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What caught my eye this week.

Jason Zweig is an investment writers’ writer – the man my co-blogger The Accumulator models himself after, and the author of the only book @TA ever gave me as a present. (I’m hopeful the second one will be the completed draft of the Monevator guide to investing…)

Why, you might ask, does The Accumulator hold Zweig in such high esteem that he keeps a mugshot of the guy above the desk in his study, dotted with gold stars and a fake signature he forged by squinting his eyes and thinking of exorbitant expense ratios? (Probably).

I suspect it’s because the US veteran author has a similar ability to turn dry financial matters into pithy words of wisdom.

For a taster, here’s a few lines Zweig shared the other day:

  • In investing, as in life, too many people confuse wishes for beliefs and beliefs for evidence. Things aren’t valid just because you want them to be.
  • As you “learn” more, if your confidence doesn’t go down before it goes up, then you probably aren’t learning.
  • The future isn’t a straight line you can extrapolate from the past. The future is a storm into which we are blown backwards.
  • Walk as often as you can through the graveyard of your dead beliefs, especially the ones you murdered by your own hand.
  • Investing is a profoundly lonely activity, and it’s hard to pick your way through endless minefield of bullsh*t and boobytraps that the financial industry lays down unless you find a community of other investors at least as smart as you.

Those aren’t even particular meant as pithy one-liners by the way – they are all teasers to full articles that Zweig has written before.

See his post for the links – and set aside a couple of hours to devour them.

From Monevator

Who’s right about London commercial property – the suits in hard hats or the ones in the City? – Monevator

From the archive-ator: Why we must all think long-term – Monevator

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

Dividend tax proposal threat to rich savers and company owners [Search result] – FT

US launches criminal investigation into Bitcoin price manipulation – Bloomberg

Call to end emergency tax on pension lump sums [Search result] – FT

Noel Edmonds hijacks Lloyds AGM to accuse bank over £1bn fraud cover-up – ThisIsMoney

London house prices in worse annual slowdown since 2009… – ThisIsMoney

…as number of home owners in England rises slightly for first time since 2004 – Property Wire

Warning over “money flipping” Ponzi schemes on social media – ThisIsMoney

Retirement Pyramid 2.0 – A Teachable Moment

Products and services

Did you know you can get a no-claims discount on home insurance? – ThisIsMoney

Reputation of hedge funds hacked back hard [Search result] – FT

Survey of pension millionaires reveals they own a lot of active funds – ThisIsMoney

Starbucks is beating Apple and Google in mobile payments – Quartz

An interesting interview about the state of ETFs and market tracking – ETF.com

What conditions and treatments aren’t free on the NHS, and what do they cost? – Telegraph

RateSetter will pay you £100 (and me a bonus) if you invest £1,000 for a year via my affiliate link – RateSetter

Comment and opinion

How to build a low-risk, high-yield portfolio of shares – UK Value Investor

Why it makes sense to invest in Government bonds [Search result] – The Economist

More: Do long-term investors need bonds? – A Wealth of Common Sense

What is the point of fund platforms? – Pension Playpen blog

The market-timing game – Crossing Wall Street

All the money in the world – Fire V London

Fund managers and the illusion of skill – Rick Ferri

Philip Carret on forecasting market swings – Novel Investor

Fascinating interview with economist Jim Rickards [Podcast] – Part 1 & Part 2

European companies just aren’t growing earnings like their supposedly over-valued US counterparts – Wall Street Journal

Why did Walmart buy India’s Flipkart, and will it pay off? – Musings on Markets

What venture capitalists actually care about when you’re raising money – Fast Company

Also: How much should you raise as your business grows? – Fred Wilson

Kindle book bargains

Total Competition: Lessons in Strategy from Formula One by Ross Brawn and Adam Parr – £0.99 on Kindle

Surely You’re Joking Mr Feynman: Adventures of a Curious Character – as told to Ralph Leighton – £0.99 on Kindle

Talking to My Daughter About the Economy: A Brief History of Capitalism by Yanis Varoufakis – £1.99 on Kindle

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth – £1.99 on Kindle

Brexit: Still going better than anyone could have imagined

Mark Carney: Brexit already has households £900 a year worse off – BBC

EU talks with Australia and New Zealand deal blow to UK free trade plans – Guardian

How Britain’s departure from the EU stretches to mid-2020s [Search result] – FT

HMRC estimates Brexiteers preferred customs system could cost £20 billion a year – BBC

Why a French philosopher wants to stop Brexit [Search result] – FT

Polluting UK being sued by ECJ claims leaving EU will improve our air – via Twitter

Ex-mayor of Ipswich denied residency after 40 years in the UK – The Guardian

Off our beat

How Britain let Russia hide its dirty money – The Guardian

Electric scooter charger culture is out of control – The Atlantic

The Pygmalion effect: Proving them right – Farnham Street

And finally…

“The fact that making money from money is ultimately easier than making money from work is entirely logical when you consider that you only have a limited number of hours to work. On the other hand, your money “never sleeps”, as the old saying is quite right in telling us.”
– Andrew Craig, How to Own The World

Like these links? Subscribe to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.
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I last wrote in detail about commercial property as an asset class in 2009. In the aftermath of the financial crisis, half-finished towers and moribund building sites dotted London like the LEGO play of a child interrupted.

The towel had been thrown in. I saw an opportunity.

Over the next few years, property investments – stock market-listed Real Estate Investment Trusts (REITs) as well as old-style property investment trusts and funds – did better than anyone expected.

Helped by persistently low interest rates, property assets doubled or even tripled your money over the next few years, thanks to rising prices and generous yields. Skyscrapers soared.

Some property shares lagged the recovery, giving a chance to buy again in 2011 – especially as the recovery was slower to reach small cap property firms

However certain parts of the sector are now well down from those highs.

Industrial property companies are doing well thanks to the weak pound juicing manufacturing, and there’s a boom in the warehouses that support online shopping and other logistical operations.

But companies that own lot of office space in London trade at big discounts to their net asset value – due mostly, I think, to the ongoing Brexit fiasco.

The market also seems wary of second-tier retail exposure. That’s understandable in light of the many store and restaurant closures we’ve seen since we voted to shoot ourselves in the foot in 2016.

Bailing on Brexit

Long-time readers will know I think Brexit is our biggest unforced error since the Hundred Years War.

However everything has its price.

If I can buy prime London office space at 70p in the pound via the stock market, I have a good margin of safety. If property developers have curbed speculative ventures because they fear bankers will decamp to Frankfurt and start-ups to Lisbon, at least new supply will be limited. That should help the incumbents.

Also, I don’t think we’ve condemned ourselves to penury with Brexit. I just believe we’ll be poorer than we would have been, for the foreseeable decades to come, for little gain. (That’s bad enough!)

Jeremy Corbyn notwithstanding, the rich will still get richer, and London will remain the base of operations for most of them.

You can shake your fist from the provinces, but you can’t make an oligarch or a tech entrepreneur move their company to the middle of nowhere. (Movers and shakers are even more aghast at that idea in light of the social divisions revealed by Brexit.)

But before anyone sells their Facebook shares and plows it all into UK real estate, know three things.

Firstly, Monevator is not about share tips. At most, posts like this are just suggestions of areas worth exploring. Do your own research – and on your head be the results.

Secondly, you should know I’ve had this view about commercial property since quite soon after the Brexit vote, when traders dumped UK property faster than Boris Johnson shedding his principles.

As global money began fleeing UK PLC, property funds had to be gated so investors didn’t ask to withdraw money that the funds didn’t have. I thought this was a sign the panic was overdone, and flagged up the potential opportunity.

Since then some companies I mentioned have done okay, but others have fallen further.

