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What caught my eye this week.

A few of you have been asking what happened to our pal Lars Kroijer? And it’s true, there was a time when you couldn’t turn to Monevator without tripping over another great article by the ex-hedge fund manager turned index investing ultra.

Well, I’m pleased to report that Lars is well and so are sales of Investing Demystified. However there are only so many ways you can urge people to buy a global index tracker (tell us about it!) and I get the sense he’s enjoying a bit of a break.

Never one to ignore a hint, however, I was able to penetrate Lars’ chill-zone defenses and persuade him to make another appearance on this website.

Instead of an article though, Lars wants to do something different – a real-life Q&A where he responds to reader questions.

Lars suggested doing it live, but I watched too much Blue Peter as a kid for that and feared a calamity. So instead he’ll record a video answering your questions and we’ll post it here.

Of course that does mean we need some reader questions to ask him…

So, what would you like to know from a man whose career improbably straddles the spectrum from successful hedgie to best-selling passive investing author? Asset allocation, overseas bonds: yea or nay, whether the hedge fund world is really as witty as Billions, do they eat Danish pastries in Denmark – all fair game I reckon.

Please ask a few good questions in the comments below. Otherwise we’ll have to pad out the Q&A with karaoke requests, and nobody wants that…

From Monevator

Can you invest your way onto the Rich List? – Monevator

From the archive-ator: A mortgage is money rented from a bank – Monevator


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

Pound slides to four-month low as Brexit talks end – BBC

BT to hand £500 of shares to each of its employees – ThisIsMoney

What matters most for our life satisfaction? [Data] – Office for National Statistics

US birth rate lowest in three decades, despite improved economy – Associated Press

(Click to enlarge)

The 150 apps that power the gig economy – The Visual Capitalist

Products and services

ETF veteran hits out at negative-fee ‘gimmick’ launch – CityWire

Swap gold for Bitcoin, says fund that has $1.2bn in Bitcoin – ETF.com

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

Will anyone save the investment trust saving scheme? – IT Investor

A dive into investment trusts that yield 4% or more – ThisIsMoney

Charlie Bilello: Bitcoin has generally been a poor hedge against equity declines – via Twitter

Fidelity’s new 0% index funds versus Vanguard [US but interesting] – Budgets are Sexy

For sale: Homes used as TV and film locations [Gallery] – Guardian

Comment and opinion

Why keeping up with inflation isn’t enough – SL Advisors

The avocado principles [Month old but worth it] – Seth Godin

Who can you trust with your money? [Search result] – FT

Larry Swedroe: Emerging markets need time – ETF.com

Would being richer make you happy? [Podcast] – ThisIsMoney

…actually, money can buy happiness – A Teachable Moment

The not so obvious reasons why people want to achieve FIRE – Financial Samurai

Power of two – Humble Dollar

What should you do with an inheritance? – A Wealth of Common Sense

Why a lack of competition is rubbish for investors [Search result] – FT

Meb Faber interviews valuation guru Aswath Damodaran [Podcast] – Meb Faber

If ‘Hot Hands’ do exist, what then? – Morningstar

Is buying expensive stocks – priced above 10x sales – ever a good idea? – Alpha Architect


Tory-Labour Brexit talks end without deal – BBC

Labour’s Brexit tactics are failing spectacularly – Guardian

Is there a single Blue Rinse Tory who doesn’t fancy a knee-trembler with Boris Johnson? – Guardian

Kindle book bargains

My Morning Routine: How Successful People Start Every Day Inspired by Benjamin Spall – £1.99 on Kindle

Trump: The Art of the Deal by Donald Trump – £1.99 on Kindle

So Good They Can’t Ignore You by Cal Newport – £0.99 on Kindle

The Personal MBA: A World Class Business Education in a Single Volume by Josh Kaufman – £1.99 on Kindle

Off our beat

Goal! The football league that helped one man lose five stone – Guardian

What happens when a podcast addict goes cold turkey for two weeks – Fast Company

Air pollution is slowly killing us all, new global study claims – Clean Technica

Manchester restaurant accidentally serves £4,500 bottle of wine, but wins on social media – CNBC

And finally…

“Wealth is not an absolute. It is relative to desire. Every time we yearn for something we cannot afford, we grow poorer, whatever our resources. And every time we feel satisfied with what we have, we can be counted as rich, however little we may actually possess.”
– Alain de Botton, Status Anxiety

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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”.
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I have long had a guilty fascination with The Sunday Times’ Rich List.

I remember its launch in the 1980s. It seemed a fanciful publication. As a teenager in a comp in the provinces, I saw TV skits about yuppies in London getting rich, but I doubt my family knew a higher-rate taxpayer. The Rich List was about as real as the Lord of the Rings.

Later, as a lefty student and then a mildly hedonistic 20-something, I continued to check in with the annual tally of the UK’s top 1,000 multi-millionaires. My parents kept it for me to read on my visits, and I watched as the List was transformed from a running scorecard of post-1066 jockeying to feature more financiers, entrepreneurs, and later oligarchs and other wealthy incomers.

Then, somewhere around the LastMinute era1, digital start-ups became sexy and I became more annoyed that I hadn’t made my fortune.

True, it was hardly surprising. I was working in a low-paying media job mostly for the perks. I hadn’t started a dotcom, and indeed I hadn’t even begun investing!

But that’s what the Rich List does to you.

Just as other people are frustrated by six packs in Men’s Health or long legs in Cosmo, the future founders of financial blogs probably can’t help comparing themselves to the Monaco-going Joneses.

Friends (or acquaintances) in high places

Of course I should write a bit here about how enjoying an ice-cream on a windy British beach with your loved ones is the height of life’s riches.

Or how you can live like a billionaire on the cheap.

Certainly my co-blogger would pen a missive about the folly of chasing unicorn-founding unicorns.

Agreed, yes yes, the denizens of the Rich List have more money than most of us will ever need (some of them may be excused a requirement to fund small private armies in suspect states) and there’s much more to life than money. I learned that young, too.

Still, it would have been nice to have made the cut by now. I manifestly haven’t – I’m not sure I would even if the supplement was expanded to the thickness of a Yellow Pages. (There’s a lot of asset-rich oldies out there nowadays.)

