the higher rate would have to pay in tax? Perhaps you will correct me – but I am assuming that an extra 5% on salary over £80,000 from 45% to 50% is approximately £250 a year or £20.83p a month extra in tax?
This proposal would increase the tax rate applying to the top part of the earnings of someone earning more than £80,000 a year.
For a person earning £85,000 a year the top £5,000 of their earnings will now be subject to tax at 50% instead of 40%. So on that £5,000 alone they will see a tax increase of 10% which means that they will pay £500 of additional tax as a result.
As I understand it Labour’s proposal is that at 80k the individual will pay 45% and that from 123k the individual will pay 50%.
Of course the highest rate of tax under Labour’s new proposals will be between 100k and 122k where as a consequence of personal allowance being phased out the individual pays a marginal rate of 67.5% on the pound. Under the current regime the effective marginal tax rate at that point is 60%.
So I have overstated the additional charge writing in haste on a train
Sorry
Richard, you have predicted an impending stock market crash many many times since 2010. I am sure one day you will be right.
In the meantime a quick search of your website reveals that you predicted crashes on 9 August 2011, 20 January 2016 and 1 January 2017 when the FTSE 100 were at 5393, 6123 and 7337 respectively. It’s now 7,500. If an investor had followed your advice in 2011 (when you stated all your pension was in gilts because equities were too risky) they would have foregone on average a 40% capital return plus all the dividend income earned during that period (approx. 4% per annum). With that sort of return I would suggest they have enough cushion to weather some market turmoil ahead.
They will also forego a 40% or more loss….
It’s hard to rationalise why Piketty thinks an average return on capital of around 5% per annum will persist into the future when making his arguments. He makes it sound like it’s an easy thing to do and so we should do something about it with tax as it causes increasing inequality. However, you suggest it’s very hard with all the volatility on equity. Perhaps he’s wrong.
He argued r > g
Richard, it would have to fall about 70 plus percent for a person investing in equities in 2011 to lose the original capital – if the income return on the shares is taken into account. That’s just about unprecedented and the FTSE fell nowhere near this even during the financial crisis. Even a 40% fall would leave the investor ahead compared with most “lower risk” investments. If you have a long time horizon (10 years plus) the best bet has always been to buy and hold equities. Although the future could be different this has been true for a few hundred years. That’s all the FT article is really saying. You may, however, have a better strategy and if so you could make a lot of money from selling your advice although the labour tax policies would reduce your financial return if they are elected.
I’m not in the business of selling advice on gambling
It’s basically something I don’t do
I am baffled as to the reason why we put it at the heart of our economy
I imagine you have insurance so you do take a financial gamble on uncertainty. For example, on your car insurance you bet a few hundred quid that you will have a car accident while the policy is in force and the insurance company bets you don’t. At the end of the period of cover one of you will have won their bet. Same principle for all insurance. For insurance you often lose your whole stake but it gives you piece of mind. If you claim it gets you back at best to the position you were in. Equity investments give you the chance of increasing your return but with possible down side risk. That’s why you use a portfolio to pool your risk just as insurance pools risk.
Oh for heaven’s sake stop being a boring pedant and get a life
To suggestion there is a comparison is crass and if you don’t know it your comments are not worth publishing
But long term investment in the stock market is not gambling. This has been statistically proven for 10 year periods. It has often been substantially higher at the end. If your pension really is exclusively gilts then you will be enduring a substantially poorer retirement than if you had put that into the SM.
You might think that
On this basis, and fortunately for the avid readers of your blog, your early retirement is a long way off.
I am retiring at 83