Again, do your own research – because you will have to live with the consequences.

This time it’s different

The third thing to note is that back in 2009, property prices really had plunged.

If you wanted to go out and buy a London office following the financial crisis, it was cheaper than a few years before. Same with a new lease, too. Prime property was going cheap.

The falls in property investments on the stock market then reflected this gloomy reality.

That’s the standard cycle in commercial property. Boom years – in which money is easy to find and development rampant – followed by lean years where over-extended developers go bust.

Sell when the fat blokes in suits and hard hats in the business pages look smug and contented, that’s my rule of thumb. Consider buying when those CEOs have been shuffled away for wiry upstarts who appear in the same pages talking up the forgotten sector again.

This time – so far – it’s different.

London office space is holding its value, and rents remain high, too. Brexit fear has not yet dinged the hard bricks and mortar assets themselves, just their stock market proxies.

Those discounts to net asset value we see with certain REITs may reflect an irrational disconnect with reality on the ground. Perhaps some of the beefy property blokes will be proved right to be more confident about Brexit than the flighty liberal elite fund managers selling down REITs?

Alternatively – more technically – it may be that hedge funds and the like who are very pessimistic about Brexit have turned to shorting the shares of listed property giants as an easy way to express that view. (The funds are unlikely to own physical offices to dump).

Does this make the big London office REITs more of an opportunity this time – because it’s a phony war – or less so – because the usual cycle hasn’t yet played out from peak-to-trough?

It’s something to think about.

Commercial property and your portfolio

In my next post I’ll recap the broader investment case for commercial property, whether you’re an active or a passive investor.

Why do some model portfolios include specific commercial property exposure, and how does the asset class differ from equities and bonds? What if you already own your own home?

The exciting bit is over, but the important stuff is to come. Subscribe to catch it.

Disclosure: I have various beneficial interests related to London property.

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What caught my eye this week.

Royal Wedding day, and this week’s money and investing links will flutter by you like confetti in the wind. Before becoming confetti stuck between your teeth. After becoming confetti that snagged in your hair. And then becoming confetti that falls into your glass of bubbly before the speeches.

Or is that just me?

I like confetti at a wedding as much as the next temporary hedonist – when it’s spiraling through the air and framing the happy couple and everyone inhabits in a Disney movie for an instant, or at the very least an episode of Emmerdale.

But then the confetti falls to the ground. The newlyweds go off on honeymoon to argue about whether they should get out of bed to eat the complementary breakfast they’ve already paid for. And the guests go home to nurse their credit card bills.

Weddings are great fun. But unless you’re rich, they’re too often an extravagance.

Even if a parent is paying, that’s money they might have given you instead to go towards a home – or to invest in a pension for those long distant post-youthful years when you’ll really need a party.

I’ve been to several weddings where I’ve guiltily winced at what it cost because I knew they couldn’t afford it. Not in the sense of they wouldn’t pay the bills and we’d all end up in the kitchen doing dishes in our suits and frocks. Just that it’d be a five-figure sum dogging them for years to come.

According to the BBC, today’s event will boast 600 guests, with another 200 coming along to the evening bash. The Financial Times puts the cost at around £32m, which seems low, especially as it reckons £30m of that will go on security.

I liked the sound of Claer Barrett’s £10,000 affair, recounted in the FT [search result]:

“I would have got the number 26 bus to the wedding, but my dad insisted on a taxi.”

I’ve also given some tips on a better value wedding in the past.

True, I’ve never gotten married (and not only because I’m too tight) but the perspective of someone who has been a guest at a couple of dozen weddings could be useful if you’re trying to save a few quid.

Not a churlish guest, I stress – as I say I love weddings.

At the very least the music today will be amazing, even if you’re no royalist. The money is spent, so let’s enjoy it. And I wish Harry and Meghan the best of luck in a life you couldn’t pay me £30m to take on.

Did you get married on the cheap – or blow the budget? Was it worth it? Could you have done anything cheaper, in retrospect?

Let us all know in the comments below.

From Monevator

A retirement income from ‘Smart’ ETFs – Monevator

From the archive-ator: Will a high salary make you happy? – Monevator

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

Number of low-paid workers falls to lowest level since 1982 – Guardian

HMRC court win sets up £30m swoop on people who used stamp duty avoidance schemes2Telegraph

Record number of savers abandon final salary pension schemes [Search result] – FT

Average person will need £260,00 for retirement, says report – Guardian

Government takes aim at private contractors in tax grab worth £1.2bn a year – Telegraph

High US stock buybacks aren’t really signalling euphoria – The Macro Tourist

Products and services

Going global with bonds: The benefits of a global bond allocation [PDF] – Vanguard

Bank of Cyprus UK launches savings and ISA rates just 0.01% higher than next-buy deal – ThisIsMoney

Experts warn against ‘confusing’ fund performance fee models – Telegraph

Seven low-cost energy-saving ways to make your home greener and cheaper to run – ThisIsMoney

TSB meltdown leads to eight-fold increase in customers switching accounts – Telegraph

Wealthfront’s experiment in risk parity has a rocky start [Search result] – FT

New online passport application accepts phone photos, saves you £25 – ThisIsMoney

How much does it cost to run a hedge fund? [PDF for nerds] – Meketa Group

Six homes in the country for sale that come with their own businesses – ThisIsMoney

Comment and opinion

Great things take time… – Of Dollars and Data

…but what if you’re in a hurry? Three potential investment miracles – Morningstar

The relationship between time, money, and happiness – Get Rich Slowly

How much do you earn? It’s not something we want to talk about – The Guardian

How Mr Money Mustache eats rich for less – Mr Money Mustache

Three years so far with the Vanguard Lifestrategy 60/40 – DIY Investor

Some areas to be wary of ahead of the next market downturn – Schwab

The US market is richly-valued. But where’s the party? – The Humble Dollar

Save for a pension? Millennials can barely afford to eat… – The Guardian

…or perhaps they can? – A Wealth of Common Sense

Britain and Broadbent’s productivity problem – Simple Living in Somerset

Can you earn extra income from dog walking? – Little Miss Fire

Is investing starting to get difficult again? [PDF] – GMO Quarterly Newsletter

Why the Sainsbury/ASDA merger is necessary but not sufficient – UK Value Investor

Buying quality companies is no guarantee of investment success – Phil Oakley

Kindle book bargains

Surely You’re Joking Mr Feynman: Adventures of a Curious Character – as told to Ralph Leighton – £0.99 on Kindle

Talking to My Daughter About the Economy: A Brief History of Capitalism by Yanis Varoufakis – £1.99 on Kindle

Total Competition: Lessons in Strategy from Formula One by Ross Brawn and Adam Parr – £0.99 on Kindle

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth – £1.99 on Kindle

Off our beat

You can change what words you hear by thinking about it [Try this!] – via Twitter

The curse of the open-plan home – The Atlantic

How long will investors keep subsidizing consumers? – New York Times

Researchers can send subliminal messages to your Amazon EchoNew York Times

Creepily intelligent things that pets have done – via Reddit

Why the Internet is not fun anymore (and blogs like Monevator are endangered) – New York Mag

And finally…

“Don’t tell me what you ‘think’, just tell me what’s in your portfolio.”
– Nassim Nicholas Taleb, Skin in the Game

Like these links? Subscribe to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.
  2. Suspicious coincidence! Perhaps this £30m swoop is to pay for the Royal Wedding?
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Many months ago, I promised to look at the practicalities of using income-seeking ETFs to generate an income in retirement.

It seemed sensible to split the post into two parts:

  • A second post – this present one – looking at so-called Smart Beta income-seeking ETFs.