Adding to my angst, the Rich List is no longer the outright fantasy it was back when Kentucky Fried Chicken was my birthday treat.

I’ve met hundreds of very rich people in the years since then. I’ve several wealthy friends (universally good sorts, but I pick them that way) and there are even a few people on the Rich List who’d reply to my emails. One or two I might conceivably have dinner with. And most of them got on to the list in the time I’ve known them.

So it Can Be Done. Just has not by me!

In the compound

This isn’t a shocker. I tried starting a business with some friends a decade or so ago but bailed out after a couple of years. It wasn’t for me.

Investing is for me, but even here I’ve not pursued some opportunities that presented themselves. (Specifically, I’ve never tried to set up or even get a job running a fund. Maybe that wouldn’t have worked out either – I didn’t pursue the slender openings for a reason – but who knows.)

So that leaves compounding my own wealth, on a decent but pretty average by successful Londoner standard’s income.

Is it feasible? Can you invest your way onto the Rich List?

Zero-ing in on millions

I turn reflexively to the last page of the Rich List first, to see the current cut-off. This year it’s £120 million to make the final 1,000.

Can I compound my way onto the List before I’m more likely to trouble the obituaries?

Obviously we need an expected return rate to plug into the Monevator compound interest calculator. And since my last dalliance with revealing more about my active investing stalled, I don’t propose revealing precise figures here.

Additionally, my income is still rising and I’m not even rich enough for savings not to make a big difference to the final sums.

I’m also now using leverage, effectively, with an interest-only mortgage set against my flat.

And I’m only going to do rough-and-ready sums anyway. This is just a thought experiment, not a submission to the FCA!

In consideration of all that, let’s pick a reasonable ‘rate of wealth growth’ (ROWG) to plug into the compounding machine.

  • If I consult my investing logs, I can see that over the past ten years my ROWG has been about 23% annualized.


However that’s growth pretty much from the nadir of the financial crisis – a time when I was literally selling possessions to buy more shares.

Clearly that was a generational basing opportunity for anyone who wants to produce a high ten-year return figure. What about over five years?

  • My five-year annualised ROWG comes down to about 16%.

We need to knock a bit off for inflation, so we can compare the £120m today with the same amount in 2040 or 2050. In practice the rich are getting richer ahead of the rate of inflation, but I’m going to ignore that to keep things simple. And who knows if it will last, anyway.

My investment returns would surely become constrained as my wealth grew in this (fantastic) scenario, although I’d hope to offset some of that drag with more direct investing in businesses and property, and perhaps a bit more debt-juicing. Savings will eventually be irrelevant to growing my net worth, too, whereas they have definitely been a factor in reality.

  • I’m going to settle on a real2 ROWG figure of 10%.

You may well feel that’s ludicrously high. Fair enough. As I say, all this is just for fun.

I will ignore the rampages of tax. I’ll assume everything is in a tax shelter and not withdrawn, or else is locked-up as capital gains.

Plug all that into the interest-upon-interest adder-upper, where does that leave me?

Well, unless I’ll be approaching my telegram from an equally geriatric King William to brighten up my mornings, I will probably not be making it onto the Rich List through my active investing prowess alone.

Stand down The Sunday Times!


What about you? Maybe you’re very rich already, much younger, or a true once-a-generation investing genius?

All of that will help. Could you become one of the UK’s 1,000 wealthiest simply by compounding savings from your 9-5?

Here are a few scenarios showing how you could hit that £120m in today’s money, and how long it would take to get there. (Position your mouse over the footnote numbers to see my assumptions.)

Future Rich Listing Non-Professional Investor
Starting pot ROWG3 Years
Young inheritor4 £20m 3% 60
The Next Spare Room Warren Buffett5 £20,000 17% 46
The New DIY George Soros6 £20,000 27% 32
Ultra high-earning global indexer7 £50,000 5% 75
The cryogenic investor8 £5,000 2% 275

Note: You probably don’t want to try anything but saving-and-indexing at home. Especially the cryogenic stuff.

You can see the assumptions I’ve chosen for my table in the various footnotes. And I am sure that in the time it takes to read them, many of you will find objections.

Fair enough. This is just an arbitrary illustration of a few scenarios as a conversation starter. Feel free to plug in your own numbers. Let us know what you discover in the comments.

However I think the table does illustrate:

  • Why nobody on the Rich List got there by investing their down-to-earth wages.
  • Why it’s important to remember that even Warren Buffett first made his starting pot by running a hedge fund.
  • Ditto George Soros, whose legendarily high returns weren’t actually achieved for a period as long as 32 years. (I strongly suggest you don’t use 27% for your sums. Try 7% if you’re bold.)
  • It does help to start very rich to end up truly filthy rich, but even that’s not enough unless you take some risks. If our inheritor had put the family silver into a global tracker it would still take 37 years to turn their pot into the £120m in today’s money that’s required. Most rich people are more concerned with wealth preservation.
  • As I’ve said before, if you want to make easy money do something hard. Starting a business that becomes a household name – or at least big enough to get into scraps with governments – is the only real chance most of us have of making the Rich List. (That or starting a hedge fund.)

Deflated? Oh well, remember net worth =/= net wealth.

Feel better now? Thought not!

Who wants to be a multi-millionaire, anyway?

To conclude, I’ll stress that if I actually was loaded enough to be in the running for Rich List positioning, I’d do my damnedest to keep it a secret.

I’m a very private person. The last thing I’d want to see is a photo of myself in print standing next to my wife/dog/double oven trying to appear smugly relaxed.

When it comes to my Rich List daydreams, it’s more the thought that counts. Agreed, it’s not a good thought. It’s not a good competition. But I’m only human.

Luckily it seems the maths will save me from myself.

Anyone out there feeling punchier? (Any Monevator readers actually on the List?)

  1. c. 1999.
  2. i.e. Inflation-adjusted
  3. Inflation-adjusted, and unlike the ROWG figure I used above NOT including savings from income. Those are plugged in separately.
  4. Assume a 3% safety-first real return, no spending capital, no net savings from fun Trustafarian job.
  5. 20% annual returns, adjusted down 3% for inflation. Savings add flat £10,000 a year.
  6. 30% annual returns, adjusted down 3% for inflation. Savings add flat £10,000 a year.
  7. 5% annual real return. Saves flat £75,000 a year over period.
  8. Saves £10,000 a year, much kept in cash. Freezes her brain in a jar.
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What caught my eye this week.

For some people, news that the population time bomb may be spluttering gives hope we can halt – or even reverse – environmental calamity.

For others, it’s the harbinger of a demographic shift that will hole portfolios below the line and lead to a great deflation.

Given the huge numbers involved – billions of lives, trillions of dollars – there’s naturally some debate about exactly when Facebook will have to start reporting shrinking user numbers.

This graph from Bloomberg plots several schools of thought:

(Click to enlarge the population projection!)

I argue quite often with friends – some whom I’d never expect to have such a debate with – about the desirability of a radical reduction in the human population.

I’m all for it. Presuming it happens slowly, and without plague, nuclear bombs, or grey goo.

But many friends are perturbed by the idea.

Some are parents who tell me their kids will pay my pension, and theirs. A handful are religious. But unexpected friends fear it, too. Determinedly childless singletons, and one who otherwise seems a confirmed misanthrope.

Our two million-year-old family tree was populated by those with genes that willed them to spread far and wide (and trimmed the likes of me) so I shouldn’t be surprised.

I suspect it’s a also cultural thing. The very idea is alien.

I have daydreams of half a billion people living in beautiful megalopolises, serviced by robots, surrounded by wilderness, and connected by Hyperloops and electric helicopters.

They see a lack of consumers. And, I suspect – though it’s unspoken – a lack of Europeans.

Bye bye birdies

Whether a plateauing population can save the planet is as debatable as whether capitalism could withstand it.

From the Bloomberg piece:

Let’s assume that their lowest population projection is correct, and global population will peak in 2045. That’s still a quarter-century from now, and population wouldn’t return to current levels until the 2090s — more than enough time for us to drive hundreds of thousands of plant and animal species extinct and perhaps boost global average temperatures enough to bring polar-ice-cap-melting chaos.

The “rapid development” scenario behind that population forecast also requires that poorer countries, well, develop more rapidly, which in the past has meant rising per-person environmental stress.

If India’s population were to stop growing tomorrow but its per-capita carbon emissions kept rising to current U.S. levels (a nearly tenfold increase), that would lead to a 59 percent rise in global carbon emissions, all else being equal.

Before anyone types it, yes I’ve read stuff by Hans Rosling and Bjorn Lomberg. The former is great but very anthrocentric. The latter was weak on biodiversity, as I recall.

Personally, about the only reason I have for not wishing I was 20 years younger – apart from genuine gratitude at the life I’ve had along the way – is the mess we’re making of the planet.

(Oh I know, I know, you wouldn’t change a thing… but think of the compound interest!)

Related reads this week:

  • A good primer for private investors on global warming – DIY Investor
  • The UK just went six days without using coal. Here’s how it did it – WIRED
  • Scientists test radical ways to ‘fix’ the Earth’s climate – BBC
From Monevator

Why I’m saving and investing for the disaster to come – Monevator

From the archive-ator: Getting an income from investment trusts – Monevator


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

UK economy rebounded in the first-quarter – BBC

Philip Hammond may be planning the world’s highest minimum wage – Guardian

Ageing population ‘an opportunity not a problem’ say MPs [Search result] – FT

London v England: Where does your area fit in the great divide? [Interactive tool] – Guardian

UK house prices for April show biggest jump in two years – Guardian

When does market timing work? – Of Dollars and Data

Products and services

Equity release: How to squeeze money out of your home [Search result] – FT

All the big grocers’ online delivery services compared – ThisIsMoney

The best Monzo hacks and hidden features – WIRED

RBS chief admits that free bank accounts won’t be around much longer – AOL

Banking app Yolt pulls in Monzo and Marcus savings – ThisIsMoney

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

One in five new Barratt homes to be built in factories – ThisIsMoney

Apple launches Warren Buffett Paper Wizard iPhone game – Mac Rumours

Marmalade Lane, Cambridge: The car-free, triple-glazed, 42-house oasis – Guardian

Comment and opinion

Are index funds really a cause for concern? – The Financial Bodyguard

Rick Ferri on life after Bogle [Podcast] – The Evidence-based Investor

Calling the shots – Humble Dollar

Stay rich and maybe get a bit richer without dying: The Permanent Portfolio – Demonitized

Financial superpowers – A Wealth of Common Sense

Coming to a cubicle near you: Human work – Vanguard Blog

Merryn on pension allowances: The truly punitive, and the reasonable [Search result] – FT

Should you ever pay off your mortgage? – Engineering Peace of Mind

More: Why we disagree on paying off the mortgage – [Mrs] Young FI Guy

Social Security is an asset, but it’s not a bond – Oblivious Investor

Live a rewarding retirement on auto-pilot – Mutual Fund Observer

Coping with FIRE gone wrong – case studies [Month old, but only just read it!] – MarketWatch

Our shared ongoing battle not to buy a Tesla – Mr Money Mustache

What makes a great investor? – Enterprising Investor

Down 30%, is Reckitt Benckiser now good value? [PDF] – UK Value Investor

Reminiscences on human nature – Novel Investor

Looking for the next great ROIC machine – Intrinsic Investing

When you can’t wait for tomorrow – Albert Bridge Capital


Conditions are ripe for the biggest populist backlash imaginable – Sky

The Brexit Party is a post-politics entity – Politics.co.uk

Gina Miller launches Remain United to coordinate tactical voting in Euro elections – Guardian

Brexit: Not in my name, thanks – Simple Living in Somerset

Kindle book bargains

So Good They Can’t Ignore You by Cal Newport – £0.99 on Kindle

Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler – £1.99 on Kindle

Zero to One: Notes on Startups by Blake Masters and Peter Thiel – £1.99 on Kindle

The Personal MBA: A World Class Business Education in a Single Volume by Josh Kaufman – £1.99 on Kindle

Off our beat

A one-off injection may dramatically reduce heart attack risk – Guardian

Why you should start binge reading right now – The New York Times

How economic theory can explain the competition between Uber and Lyft – TechCrunch

And finally…

“I’d tell men and women in their mid-twenties not to settle for a job or a profession or even a career. Seek a calling. Even if you don’t know what that means, seek it. If you’re following your calling, the fatigue will be easier to bear, the disappointments will be fuel, the highs will be like nothing you’ve ever felt.”
– Phil Knight, Shoe Dog: A memoir by the creator of Nike

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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”.
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Some people are preparing for the end of days. A fall or retreat of civilisation, linked to peak oil or the collapse of the global financial system or environmental disaster. Or whatever.