That said, as I’ve remarked before I’m not necessarily a fan of ‘smart’ income-seeking ETFs. Countless investors had their fingers burned investing in the popular iShares’ FTSE UK Dividend Plus ETF (Ticker: IUKD) ten years ago, having mistakenly seen it as a lower-cost and less-risky way of getting an income from higher-yielding shares.

I’ve also revised the intention of this post. As I was writing it, I increasingly saw less point in trying to construct an example portfolio, as I did with those purely passive ETFs.

There are so many choices to make – many of them very personal – and the chosen Smart Beta methodology plays a critical role. My own selection would arguably be arbitrary compared to yours.

Rear view mirror

Smart ETFs aren’t smart in the sense that a real-life manager of a fund or investment trust might be. There’s no judgement at work, or years of investment experience.

Instead, a theoretical index is constructed containing shares that meet specified criteria – criteria that for the purposes of this post would supposedly correlate with high, robust, and reliable levels of income.

By definition, then, these smart income approaches necessarily look backwards. They extrapolate into the future a set of dividend-paying characteristics that have been observed in the past.

And the past, as the financial services industry is duty bound to remind us, is not a reliable indication of what may happen in the future.

The consistent growth approach

A number of ETF providers offer ETFs that aim to track S&P’s family of Dividend Aristocrat indices. These contain shares with a history of increasing their dividend payments for 25 consecutive years or more, subject to a (large-ish) minimum market capitalisation. The final decision on inclusion is made by a committee.

On the face of things, this is a reasonable approach. Not least because a consistently growing dividend may speak to substantial free cash flow, which is always a good thing.

But as an income investor, I know all too well that there is no guarantee that a company that has grown its dividend for 25 years or more will continue to do so. Or indeed, that it will continue to pay dividends at all.

Consider Tesco, for instance. The grocery giant abruptly cut its dividend by 75% in August 2014, and abandoned paying it altogether in January 2015 — and it, too, had that golden 25 year reputation.

More recently, America’s gigantic GE—a member of the Dividend Aristocrat index for 35 years—was booted out after incoming chief executive John Flannery cut the dividend. Pfizer offended similarly.

Perhaps more fundamentally, the Dividend Aristocrat approach excludes any consideration of yield. As an income investor, I want consistency, but I also want income.

Granted, the Dividend Aristocrat approach has been shown to deliver superior overall returns, but at the end of the day, we’re talking income here.

The higher-yielding approach

An alternative approach goes gung-ho for income, building indices of higher-yielding shares. Vanguard’s family of High Dividend Yield ETFs, for instance, track FTSE Russell’s matching family of FTSE High Dividend Yield indices – the FTSE All-World High Dividend Yield Index and various national flavours of the same.

FTSE Russell isn’t the only index provider doing this. MSCI has its own High Dividend Yield Index, while Dow Jones maintains a series of Select Dividend indices.

iShares ETFs often (but not exclusively) use the Select Dividend series, while providers such as WisdomTree and Amundi often use the MCSI indices.

STOXX and Société Générale maintain their own flavours, the latter under the Quality Income index. These are less widely available than the majors – and when ETF market capitalisation has a bearing on charges, that can be a disadvantage.

Dig even deeper and you will also come across boutique offerings, too, like VT Munro Smart-Beta fund.

Methodologies vary. FTSE Russell’s approach is to capture the highest-yielding 50% of the market, ranked by forecast yield, for instance. Others are pickier: STOXX wants to see positive dividend growth over five years, and a dividend payment in four of the last five years, while Société Générale adds nine ‘quality factors’ to the mix, including profitability and solvency.

So how to pick an ETF constructed on ‘higher yielding’ basis? My suggestion would be to start with the index methodology, and choose the one with which you are most comfortable. Which comes closest to your own stock-picking approach, or seems the most sensible?

Don’t be surprised if that leads to some awkward decisions. The iShares STOXX Global Select Dividend 100 ETF (Ticker: ISPA), for instance, seems only to be available on the German bourse, while Lyxor’s SG Global Quality Income ETF (Ticker: SGQI) will take you to Paris. From a ‘smart’ perspective, both of these seem to me to be ‘smarter’ than ETFs based (say) on the more simplistic FTSE Russell approach.

But if you look to buy on costs – as many people do with ETFs – then Vanguard’s FTSE Russell-based ETFs are undeniably considerably cheaper than Lyxor’s SG Global Quality Income and iShares’ STOXX offerings.

What would I do?

On the one hand, you have fairly sophisticated products based around Société Générale’s Quality Income index methodology, and on the other you have the broad simplification of the FTSE Russell approach. Both have their merits.

Which is best? There isn’t a simple answer.

On the whole, I remain to be convinced of the worth of smart income-focused ETFs – compared to say income investment trusts.

None of these Smart Beta products feature in my own portfolios, nor are likely to.

But if I were to seek to build a retirement income from such a set, I’d want to spread my risks by opting for multiple providers, and multiple methodologies. Nor would I buy solely on cost – diversification has a price, and it’s probably one worth paying.

Why the emphasis on diversification? Simple: to try to minimise the downsides of ETF algorithms blowing up, à la IUKD.

Finally, I know that I’ve been away from the site for many, many months. Sorry about that: sometimes, real life gets in the way.

But I know – from the nudges I’ve had from The Investor – that at least a few of you have missed me. It’s good to be back.

You can catch up on all Greybeard’s previous posts about deaccumulation and retirement.

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What caught my eye this week.

Back when this blog was more about my personal adventures in investing than about what you should do with your money, I used to write a lot about Warren Buffett.

How Buffett really got rich, how his family appreciated the benefits of cash, and of course the obligatory How to Be Like Buffett post.

The Internet is full of people praising Buffett though. In contrast, ten years ago there was little about passive investing and index funds. And, ironically, even Buffett says you should use tracker funds.

So my co-blogger came on-board to write the manual on passive investing, my active investing escapades mostly took a backseat, and the rest is history. (Or rather, a website.)

However, like some South American tribe who ate 17th Century missionary food in hastily knocked-up churches by day but continued to worship vultures and rivers in the forest by night, I never myself converted to passive investing. (In fact I’ve gotten even more active over the years.)

All of which preamble is to set the scene for why I was so delighted when CNBC revealed its Warren Buffett archive last week.

The site collates tons of Buffett bumph from across the ages. But by far the jewel in the crown are full video recordings of 25 years of his Berkshire Hathaway annual meetings!

We Buffett fans didn’t even know these existed, let alone dreamed we’d one day be able to while away a Sunday afternoon watching many hours of a septuagenarian and an octogenarian discussing reinsurance premiums in the 1990s.

Think that sounds dull? Totally understandable, and good for you.

For a certain micro-sliver of readers though, this is like when The Phantom Menace was first announced. (But without the anti-climax of the actual movie, I stress.)

When you’ve got this much grainy video of two of the world’s greatest stock pickers holding forth, who needs sunshine?

From Monevator

Oh dear, a super busy week leaves me frantically pressing the red button on…

The archive-ator: 5 lessons my dad taught me about money – Monevator

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

Interest rates on hold as Bank of England cuts growth outlook – BBC

British shares have only been cheaper during the world wars – Telegraph

UK house prices are on the slide. Where will they go now? – The Guardian

96-Year-Old secretary quietly amasses fortune, then donates $8.2 Million – N.Y.T.