The solution is extreme diversification – up to and including living off-grid, or buying your own remote and defensible farmstead, complete with independent water supply, power generation capabilities, and the ability to feed your nearest and dearest until the smoke clears.

Anyone with an imagination is surely visited by such visions of the Apocalypse.

But the disaster scenario that preoccupies my mind is purely personal.

What are the chances that life will turn out as I dream it will – contented, productive, and blessed with good financial and physical health – without the intervention of some catastrophic event that leaves the long-term plan in ruins?

Financial disaster strikes

Whatever the odds, I’ve known a number of people who’ve suffered irreparable loss of income due to a bad roll of the dice:

  • One was forced out of a job they loved by workplace bullying. Their loss of confidence has meant they’ve never returned to the same level.
  • Another rose to lofty heights before being sidelined by management politics. Redundancy followed, and equivalent positions are often impossible after a period out of the workforce.

The trajectory of many other lives has been permanently damaged by misfortune such as:

  • A rapid deterioration in physical or mental health – either their own or somebody near and dear.
  • Loss of funds due to fraud, scandal, or naive decision-making.
  • Loss of reputation or freedom.
  • Divorce, addiction, abuse, or the death of someone they depend upon.
  • Ill-advised ‘all-in’ investments/bets that ended in failure.
The foretelling

Whatever the cause, I doubt many of the affected thought it would happen to them, nor did they plan for it.

Because how can you plan for an ill wind?

I’m a relatively optimistic person – this post aside – but witnessing the casualties of life has caused me to assess my personal risk exposure to a reversal of fortune.

I don’t work in a job that exposes me to a high degree of accident or danger.

My health should be okay, too, especially given my family history, my familiarity with kettlebells, and my all-you-can-eat approach to vegetables.

But the industry I work in is being rapidly transformed by the creative destruction of the digital age. It’s an opportunity for some, but the inevitable outcome will be fewer people being employed doing what I do.

There’s every chance that I could get caught up in the fallout – my skills deemed obsolete, or at least worth a lot less in the era of globalisation.

Given the increased volatility of the global economy, I could be a casualty of a dip-of-the-curve sometime in the next five or ten years. And there’s no guarantee that I’ll be able to make good the loss.

Prepare for the worst, hope for the best

That’s a big part of the reason why I’m not relying on a 25-year plan to pay off the mortgage or an optimistic investment strategy that relies on my life going like clockwork until I can retire at 65.

I can’t plan for a quantum universe in which I’m struck by a debilitating illness1 when I’m aged 55 and 11-months.

But I can give myself plenty of room for error.

I’m saving and investing much more than I need to, by conventional lights. I want to do the hard work upfront while I still can.

The way I see it, by spending less on fancy caffeine now I either reach my goals more quickly, or I am better insulated against my personal apocalypse, if and when it happens.

Take it steady,

The Accumulator

  1. Of course there’s insurance, but it’s hard to insure against every possible calamity that can afflict you and yours without paying well over the odds.
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What caught my eye this week.

How are you feeling? Pretty comfortable? Enjoying the stock market recovery? Ready for a relaxing weekend?

Well I’m here like the Angel of Bad Breath to cause a stink with the following miserable graph, which comes courtesy of The Retirement Field Guide via Abnormal Returns:

The graph shows how after the age of 60, financial literacy decreases by about 1.5% a year.

As author Ashby Daniels says:

Nobody likes to think about getting older. Even less so, nobody likes to think about the decline of their mental health.

But the harsh truth is that as we get older, our cognitive abilities decline. This is especially true with regard to personal finances.

In an era when we’re being charged with taking control of our finances as never before – from how we save for retirement to how we invest our pensions – this seems to me a wrinkled grey elephant in the room.

Older and not wiser

Even worse of course is that we don’t want to admit to any decline. Just as we’re all better-than-average drivers, so we’re destined to believe we’re on top of our finances long after we’re not.

And let’s face it, older people aren’t exactly receptive to being reminded of these issues. My mother already thinks young people have it in for her generation by questioning its stance on Brexit.1 It’s easy to guess how they’d take to being told they don’t know best what to do with their own money.

I’m saying “they” but I appreciate not a few of you are in this older age group. Besides, I know what I’d say if confronted for the first time at 75 by someone saying they needed to take control of my investments (er, “f…lounce off!”) so we’re all in this together.

Clearly there needs to be more discussion – not least on our own site – as to how to guard against the potential downsides of poor decision-making in our later years. Children should be involved before they’re needed if they’re around, capable, and willing. If they’re not all three, there’s a role for trusted friends or professionals.

Many of us may aspire to remain mentally agile Warren Buffett types at 90 – that’s long been my goal – but it’s not in our gift to make it so, however many crosswords we do and new languages we try to learn.

“I’m mismanaging my own money”

Incidentally, this decline also has a potential impact on asset allocation decisions and other aspects of portfolio management that you rarely see referenced in the literature.

At the least it’s a tick in the box for underwriting your minimum income requirements with a simple annuity.

I also wonder if I should better incorporate it into my arsenal in my on-running guerrilla war against the “Screw income, total return is all that matters, sell capital each year!” passive orthodoxy.2

I’ve noted in previous skirmishes that calculating how much to withdraw and selling down your capital each year might seem a fine plan at 45, but it could be terrifying prospect for a mentally slipping and frightened 80-year old.

Monevator contributor The Greybeard has pondered this quandary, too.

Perhaps relying on a portfolio of income generating funds dumping cash into a current account (i.e. not even bucketing) would also be beyond me in that state but it seems intuitively to be a lower hurdle.

Again, what a shame (most) financial professionals don’t have the same reputation as say doctors. There’s an obvious need here. But not an all-encompassing obvious solution.