Student loan interest rate is ‘absurd’, say MPs – Telegraph

Buy-to-let isn’t dead: Where landlords could make greatest profits – ThisIsMoney

The US yield curve hasn’t been this flat since 2007 – Bloomberg

Products and services

Transferwise’s new ‘borderless’ debit card gives you a free account anywhere in the EU, Australia, the US and Britain – ThisIsMoney

Rise in cashback mortgages as lenders appeal to first-time buyers – Telegraph

How futures trading changed [crashed] Bitcoin prices – Federal Reserve Bank of San Francisco

Merryn S-W: Time to stop worrying about inheritance tax [Search result, on perils of using life insurance to mitigate IHT] – FT

Smart Beta Vs. Factor Funds: What’s The Difference? – ETF.com

Why the GDPR deluge, and can I ignore it? – The Guardian

Free-to-trade US broker Robinhood aims to rival Coinbase in crypto with $363 million funding round – Fortune

Comment and opinion

Bad financial advice can be expensive – A Wealth of Common Sense

Nobody planned this, nobody expected it – Morgan Housel

A passive investor buys a portfolio of stocks for the first time – bps and pieces

The case for a five-hour working day [Search result] – FT

At last a reason to celebrate! House prices are falling – The Guardian

Did you hear about strategically humble college endowment fund that invests passively in Vanguard funds and beats 90% of its peers? This guy thinks they should lever up and pay higher fees… – Bloomberg

How to invest a lump sum – Fire V London

Managing your money for a lifetime of financial security [Search result] – FT

The costliest bias of all – The Evidence-based Investor

Common Sense with Ben Carlson [Podcast] – Canadian Couch Potato

The worst possible time to retire – Investment News

Drawdown: Lamborghinis and holidays – YoungFIGuy

Why winners keep winning – Of Dollars and Data

Centrica’s 8% yield is priced for energy Armageddon [PDF] – UK Value Investor

Why you should split your start-up 50-50 – Medium

Kindle book bargains

Talking to My Daughter About the Economy: A Brief History of Capitalism by Yanis Varoufakis – £1.99 on Kindle

Total Competition: Lessons in Strategy from Formula One by Ross Brawn and Adam Parr – £0.99 on Kindle

Tomorrowland: Our Journey from Science Fiction to Science Fact by Steven Kotler – £0.99 on Kindle

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth – £1.99 on Kindle

Off our beat

What’s on the menu in hospitals around the world [Pictures] – The Guardian

Rolling the dice in a battle with Russia [Podcast] – The New Yorker Radio Hour

At 112, America’s oldest man has the secret to a long life: ‘Just keep living. Don’t die.’ – Dallas News

Tesla’s giant battery in Australia reduced grid service cost by 90% – Eletrek

When children become scarce – Axios

This is how the [dying] paparazzi business really works [Podcast] – Oddlots

And finally…

“Here were two billionaires hurling insults while the world stopped and watched. CEOs from Davos to Dallas stopped what they were doing to watch it. It was a moment in time – organic, bizarre, and completely unplanned.”
– Scott Wapner, When the Wolves Bite: Two Billionaires, One Company, and an Epic Wall Street Battle

Like these links? Subscribe to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.
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What caught my eye this week.

Long-time Monevator readers all know you cannot avoid risk when investing. Indeed, I try to assume that any investment could – conceivably – fail me.

Does my maudlin mindset lead me to keep all my money in guns and ammo?

Not at all.

Firstly, a prepper arsenal will prove a lousy investment if there’s no societal breakdown / zombie invasion (though some exposure might still have been a good insurance policy, as discussed in a fun article below.)

All investments can fail me, remember? Heck, maybe my gun will jam.

More seriously, assuming failure is possible with everything I invest in or own helps keep me diversified across different holdings and asset classes.

You regularly hear horror stories of people putting all their life savings into some property scheme or ‘guaranteed’ bond or offshore opportunity.

Madness – even when such schemes are not outright scams.

You have been warned

Many of you will be nodding along here. But I’ve discovered one area where quite a few readers think I’m just too paranoid.

Which is that personally I would never run all my money with one fund manager, nor keep all my funds with one broker or platform.

To me, diversifying against the very unlikely case of major company incompetence or fraud is cheap and simple. Even for the strategically laziest passive investors, monitoring two accounts instead of one should only add 30 minutes or so to your annual workload.

Investor compensation under the FSCS is limited to just £50,000 – and that’s assuming you’re even covered.

And while I think the chances of losing money with a huge fund house or one of the biggest platforms is very small, the financial crisis taught me that just not having access to my money is scary.

I wouldn’t whistle contentedly while waiting weeks or months for all my worldly wealth to be recovered in full. I doubt you would, either.

People reply that their assets are legally ring-fenced, so they aren’t too bothered.

Of course I’m well aware of this. However things can and do go wrong, I reply – sounding like an Eeyore.

Well, in the past few months something has and is going wrong, with the demise of a small broker called Beaufort Securities.

As the FT reports [Search result]:

Accountancy firm PwC, which was appointed as administrator by the UK’s Financial Conduct Authority, has faced mounting criticism after it said last week that it could cost as much as £100m to return the cash and assets held by the company, currently valued at £550m, to its thousands of private investor clients.

Some 700 clients with larger portfolios — of more than £150,000 in cash and assets — are expected to bear much of the cost.

“In the absence of any other available resources . . . the overall costs of delivering [returns] to clients has to be shared appropriately by those to whom the assets belong,” said Russell Downs, a joint administrator and partner at PwC, on Wednesday, citing legislation introduced in the wake of the financial crisis.

Repeat: Ring-fenced client money is going to be taken and used, and clients will not get all their money back.

The long-time investor Lord Lee of Trafford has tabled a question in the House of Lords about the basis for PwC’s decision.

Lee told the FT:

“Everyone is of the view — including me — that client funds are ringfenced and protected, and no one can put their hands in and dip into them.”

But PwC has insisted there is a legal and practical case for using clients’ money in the wind-up process.

Repeat: You have been warned

No doubt we can have an informative discussion in the comments about exactly what happened here.

I’m only familiar with what I’ve read in the press, and am far from an expert on the law.

I also fully expect some readers to say it couldn’t happen with this or that big fund manager or the platform they frequent (although I’d argue some sophisticated passive investors who chase the lowest fees and express annoyance when anyone makes the case for a big and boring platform could actually be more likely to find themselves on a rickety outfit…)

That said, perhaps people will be more reticent to shout “Never!” now this has happened.

Besides, the specifics of this case aren’t the point. Next time the specifics will be different.

The big reminder is what is important for our purposes: Things fail.

Giant investment banks can’t fail until Lehman Brothers failed. Interest rate can’t go to zero until they did. Company pension schemes were safe until some immoral mogul stuck his fingers in the pot.

Order reigns until a time of crisis, when anything can happen.

Normally we’ll be fine. Virtually always we are.

But not always.

I wouldn’t put all my eggs in any single basket.

  • Are you a Beaufort client? Voices on Twitter are urging you to write to your MP.