Enjoy the weekend, whatever age you are!

*A drag on your returns. Geddit grandpa? What, you’re only 26? Oh, it’s sort of a pun.

p.s. I’ve closed the poll in our great debate about whether to include your house in your net worth number. In the end 54% of you voted yes and 46% said no, with nearly 1,200 readers voting. The comments on that article were excellent, too – well worth a read if you’ve only seen the post over email. Thanks to everyone who chipped in!

From Monevator

Possibly more than you ever wanted to know about bond index funds – Monevator

We updated our broker table, and there’s a couple of new entries – Monevator

From the archive-ator: Gold as an asset class – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!3

Did grandad have it easier? FCA to study financial divergences between generations – FCA

Bank of England raises growth forecast; warns more rate rises probably needed – BBC

Fresh HMRC tax crackdown on freelance contractors [Search result] – FT

First-time buyers benefit from weak house price growth – Guardian

Millionaires flee the politics of their homelands [3,000 left Britain last year] – Bloomberg

UK call centre to trial four-day week for hundreds of staff – Guardian

The world’s richest institutional investors, ranked – Institutional Investor

Universal credit regulations ruled unlawful by High Court – Guardian

There’s a premium nowadays on professionals who’ll be available 24/7 – New York Times

Products and services

Equity release: how to squeeze money out of your home [Search result] – FT

Future of 1p and 2p coins secured ‘for years to come’ – BBC

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

Track your portfolio with Rebo [In Beta, the creation of a UK money blogger] – Liberate Life

Checking out the UK’s first till-free grocery store [Search result] – FT

Out of the ordinary houses for sale [Gallery] – Guardian

The inside story of Amazon Prime – Vox

Comment and opinion

Wrong approach – Humble Dollar

Lars Kroijer interviewed by Meaningful Money on how to invest [Video] – via YouTube

Is ‘direct indexing’ set to disrupt the ETF market? – Wealth Management

How to invest given that investing is a commodity – Bone Fide Wealth

Useful and overlooked skills – Morgan Housel

Should we tax frequent flyers more heavily? – Simon Lambert

Becoming a financial advisor could be a great career move for will-be mums – The Belle Curve

Are investors paying lower – or just different – fees? – Morningstar

Psst! Wanna buy a wind farm? – DIY Investor (UK)

Glass half-empty becomes glass half-full – Investing Caffeine


Brexit has drained £30bn from UK-domiciled funds, says Morningstar – Investment Week

The local elections looked like a kick against Leaving, but media not sure – via Twitter

Theresa May also claims people voting for non-Brexit parties is a mandate for Brexit – BBC

Remain Voter website aims to help Remainers vote tactically in Euro elections – Remain Voter

Get Voting app should get you on the electoral role with minimum fuss – Get Voting

Buy a £1.7m villa in Cyprus and qualify for a Golden Visa to stay an EU citizen – ThisIsMoney

Kindle book bargains

So Good They Can’t Ignore You by Cal Newport – £0.99 on Kindle

Nudge: Improving Decisions About Health, Wealth and Happiness by Richard Thaler – £1.99 on Kindle

Zero to One: Notes on Startups by Blake Masters and Peter Thiel – £1.99 on Kindle

The Personal MBA: A World Class Business Education in a Single Volume by Josh Kaufman – £1.99 on Kindle

Off our beat

The minimizing coin – Seth Godin

The gambler who cracked the horse race betting code – Bloomberg

The $70bn quest for a good night’s sleep – Fast Company

The story of London’s tech start-up scene, as told by those who built it – Wired

Fancy graphs showing how the world’s population is changing – Visual Capitalist

She was “the queen of the mommy bloggers”. Then her life fell apart – Vox

The errors that I don’t see – Of Dollars and Data

Turns out coffee pod machines are [sort of] good for the environment – Wired

Let sleeping co-workers lie – Slate

How Uber changed Silicon Valley [Search result] – FT

Scientists find cocaine in river shrimps in Suffolk – BBC

And finally…

“When I was a kid my father told me there were two kinds of people in the world: smart people and wise people. Smart people learn from their mistakes. Wise people learn from somebody else’s mistakes.”
Brendan Moynihan, What I  Learned Losing A Million Dollars

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  1. No, not every young person. No, not every old person. But a valid generalisation. See: https://twitter.com/SkyData/status/746700869656256512
  2. Which includes my own co-blogger, who I have immense respect for so obviously I’m teasing a bit with my language here. Also as I’ve said many times, living off income is a richer retiree’s game, and it leaves a lot of cash on the table when you die.
  3. 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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Immerse yourself in the Monevator archives (hey, it’s what Saturday nights were made for), and you’ll notice we talk a lot about investing in shares. Much less so about bonds.

Bonds – aka fixed income – are the unglamorous siblings to equities1. Yet whilst shares hog the limelight like a first child, you’ll be hard-pressed to find anyone – outside of the gold, guns and baked beans brigade – who say bonds have no part to play in a diversified investment portfolio.

Clearly bonds deserve more love – or at least another lengthy and excessively detailed Monevator article!

In this post we’ll dive into the nuances of the different bond funds out there, to help you find the right one for you.

Characteristics of bonds

Just like their equity equivalents, bond funds have their own special characteristics. As ever with investing, understanding these differences means more jargon to get to grips with.


We can boil down bond funds into four types:

Conventionals and Linkers hold government issued bonds. Corporate bond funds contain bonds issued by companies.

Aggregate bond funds contain a mix of both government and corporate bonds. (Inflation-linked bonds are usually excluded from aggregate bond funds, and from all but dedicated inflation-linked bond funds).


Duration is the measure of sensitivity of the price of a bond to a change in interest rates.

Longer-term bonds have greater interest rate risk. That is, if interest rates go up their price falls, and vice versa.

Bonds are typically separated into Ultra-Short (no, not a bond superhero, but bonds with maturities less than a year), Short (a few years), Intermediates (around two to ten years) and Long (10 to 15 years or more).

Lars Kroijer has already covered the importance of duration and short vs long-term bonds in a previous Monevator piece. Check it out to get the low-down.

Credit Risk

Another key characteristic of bond funds is credit risk: How likely is the issuer to not pay you?