From Monevator

Annuities: What’s so bad about a guaranteed income for life? – Monevator

(If you’ve already read via email you might still enjoy the many comments – Monevator)

From the archive-ator: How to be a capitalist – Monevator

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

NIESR slashes forecast for UK growth in 2018 down to 1.4% – Guardian

George Osborne stands by predictions of Brexit impact [Search result] – FT

HMRC suspends its Making Tax Digital plan to focus on Brexit – The Register

Mortgage prisoners could be handed lifeline as three in 10 borrowers could have found cheaper deal – Telegraph

Beware of ‘push payment’ scams – Guardian

More higher-earners are maxing out their ISAs as pension allowances fall – Telegraph

‘My £1,000 Macbook Air was stolen at airport security and no one cares’ – Guardian

Argentina has raised its interest rate to 40% – BBC

Back to the future: US one-year government bonds are yielding more than US stocks for the first time since the financial crisis – Dr Ed’s Blog

Products and services

UK buyers need more help to find cheap mortgages, says FCA – Guardian

What happens to your credit card debt when you die? – ThisIsMoney

Co-op offers ‘no frills’ cremation service – Guardian

Here’s my CORRECT Thriva affiliate link. It gives you a 50% discount off your first health-tracking blood test. Thanks to reader @Ray for discovering my error last week! Sorry about the confusion. – Thriva

The ‘exclusive world’ of high-end investment clubs [Search result] – FT

An argument for adding crypto to a 60/40 portfolio [PDF] – Bitwise Investments

Hey crypto bros! Journalism ≠ advertising [Search result] – FT Alphaville

Comment and opinion

Why the masses missed the ten-year bull market – Investing Caffeine

Retired accountant fails to understand interest-only mortgage, loses house – Simple Living in Somerset

Why it’s time to sell Beazley shares – UK Value Investor

Schrodinger’s portfolio – A Wealth of Common Sense

Save your goofing off for your 50s – Humble Dollar

Can you become a millionaire on a fireman’s salary? – The Escape Artist

Is annuities’ bad press deserved? – Young F.I. Guy

How the finance industry is being replaced by better robots – Abnormal Returns

Equity factors and inflation [Nerdy] – Factor Research

Value investing isn’t dead, but price-to-book certainly looks comatose [Also nerdy] – Alpha Architect

US equities are not egregiously over-valued – Macro Man

Does higher financial literacy lead to higher returns? – Academic Insights On Investing

Kindle book bargains

Total Competition: Lessons in Strategy from Formula One by Ross Brawn and Adam Parr – £0.99 on Kindle

Tomorrowland: Our Journey from Science Fiction to Science Fact by Steven Kotler – £0.99 on Kindle

Doughnut Economics: Seven Ways to Think Like a 21st-Century Economist by Kate Raworth – £1.99 on Kindle

The Wisdom of Finance: How the Humanities Can Illuminate and Improve Finance by Mihir Desai – £3.29 on Kindle

Off our beat

The surprisingly solid mathematical case of the tin foil hat gun prepper – Medium

In Japan, old robot dogs donate organs and get a Buddhist send-off – NPR

Tim Hartford: Cheap innovations are often better than magical ones [Search result] – FT

And finally…

“The bottom line is that the victims of crime are denied justice, and people who are not guilty find themselves in prison. And what astounds me is that most people don’t seem to care. Or even know.”
– The Secret Barrister, The Secret Barrister: Stories of the Law and How It’s Broken

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This guest post is by Mark Meldon, an independent financial advisor (and Monevator reader!) who we’ve noticed talking a lot of sense over the years.

With more and more Baby Boomers reaching retirement, I thought I’d mount a defence of the much-maligned annuity as a solution to the question of after-work income.

As an IFA, I have seen a big increase in the number of enquiries from individuals wanting annuities rather than ‘flexi-access drawdown’ this year, and I think I know why.

But first, a little bit of history.

A serious business

…but if you observe, people always live forever when there is an annuity to be paid to them; and she is very stout and healthy, and hardly forty. An annuity is a very serious business; it comes over and over every year, and there is no getting rid of it.

– Jane Austen, Sense and Sensibility (1811)

What Jane Austen said over 200 years ago is still quite true today. Those who purchase a guaranteed income for life via an annuity – whether through using their pension fund to do so or, much more rarely, by spending their own money – tend to enjoy better-than-average health and suspect that they will live for a long time.

Otherwise why would they do it?

They also appreciate something often misunderstood by most of the population – you will live longer than you think, unless you are very unlucky.

Nowadays, even those suffering poor health or making poor lifestyle choices – smoking is an obvious example– can get recognition for their reduced life expectancy with underwritten annuities.

Annuities have been around in one way or another since Roman times and were very popular following the founding of Equitable Life in 1762 and the establishment of hundreds of competitors in the centuries that followed. Even the government sold annuities up until 1928.

Back in the 1970s and 1980s, there were well over a hundred life offices arranging annuities1. Now just a handful remain – we will see why that is a little later!

So, what, exactly, is an annuity?

Upside down life insurance

One way to think about annuities is that they are the reverse of a life assurance policy.

If you buy a life assurance policy you make small regular payments to your life office and, should you unfortunately die during the term, they send you a big cheque.

The reverse is true with an annuity. Here you send the life office a big cheque and they send you little bits of money until the day you die.

Most annuities are fixed in payment, but those that increase by a fixed percentage (‘escalation’) or by reference to the RPI (Retail Prices Index – a measure of inflation) are available and are a sensible choice if you can afford one.

We can see, therefore, that an annuity insures the annuitant against longevity risk, because of the guaranteed lifetime income stream.

You simply don’t get that with any other kind of investment – period.

I have arranged hundreds of annuities over the years, nearly all of them pension-funded ones. I can honestly say that nobody, ever, has been unhappy with the annuity. These individuals were not fazed by the ‘annuity puzzle’.

The annuity puzzle

In recent years, lots of economists have spent a great deal of time wrestling with what they like to call ‘the annuity puzzle’.

This so-called puzzle was first drawn attention to by Franco Modigliani in his Nobel Prize acceptance speech in 1985.

Modigliani said:

“It is a well- known fact that annuity contracts, other than in the form of group insurance through pension systems, are extremely rare. Why this should be so is a subject of considerable current interest. It is still ill-understood.”

What Modigliani said a third of a century ago remains true today.

According to Shlomo Benartzi, Alessandro Previtero, and Richard H. Thaler2:

‘Rational choice theory predicts that households will find annuities attractive at the onset of retirement because they address the risk of outliving one’s income, but in fact, relatively few of those facing retirement choose to annuitize a substantial portion of their wealth.

Adding some behavioural factors only deepens the puzzle because annuities have the potential to solve some complex problems with which individual struggle, like when to retire and how much they can spend each year in retirement, and thus they might be expected to be attractive for that reason as well.’

Benartzi, Previtero, and Thaler go on to say something very important and relevant to today’s ‘at retirement’ sector:

‘In addition to these arguments based on rational choice theory, certain behavioural factors should, in principle, increase the attractiveness of annuities.

As a first approximation, middle-class American households spend what they make. Whatever saving takes place occurs via pensions and paying off home equity, and the latter vehicle seems to have become much less fashionable in the last decade.

If the primary income earner in a household retires, the ‘spend what you make’ rule of thumb is no longer available. Instead, households who choose not to annuitize must learn a new skill, namely calculating the optimal drawdown rate over time.

Given the complexity of this optimization problem, it is not surprising that retirees might err, either by under-or overspending. These errors can easily be exacerbated by self-control problems if households have trouble sticking to their drawdown plans, either by spending too little or too much.

By converting wealth into an annuity, individuals and households can simultaneously answer the conceptually difficult question of figuring out how much consumption is sustainable given the age and wealth of the consumer and provide a monthly income target to help implement the plan.’

I like that – a lot! This is, after all, exactly how ‘defined benefit’ (aka ‘final salary’) pensions and our state pension works – a guaranteed income for life, with some inflation proofing, too.

They can give a ‘baseline income’ covering regular bills, and other pension funds and investments can cover other expenses as they arise.

So why are annuities still so unpopular?

Annuities are not at all sexy. They are also very much a one hit wonder as far as IFA and financial services companies fee-earning ability is concerned.

Nor can they help the reckless squander their capital!

Not so long ago I was at a conference concerned with the ‘at retirement’ market. The speakers produced various tax-planning tips, observations on the state of the investment markets and several technical sales techniques, and how much money they were making ‘managing the Baby Boomers money’. Whilst all this was very impressive in its way, and undoubtedly some of the ideas promulgated might work in certain circumstances, I did find the whole day rather discomforting.