We can use credit ratings from the credit rating agencies as a proxy for credit risk.

Bond funds mostly invest in bonds divvied up into four main tranches of credit risk:

  • AAA-only – These are the safest fixed income investments.2
  • Investment grade – BBB or better, investment grade bonds are considered unlikely to default and so are held in large amounts by institutional investors and pension funds.
  • Sub-investment grade – Bonds issued by countries or companies that are looking a little ropey and could go pop. Excuse the technical jargon.
  • Mixed – An assortment of investment and sub-investment grade bonds.


Bond funds can also be split by geography. These range from Country-specific funds (such as UK or US) through regions (Europe, Asia) to Global funds.


Some bond funds specifically target high-yielding securities. Such bonds will typically be a mixture of high credit risk and/or long duration issues.

Goin’ shopping

Enough of the preamble. Let’s look at how we can passively invest in bonds.

To do so, we need to know what indices contain which types of bonds. As we go through some of the common indices, we will point out some examples of bond index funds that track them.

Aggregate indices

Let’s start off with Aggregate indices. The big cheese of the Aggregates is the Bloomberg Barclays Aggregate Bond Index (or affectionately known as the ‘Agg’).3

The Agg is a conventional government and corporate bond index. It does not include inflation-linked bonds. The underlying bonds must also be investment grade, which rules out low credit quality bonds.

There are different Aggs at the Global, Regional, and Country level.

At the Global level is the Bloomberg Barclays Global Aggregate Bond Index. This index has over 20,000 bonds. To put this into perspective, the equity-equivalent FTSE All-World index has merely 8,000 or so stocks. An example of a fund that tracks the Global Agg is the Vanguard Global Bond Index Fund.4

The Global index has a number of sub-indices, which track different maturities, credit ratings or particular characteristics (such as ESG-weighted).

As mentioned above, there are also Aggregate indices for specific regions and countries. The most prominent example is the US Aggregate Index. An example of a fund that tracks this index is the iShares US Aggregate Bond ETF (Ticker: IUAA).

As far as I’m aware there aren’t any index trackers that follow the UK Aggregate Index.5

Government bond indices

Next up are the government bond indices. Again at the Global level we have offerings from Bloomberg Barclays. We also have a few other indices that track different geographies.

For example, Citibank produce indices that track Developed and G7 markets6. The latter index is tracked by iShares Global Government Bond ETF (Ticker: SGLO).

We also have indices for the gilts market. For example, there is the Bloomberg Barclays Gilt Index – tracked by the Vanguard UK Government Bond ETF (Ticker: VGOV) – and the FTSE Actuaries UK Conventional All stocks. An example fund tracking this index is the iShares Core UK Gilts ETF (Ticker: IGLT).

As with the Aggregate indices, there are also sub-indices that focus on different levels of maturities and credit risks.

Corporate bond indices

Similar to their sovereign counterparts, there are the full range of Bloomberg Barclays Corporate bond indices. These range from Global through to Country-specific level.

Two example trackers are Vanguard’s Global Corporate Bond Index Fund, which tracks Global corporate bonds, and the Vanguard UK Investment Grade Bond Index Fund, which tracks UK investment grade corporate bonds.

There are a few other corporate bond index providers out there. Chief among them is iBoxx, which a number of iShares ETFs and the L&G Sterling Corporate Bond Index Fund track.7

Inflation-linked indices

At the global level there is – surprise surprise – a Bloomberg Barclays Inflation-linked index. This is tracked by Xtrackers’ Global Inflation-linked Bond ETF (Ticker: XGIG).

At the UK level there is the Bloomberg Barclays UK Inflation-linked Gilt index. This is followed by a Vanguard fund of the same name.8

As with conventional gilts, there’s also a FTSE Actuaries Inflation-linked Index. This is tracked by the Lyxor FTSE Actuaries UK Gilts Inflation-linked ETF (Ticker: GILI).

Emerging market indices

Interested in the emerging markets? You’ll find a number of different bond indices, from Bloomberg Barclays, FTSE, Bank of America, Merrill Lynch, and JP Morgan.

As with emerging markets equity funds, it’s particularly important to look under the tin of emerging market bond funds to see what they hold. That’s because the definition of what is an ‘emerging market’ differs significantly from provider to provider.

Fund managers offering emerging market bond trackers include the usual suspects: Vanguard, iShares, State Street (SPDR), Legal & General, and Xtrackers.

High Yield indices

Finally, there are a range of High Yield indices that specifically cover high yielding bonds. Such bonds tend to have lower credit ratings (usually sub-investment grade) and potentially offer the opportunity of higher returns, at the cost of higher risk and volatility.

Get ’em cheap

Very handily, Monevator scribe The Accumulator maintains a list of low-cost index trackers, including bond trackers. Have a peruse at your leisure. If you know of any good ones he’s not covered, please tell us about them in the comments.

Other factors to consider when choosing a bond fund

Before we jump the gun and start throwing our money into the market there are a few other factors to consider when choosing the right bond fund.

Currency hedging

When buying foreign denominated bonds without hedging you are taking on additional currency risk. Currency volatility can swamp the returns and volatility of bonds.

We can see this in the following two charts from Vanguard:

Source: Vanguard

Source: Vanguard

As we can see in the charts above, currency hedging reduces the volatility of bond returns. In addition, it has the effect of leveling the returns of bonds from different countries.

It is important to consider what risks we want take on when investing in bonds. If our aim is to get specific exposure to the potential risks and rewards of bonds – typically to diversify our portfolios, and to dampen volatility – then it is wise to strip out the extra risk from movements in currencies.

If you want to invest in international bonds, it is therefore worth thinking about whether you want to hedge your portfolio against swings in the global currency markets.

Market exposures

Each index and associated tracker exposes you to different markets, in different ways. It’s not going to be easy as an amateur investor to have a very informed view on such exposures, which is one reason why it’s usually best to stick to broad bond markets (and arguably just to government and perhaps investment grade bonds from the UK if you live in Britain). Remember bonds are mostly there in your portfolio for security, not return.

By way of example, let’s think about the Global Aggregate index and compare it to a similar index of shares.

  • When you invest in a fund that tracks a global market-weighted equity index, you are buying exposure to shares of the world’s most valuable companies (such as Amazon, Google and Apple).
  • In contrast, with market-weighted bond funds, you buy the most bonds from the most indebted countries (or, if you prefer the sound of it, the biggest issuers). This means loading up on bonds from countries like Japan, Italy, and Spain. It also means you get more corporate bonds from more indebted companies.

You can avoid being overweight a particular country or issuer by plumping for a ‘capped’ index. This is where the weight of any one issuer (or issue) is capped at a set amount.

Credit and duration risk

A third factor to bear in mind is the substantial differences in credit and duration risk between the different sub-classes of bond indices.

For example, UK gilts tend to have very long duration compared to government bonds of other countries. This means that they come with higher interest rate risk.

Similarly, many indices are investment grade only. They exclude bonds from high credit risk issuers, which should reduce volatility but could also exclude you from earning higher returns.

Float-adjusted indices

You might need to consider whether you should plump for a float-adjusted index. These indices account for the fact that central banks are often the largest buyer of government bonds.

For instance, a float-adjusted US Aggregate index excludes bonds held in the vaults of the Federal Reserve.9

Given the impact of Quantitative Easing over the past few years – which has seen central banks invest enormous sums in government bonds – the difference can be quite substantial.

Taking Vanguard as an example, most of its index funds and ETFs track float-adjusted indices. This has the effect of increasing the proportion of corporate bonds relative to government bonds in the Vanguard funds.

Heresy! Consider an active fund

I’ll whisper this bit in case The Accumulator hears me. With bond investing it can sometimes pay to go active.10

Sometimes the bond fund that seems right for you might have a specific profile that’s not achievable through an index fund. You might want to avoid certain countries or duration, or you may be looking to target high yield bonds. A combination of these requirements might make an actively-managed fund more suitable.

It’s worth keeping in mind that most of the returns on bond portfolios are explained by duration and credit risk.

Where there is more leeway (in the broader global indices) managers can tailor their exposure to these risks. For example a manager might underweight Japanese Government bonds or overweight short duration bonds.

As with investing in other assets, it’s important to work out what you need from your bond allocation first and then find the product that best fits.

Don’t neglect to consider costs! In today’s lower return world, the fees of an active bond manager could well gobble up a large percentage of your bond fund’s expected return.

Rounding up

Bonds are an important asset class. We tend not to talk or think about them enough.

Bonds can act as a diversifier and a de-risker to an investment portfolio, so it’s worth considering whether an allocation to bonds can help you meet your investment goals.

Hopefully this article has set out some of the factors to think about when investing in bond index funds and pointed you towards the options available.

If you have any tips of your own when it comes to passive bond investing, please do share them in the comments below!

Read all The Detail Man’s posts on Monevator, and check out his own blog at Young FI Guy where he talks about life as a financially free twenty-something.

  1. ‘Equities’ is just a fancier word for shares.
  2. Unless they are sub-prime mortgage backed securities in 2007!
  3. The Aggs date back many decades and were originally run by Lehman Brothers. In 2008 something bad happened to Lehman and Barclays took over. In 2016 Bloomberg started looking after the indices.
  4. To be precise it tracks the float-adjusted index variant. More on that further on in this article.
  5. If any of our savvy readers can correct me, please do!
  6. Canada, France, Germany, Italy, Japan, United Kingdom, and United States.
  7. These track the iBoxx Sterling Non-Gilts ex-BBB Index.
  8. Specifically, it tracks the float-adjusted index variant.
  9. I know they’re not actually held in vaults, but it’s boring to say ‘held in their electronic accounts’
  10. Actually The Accumulator has also considered active funds before in the bond space.
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What caught my eye this week.

Figures from HMRC, as reported on in the Financial Times [search result] show the tax take from capital gains tax and inheritance tax rising fast in recent years:

Much of the increase is apparently due to growing tax receipts from property sales. The FT quotes Sean McCann, a chartered financial planner at NFU Mutual:

“Landlords are being caught in a very effective pincer movement from the taxman. From one side the higher rate tax relief on mortgage interest is gradually being phased out and making letting properties less profitable. From the other side, landlords looking to sell buy-to-let properties are being squeezed with an extra 8 per cent capital gains tax.”

I suspect most Monevator readers won’t be too sad to see buy-to-let being squeezed after a 20-year boom. I’m not against the rental sector on principle. But I did think the game had tilted too much in favour of landlords, and I was glad to see measures to address that.

Of course I myself swooped to buy my own home barely a year or so into the resultant correction. My stellar record of making a fist of the erstwhile millionaire-maker that is the London property market continues!

Tax take

I don’t think property is the whole story, though. It doesn’t take a charting genius to notice the previous peak in capital gains tax receipts was just before the last bear market. So after a decade of strong stock markets, at least some of the latest surge is surely also coming from investors coughing up on selling unsheltered investments.

Always use your ISAs and SIPPs as much as you can! Don’t be a klutz like me 15 or so years ago, when I was tardy in sheltering my investments.

I am still defusing capital gains tax liabilities from back then – as well as some built up when I’d filled ISAs but hadn’t started on a SIPP – and expect to be doing so in a decade.

You might say it’s a high-class tiny violin problem to have; perhaps but it was also an unforced error.

Back then I thought tax on investments was only a concern for moguls. Not only was I wrong, but in the eyes of The Man anyone pursuing the sort of high six-figure portfolios required for financial independence pretty much is a mini-mogul.

Now I’ve got rid of nearly all the dividend payers it’s not such a pressing issue as it was (at least not until the rules change again) but it is a pain.

Paying investment taxes can savage your returns, for no risk/reward upside. Use tax mitigation strategies wherever legal and practical.