When asked, I said how ridiculous it was that the retired had to spend so much time thinking about their investments, taking and paying for advice, and worrying about the stockmarket. I said I thought that for many it would be much better to cover their financial backsides with a lifetime annuity.

A couple of the presenters seemed to question my views and suggested some naivety on my part.

As I trudged across the rain-swept car park I wondered who was right.

Was it them with their discretionary fund management offerings, index funds managed by algorithms (what?), venture capital trusts and offshore investment bonds? Sure, these things can be useful in certain situations, but they all involve risk, sometimes very substantial risk.

Perhaps my line of thinking about how best to secure my clients a decent amount of worry-free lifetime income with at least some of their wealth is rather old-fashioned, but I remain convinced that it has its place for many people.

A 19th Century digression

I need to mention here another long-dead novelist, Anthony Trollope, who was writing his Palliser series of novels about 50 years after Jane Austen wrote Sense and Sensibility.

Since the turn of the year, I have been re-reading these great stories at bedtime – I’m about to start Phineas Redux – and something struck me related to my work.

Trollope’s middle and upper-class characters are always banging on about how much money they have, but, in contrast to the IFAs I met at that Exeter conference, their 19th century fortunes are almost always described in terms of the annual income they produce, not the lump sum.

It seems to me that hardly anybody talks about investments that way now. It’s all about net worth and asset value. I do wonder if asset values have come to play such a big role in modern financial life that we’ve forgotten what those assets are for?

In Trollope’s world, people bought shares purely for the dividend. Now dividends are usually an afterthought, with price appreciation the main goal.

I think that is wrong-headed.

Annuities don’t buy Aston Martin’s

I took a call in my office the other day from a lady seeking help with a pension sharing order following her divorce.

She didn’t appreciate that she won’t be getting a pension when it goes through. She will get an investment account wrapped up in a pension, unlike her ex-husband, who will continue to receive half his indexed-linked final salary pension. This lady was very shocked to learn that she must think about investment, interest rates, longevity statistics and all that kind of thing when her ex doesn’t.

I suspect that she might well choose to annuitise part of her eventual fund in a year or two, as she did understand the guaranteed income for life bit of our discussion.

Yet this lady also helped confirm what I thought was merely an urban myth. A close relative of hers took a transfer out of his employer’s final salary pension scheme just past age 55. He then cashed-in the whole lot – paying away almost half the fund in tax and losing his personal allowance – and blew £160,000 on an Aston Martin DB11.

I said that was completely crazy and she agreed. Apparently, the gentleman enjoys good health, but he sure is going to be income poor when he is 80.

I have no reason to disbelieve this story.

So, what to do when it comes to annuities?

I recommend you think hard about all options when you are nearing retirement and looking at your investment choices:

  • Consider annuities very seriously.
  • Maybe mix and match annuities with other financial arrangements.
  • Conventional annuities are certain! Nothing else is. There are investment linked annuities around, but these are not ‘certain’ in the same way.
  • Annuities don’t cost much to arrange. An IFA will charge to search out the best deal and to set one up – but there are no ongoing fees to pay, as far as the annuity purchase itself is concerned.
  • Most annuities involve no investment risk.
  • If you think you will live forever, an annuity is a great idea.
  • If you think you will die soon, think hard about not buying an annuity.
  • Final salary pensions are, in practice, annuities.
  • So is the state pension.
  • You can use ‘flexi-access drawdown’ as the icing on the cake – but remember it isn’t guaranteed and it costs a lot to run.
  • You say you don’t want an annuity? But do you really want to be invested when you 90 – or a landlord with a portfolio of buy-to-lets?
  • Remember inflation. Even today, with inflation quite low in historical terms, rising prices quickly erode the purchasing power of a fixed income. You can purchase annuities that increase in payment by a fixed percentage – usually with a maximum of 8.5% per annum – or index-linked annuities that are referenced to any increase in the RPI. In many ways, an index-linked annuity would be ideal, but they are very expensive, often reducing the ‘starting’ income compared with a fixed annuity by around 50%.
  • If you are worried about dying sooner than average – and thus subsidising those who live longer than average – consider a life assurance policy for your financial dependants
  • Don’t arrange a single-life annuity if there is someone else financially dependent on you
  • Finally, annuities offer something priceless – peace of mind!

Mark Meldon is an Independent Financial Advisor based in Cheddar, Somerset. You can find out more at his company website. You can also read his other articles on Monevator. Let us know in the comments if there’s a topic you think Mark could cover.

  1. Source: UK annuity price series, 1957-2002, Edmund Cannon & Ian Tonks, University of Bristol & University of Exeter
  2. Annuitization Puzzles – Journal of Economic Perspectives – Volume 25, Number 4, Fall 2011
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What caught my eye this week.

One reason I found it pretty easy to rent for so long is that I’ve always done very well for landlords.

My last landlord in particular was a star. He sensibly recognized that his initially fully refurbished property was kept in good shape for the many years we rented it. By the end we mostly chatted over email rather than going through the agents. The rent, which was high-ish when I first moved in, was only raised once in a decade.

He was also flexible in moving me to a one-month rolling contract when I started looking for somewhere to buy after my housemate bought a property and moved on.

And when I completed rather out of the blue and moved, he just let me pay to the end of that month instead of asking me to pay the next month as he was entitled to given the lack of notice, which saved me (and cost him) £1,750.

I was therefore pretty sympathetic to the post at My Deliberate Life defending amateur landlords against some nasty accusations in The Guardian.

The author, a landlord, writes:

I’m not trying to make out like I’m some kind of saint. Obviously I’m in it for the money and it does give a good return. And a lot of these services I’m legally required to provide and rightly so.

But don’t paint me as some kind of demon, or parasite, or ‘feudal incubi’ (whatever that is). I am not any of those things.

The very long post is well worth a read for a pretty balanced recap of the state of the UK housing market.

Personally I think the scales were tipped in favour of buy-to-let landlords for far too long, and that combined with very low interest rates this has taken a generational wealth gap to dangerous levels. The recent tax changes seem to be addressing this.

But in my experience the average buy-to-let landlord is no more a social parasite than an investor in an index tracker funds.

Don’t hate the player, hate the game.

From Monevator

Lyxor ETFs: Very low cost, but be aware of some wrinkles – Monevator

From the archive-ator: How to enjoy life like a billionaire – Monevator

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

UK economy stagnating according to 0.1% GDP growth figure – BBC

Interest rate rise in May is no longer odds-on – ThisIsMoney

Use inheritance tax to tackle inequality of wealth, says OECD [and me] – Guardian

Is it time to reform inheritance tax? [Search result] – FT

Prince left no will. As a result his estate is a mess – The Washington Post

What happens when the NIMBYs battle the YIMBYs? – ThisIsMoney

Stamp duty cut helps nearly 70,000 first time buyers [Search result] – FT

Beware of scammers posing as HMRC demanding cash – ThisIsMoney

Bear Grylls puts survival skills of the wealthy to the test [Search result] – FT

Most US investors are now in lower fee funds.

And the trend is accelerating…

We need to update our rhetoric… in the US at least, the argument for cheap funds appears to have been won – Morningstar

Products and services

The US entrepreneur who wants to launch a Long-term Stock Exchange [Q&A] – NewCo

Leeds Building Society launches new cash ISA link to Bank of England base rate – ThisIsMoney

SSE/Npower merger could reduce competition and increase bills, says watchdog – ThisIsMoney

Refusing a smart meter could cost you £111 a year due to poor deals – ThisIsMoney

We’re on our knees, says TSB boss as IT crisis drags on – Guardian

Why a 1% chance that Bitcoin could hit $700,000 is worth betting on… – Fortune

…although Bitcoin could equally be the biggest pump-and-dump scheme in history – Recode

I am getting healthier by tracking my regular blood tests via Thriva and its online dashboard. (Really!) Get 50% off your first test via my affiliate link2Thriva

Homes for sale in former chapels, in pictures – Guardian

Comment and opinion

The limits of retirement simulation – The Retirement Café

The myth that markets get prices right won’t die – Bloomberg

Investing: Past, present, and future – CFA Institute

Can we help consumers avoid running out of money in retirement?3 [Report] – IFoA

ThisIsMoney podcast debates the Bank of Mum and Dad [Podcast] – ThisIsMoney

Investment trusts for the grandchildren – DIY Investor

Safe withdrawal rates: An inconvenient truth – YoungFIGuy

Will you move during retirement? – Vanguard blog

Merryn S-W: Fund managers and the struggle to be average [Search result] – FT

Do you even know what’s going on in your pension? – The Escape Artist

When your emergence fund cash call comes – SexHealthMoneyDeath

Morrison’s recovery is underway, but is it in the share price? – UK Value Investor

Beware the rise of the loss-making IPO – The Value Perspective

A deep dive into Amazon’s valuation – Musings on Markets

Yes, we’re in a tech bubble. So what? – Research Affiliates

Kindle book bargains

Side Hustle: Build a Side Business and Make Extra Money – Without Quitting Your Day Job by Chris Guillebeau – £0.99 on Kindle

McMafia: Seriously Organized Crime by Misha Glenny – £0.99 on Kindle

The Millionaire Next Door by Thomas J. Stanley Ph.D.– £0.99 on Kindle

ReWork: Change the Way You Work Forever by David Fried – £0.99 on Kindle

Off our beat

How bacteria are changing your mood – BBC

Extroverted, conscientious, and disagreeable forty-somethings earn more – HBR

Open, closed, and privacy – Stratechery

Nassim Taleb: Beware the big errors of Big Data – Wired

The real reason you want an iPhone X – Hackernoon

The BBC has made a 16,000-strong sound library freely accessible. Have fun! – BBC

And finally…

“There was a balance. It wasn’t because humans lived in balance with nature. Humans died in balance with nature.”
– Hans Rosling, Factfulness: 10 Reasons We’re Wrong About The World

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  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.
  2. I believe the discount shows up at checkout, but check carefully as there’s no special landing page!
  3. Thanks Snowman!
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Cost is one of the best predictors of return (low = good), so you might think we’d be filling our boots with the new Lyxor Core ETF range.

This is a family pack of plain vanilla ETFs with fund expenses so low that you wonder if Lyxor still employs any humans.

£10,000 in a Lyxor UK index tracker now only costs you £4 a year to own, at the headline Ongoing Charge Figure (OCF) rate of 0.04%.

Compare that with the £100 a year you’d pay if you had the same money stuck in Virgin’s notoriously expensive UK tracker cum customer inertia trap.

Price war over – back up the truck?

Not so fast.

War! What is it good for? (Costs now nearly nothing…)

First let’s compare the Lyxor range on OCF versus its nearest rivals.

Here’s where Lyxor wins or ties for the no.1 spot in the main equity categories (note: bold type is just for easy reading):

 Fund UK US Europe Japan World
No. 1 or tie Lyxor Core M’star UK ETF Lyxor Core M’star US ETF Lyxor Core EURO STOXX 300 ETF Fidelity Index Japan P Lyxor Core MSCI World ETF
OCF (%) 0.04 0.04 0.07 0.1 0.12
UK* reporting fund No No Yes N/A No
No. 2 or tie iShares UK Equity Index Fund D HSBC American Index Fund C HSBC European Index Fund C Lyxor Core MSCI Japan ETF Fidelity Index World P
OCF (%) 0.06 0.06 0.07 0.12 0.12
UK* reporting fund N/A N/A N/A No N/A

*UK reporting fund: A ‘No’ in this column is a big concern if the ETF is held outside of your ISA or SIPP. Yes or N/A means there’s nothing to worry about. “M’star” = Morningstar.

And here’s where Lyxor wins in UK government bonds categories (no pesky ties):

 Fund All-Gilts Short Gilts Index-Linked Gilts
No. 1 or tie Lyxor Core FTSE Actuaries UK Gilts ETF Lyxor FTSE Actuaries UK Gilts 0-5Y ETF Lyxor Core FTSE Actuaries UK Gilts Inflation-Linked ETF
OCF (%) 0.07 0.07 0.07
UK* reporting fund Yes Yes Yes
No. 2 or tie Vanguard UK Gilt ETF SPDR Bloomberg Barclays 1-5 Year Gilt ETF Vanguard UK Inflation Linked Gilt Index fund
OCF (%) 0.12 0.15 0.15
UK* reporting fund Yes Yes N/A

*UK reporting fund: A ‘No’ in this column is a big concern if the ETF is held outside of your ISA or SIPP. Yes or N/A means there’s nothing to worry about.

Should you switch?

On costs, the Lyxor Core ETFs now own the joint. They’ve even cut a third off annual fund expenses in intensively competitive markets like UK and US equities.

That’s impressive.

Yet the truth is the savings are negligible if you already own a rival cheap tracker that slashes costs like Freddy Krueger slashes screaming teens.

For every £10,000 of fund you own, each 0.01% OCF reduction saves you £1 per year.

Switching to Lyxor’s UK ETF might save you £2 over the next 12 months if you already have £10,000 in an iShares UK Equity Index Fund, for example. (Assuming the latter maintains its 0.06% OCF. This example for training purposes only. Terms and Conditions apply.)

I’ve heard of the miracle of compound interest, but you’ll struggle to get many loaves and fishes for that money, even years later.

Don’t get me wrong – I’m not suddenly saying costs don’t matter!

But there comes a point where even Martin Lewis wouldn’t get out of bed for the savings.

If you’re already in a competitive tracker, consider whether switching is worth your time. Or worth the risk of being out of the market.

Even if you can switch in the blink of an eye between two ETFs then it could still take you years to make back the cost of a couple of trades, depending on how much you’ve invested.

New money doesn’t face this switching cost, of course.

But there are a couple of other stink bombs to watch out for…

Pong! UK reporting fund status

The UK, US and World Lyxor ETFs do not currently have UK reporting fund status.

That’s potentially a problem if you plan to own them outside of an ISA or a SIPP – although hopefully this situation will soon be resolved.

What’s the beef?

Lyxor’s Core ETFs are based in Luxembourg.1 That makes them offshore funds.

If offshore funds do not have UK reporting fund status and they aren’t in your tax shelters (ISAs or pensions) then any capital gain you make on that fund is taxed as income rather than capital gains when you sell.

That’s usually bad for three reasons2:

  • Income tax is much higher for most people than capital gains tax (CGT).
  • Your tax-free £11,700 CGT annual allowance does not apply.
  • You can’t use capital losses elsewhere to offset the gain.

A basic rate taxpayer would pay 20% tax instead of 10% on any capital gain over zero if they sold an un-sheltered, non-reporting fund.

Avoid that scenario like Novichok!

The reporting fund status of each Lyxor ETF is stated on its individual webpage. It’s easy to miss because they’ve used the obscure acronym ‘UKFRS’ to indicate UK Reporting Fund Status. Cheeky.

The good news is this is likely a temporary situation.

Lyxor tells us it applies for UK Reporting Fund status on all LSE listed funds as a matter of course, but that it can take some time for status to be granted. Typically three months or so.

For what its worth, it also says investors needn’t worry if they trade in the meantime, because reporting status applies historically once granted.

But we’d probably err on playing safe and waiting until status is officially granted if you’re buying outside of an ISA or SIPP.

(If you are buying the ETFs tucked safely away in a tax shelter, then “no wuckers”, as Australian bartenders enigmatically say, as then the entire matter is irrelevant.)

Nose peg! Withholding tax

You also need to watch out here for withholding tax.

Stealthy as a pickpocket, withholding tax lightens the income you receive from overseas.

For example, if you directly own US shares, then Uncle Sam docks you 30% of your dividends in withholding tax before the money makes it over the border.

Fill in the right form and you’ll only pay 15%. That’s because HMRC are next in the queue, and a double-taxation treaty exists between the US and UK to stop you being spit-roasted between two taxmen.

Funds also have to pay withholding tax if they hold foreign securities. So the overseas dividends and interest paid to you come pre-shorn of withholding tax.

You can’t escape withholding tax levied on the fund no matter how roomy your personal tax shelter.

This applies to ETFs based in Luxembourg and Ireland even though you may have heard they’re a withholding tax-free zone.

While it’s true withholding tax is not levied on dividends and interest repatriated to the UK from those territories, the reality is that funds have already paid withholding tax on income they’ve earned in the US, Japan, Australia or anywhere else they hold foreign securities.

Where’s all this leading? Well, it appears Luxembourg-based ETFs such as Lyxor’s may not enjoy the same tax treaty privileges as Ireland or UK-based funds.

For example, the US whacks Luxembourg funds for the full 30% withholding tax charge according to this KPMG research.

In contrast, most Irish (and UK) funds are able to claim back 15% withholding tax in line with their country’s double taxation treaties with the US.

Lyxor has confirmed to us that dividends on its US equity fund are paid after 30% withholding tax. The company notes that US shares aren’t typically high dividend payers anyway – especially at the smaller end of the market touched by the longer reach of the Lyxor US fund, which goes beyond the S&P 500. And there are also question marks as to how long the current withholding tax regimes in other territories will last.

So one could perhaps argue that the small tail of withholding tax shouldn’t wag the investing dog here.

Still, do the sums and you’ll see that in the case of US equities, a 15% bigger bite out of your dividends could easily overwhelm the slim 0.02% OCF advantage of the Lyxor ETF – depending on how dividend-heavy the returns from its Morningstar index turn out to be.

Buyer be aware

So the situation requires more awareness than a mindfulness course.

And you may well need a mindfulness course to heal the psychic trauma inflicted by wading through this lot.

For sure, I couldn’t be happier that funds this cheap have come to the UK market, despite my laundry list of “Ah, buts…”

It’s just that there’s more to choosing an index tracker than a waifish OCF.

We haven’t even gotten into the fact that the index of the Morningstar UK ETF tracked by Lyxor is only 81% UK. 9% is Dutch, nearly 3% Swiss and 2% US!3

More reassuring is that the Lyxor ETFs don’t do securities lending and they do fully physically replicate their indices.

Gilt-y pleasure

The case is much more straightforward for Lyxor’s UK Gilt ETFs. They cost around 50% less than their rivals and aren’t troubled by withholding tax / reporting fund doubts.

Hurrah!

And regardless of whether the equity ETFs tally with your personal situation, they’ll hopefully pressure other fund providers into following suit and taking costs even closer to zero. That way we all get to keep more cash in our pockets.

Take it steady,

The Accumulator

  1. You can tell because their ISIN codes begin with LU for Luxembourg. IE = Ireland, GB = UK, FR = France.
  2. Everyone’s exact tax situation is different, so we can only talk in generalities here and throughout this article.
  3. This mix may in part reflect the index tracking the overseas alternatives of FTSE giants, such Royal Dutch Shell or Unilever. Either way it’s another thing to be aware of.
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What caught my eye this week.

Academic research has confirmed what we obsessive savers already suspected – that we’re pretty damn attractive to the opposite sex.

As Jonathan Clements at The Humble Dollar reports:

Savers, both men and women, were viewed as more desirable romantic partners, because they’re perceived to have greater self-control.

In truth, it isn’t clear that good savings habits and greater overall self-control really are connected.

But because good savers are viewed that way, they’re seen as less likely to, say, lose their temper, drink too much, or be unfaithful.

It brings new meaning to the phrase “interest rate”, eh?

Form a queue please…

From Monevator

Book Review: Beyond the 4% Rule – Monevator

Could global prime property be the canary in the goldmine? – Monevator

From the archive-ator: How to get a 13% return from RateSetter – Monevator

News

Note: Some links are Google search results – in PC/desktop view these enable you to click through to read the piece without being a paid subscriber.1

BOE Governor Mark Carney: Brexit could delay interest rate rises – BBC

Half of high net worth investors expect to live to 100 – Guardian

Buy-to-let sector being reshaped by tax changes – ThisIsMoney

One in three UK millennials will never own a home, report finds – Guardian

How a 32-year old turned $200 into a company he sold for $10m in a matter of months – CNBC

Each mooted Brexit deal will leave Britain worse off, study finds – Guardian

Products and services

Wyeland Bank’s new two-year fix tops saving table, pays 2.15% – ThisIsMoney

Ministers under fire as student loan interest rate hits 6.3% – Guardian

Beware “cheap” funeral plans that could leave your family out of pocket – ThisIsMoney

Vinyl records turn the tables for collectors and investors [Search result] – FT

Scottish Power to increase energy prices by 5.5% – ThisIsMoney

Understanding the State Pension/NI fiasco – Young FI Guy

How much does a patio heater cost to run? – ThisIsMoney

Entrepreneur launches a website where you can raffle your house instead of selling it – ThisIsMoney

Comment and opinion

Stealing the golden years – A Teachable Moment

In the Land of the Lost – Of Dollars and Data

Five tax traps to avoid in retirement [Search result] – FT

The recent success of momentum investing in the UK – Twitter

Merryn S-W: Payback time for QE looms [Search result] – FT

Smart Beta ETFs don’t do what many investors believe they do – Factor Research

Would you pay £1,000 to go a wedding this summer? – The Pool

Forecast your misery to live a happier life – Financial Samurai

Cashflows as a guide to retirement planning – The Financial Bodyguard

Do big US endowment funds generate alpha, or just take more risk? – Abnormal Returns

Help! Ten years might not be enough for financial independence – 3652 Days

Bitcoin is worth… somewhere between $20 and $800,000 – Bloomberg

The yield curve is flattening. Eventually it will matter – The Macro Tourist

The biggest companies can be casualties of their own success – Morgan Housel

Entrepreneurs are ‘cherries’ and employees are ‘lemons’ – Steve Blank

Lars Kroijer on the truth about hedge funds and demystifying investment [Podcast] – Marketing and Finance

There’s something you should know about fairness – The Escape Artist

Kindle book bargains

McMafia: Seriously Organized Crime by Misha Glenny – £0.99 on Kindle

The Millionaire Next Door by Thomas J. Stanley Ph.D.– £0.99 on Kindle

ReWork: Change the Way You Work Forever by David Fried – £0.99 on Kindle

Side Hustle: Build a Side Business and Make Extra Money – Without Quitting Your Day Job by Chris Guillebeau – £0.99 on Kindle

Off our beat

Why US Midwest cities are losing their accents – City Lab

People and the productivity paradox – Maudlin Economics

Stella McCartney: “Only 1% of clothing is recycled. What are we doing?” – Guardian

Jerry Muller on the tyranny of metrics [Podcast] – EconTalk

Flight/Wings (Xenogears 20th Anniversary Concert) [Video] – YouTube

And finally…

“Remember, retirement planning for average life expectancy is quite risky – half the population outlives their expectancy.”
– Wade Pfau, How much can I spend in retirement?

Like these links? Subscribe to get them every Friday!

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.
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