From Monevator

How to improve your sustainable withdrawal rate – Monevator

From the archive-ator: Environmental degradation threatens your long-term wealth – Monevator


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

The Slashie: A glamorous new way to work, or the ultimate grind? – Guardian

Tickets now on sale for the UK premiere screening of Playing with FIRE – EventBrite & Review

Number of landlords investing in London falls 31% since 2010 – ThisIsMoney

Living costs rising faster for UK’s poorest families than richest – Guardian

More companies are going public again, but the trend to stay private longer is here to stay – Tech Crunch

“Outrage is justified”: David Attenborough backs school climate strikers – Guardian

They’re popular, but high-yield bonds offer the worst of both worlds – Bloomberg

Products and services

Monzo announces new ‘Plus’ accounts with a £6 monthly fee – Monzo

20 ways to save cash while helping to save the planet – ThisIsMoney

Ratesetter’s £100 bonus effectively boosts your expected annual return on £1,000 to 14%  – Ratesetter [Affiliate link]

GiffGaff is the best rated mobile deal provider – ThisIsMoney

Smart Beta slows down – Institutional Investor

Are prefabs the homes of the future? – ThisIsMoney

The price of buying into the classic English country life – ThisIsMoney

Five of the best wisteria-clad homes for sale [Gallery] – Guardian

Comment and opinion

The problem with most financial advice – Of Dollars and Data

Is the value premium dead? – The Evidence-based Investor

You played yourself – Morgan Housel

[Effectively] get 97% off annuity rates with Class 2 NI contributions… – Simple Living in Somerset

…but beware the top-up system is complex and overdue an overhaul – ThisIsMoney

A stealth wealth solution for property investors with kids – Financial Samurai

Only intrinsic motivation lasts – Daniel Vassallo

“I’m having more fun than any 88-year-old in the world”: Warren Buffett [Search result] – FT

A bad year in the bond market is a bad day in the stock market – A Wealth of Common Sense

The path-dependent nature of Perfect Withdrawal Rates [Nerdy] – Flirting with Models

How many stocks should you own in your portfolio? – Intrinsic Investing

Bond-fund managers have enjoyed a happier hunting ground – Morningstar

Professional investors are now very bearish. Retail investors are very bullish – The Macro Tourist

There’s a case for a 1% allocation to Bitcoin, but beware the charlatans – Money Maven

How do great (active) investors measure success? – Market Fox


The best place to build a life in English? The Netherlands [Search result] – FT

Kindle book bargains

How to Have A Good Day by Caroline Webb – £0.99 on Kindle

Eat Well for Less by Jo Scarratt-Jones- £1.99 on Kindle

Mortality by Christopher Hitchens – £1.39 on Kindle

What You See is What You Get by Alan Sugar – £0.99 on Kindle

Off our beat

Who’s really buying property in San Francisco? [Fascinating end-of-times stuff] – The Atlantic

Global warming: Is Greta Thunberg right about UK climate emissions? – BBC

Computer scientists say AI’s ethics have yet to move beyond Libertarian phase – The Onion

Housework could keep your brain young, research suggests – Guardian

On finding something to say – Seth’s Blog

The Instagram aesthetic is over – The Atlantic

How to talk like you’re a character in BillionsVulture

Post-coal Prom Queen: Romania’s lost lands [Gallery] – Guardian

And finally…

“Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious, because we have a temperament advantage that more than compensates for a lack of IQ points.”
– Buffett’s partner Charlie Munger quoted in Michael Batnick’s Big Mistakes

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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”.
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Thus far we’ve explored why the 4% rule doesn’t work in the real world, and established a more sustainable withdrawal rate (SWR) for UK / global investors. Please read those articles if you’ve not already done so, in order to get the most out of this piece.

Now for the good bit! We’re going to talk about why you can use a higher SWR if – and only if – you’re prepared to execute a withdrawal plan that’s considerably more sophisticated than the 4% rule.

To raise our SWR we’re continuing to use the layer cake concept advocated by leading retirement researchers William Bengen and Michael Kitces.

The layer cake personalises our SWR by applying a suite of plus and minus factors.

  • The last post was all about the bad stuff. We saw how it forced my SWR down to 3%.
  • Now I’m going to layer on all the positives, and test my approach using global historical data.

Without wanting to ruin the surprise, I was pretty shocked by the results you’re about to see and I think I’ll need to be more cautious than the test suggests when the rubber really hits the road.

Even Kitces is very clear about the layer cake’s limitations:

Although the ‘layer cake’ approach of safe withdrawal rates does allow for planners to adapt a safe withdrawal rate to a client’s specific circumstances, there are several important caveats to be aware of.

The first and most significant is that many of the factors discussed here were evaluated in separate research studies, and it is not necessarily clear whether they are precisely additive.

Okay, so remember my SWR is currently bottomed out at 3%.

Let’s head for the top!

Diversification sweetener

Our baseline SWR assumes we’re invested in a Developed World 50:50 equity / bond portfolio. Yet there’s plenty of evidence that a stronger equity tilt and more diversification increases your SWR, especially over longer time horizons.

The shotgun spread of long-term equity returns means that an equity-heavy portfolio can shoot the lights out sometimes. However it also falls far short of the target on unlucky occasions. Bonds can staunch the bleeding when equities haemorrhage, yet too much bondage may also cripple you over time.

Early Retirement Now (ERN) sums up the dilemma:

Stocks have a lot of short-term risks, but in the long-term stock returns are tied to economic growth and thus, in the very long-term, real returns become less risky due to that.

Bonds have relatively little short-term risk around their trend growth rate, but their trend growth path itself has a lot of risk in stark contrast to stocks.

The answer isn’t to simply load up 80-100% in equities and hang on for dear life. Rather we can aim to alter our asset allocation as we go.

Michael McClung in his brilliant retirement portfolio book, Living Off Your Money, recommends an eve-of-retirement bond allocation of 50% for a 30-year time horizon, or 55%-65% for longer stretches.

The reason for starting retirement with a heavy bond load is that you’re particularly susceptible to sequence of return risk in the closing years of accumulation and the opening decade of deaccumulation. You can protect yourself during this period with high-quality government bonds.

Kitces has shown how an ill-timed stock market crash can setback your retirement plans like an asteroid strike scuppered talking dinosaurs. He also explains how the sequence of returns in the first 10 to 15 years of your retirement can seal your fate for good or bad.

It’s important to have enough bonds to deal with these threats, and to deploy your bonds effectively.

McClung in particular has developed techniques to help you do this – see the ‘dynamic asset allocation’ section below. The trick is that you allow your bond allocation to wax and wane according to market conditions.

More generally, the historical data sampled by Kitces, Bengen, McClung and others tells us that broad diversification beyond bonds works in retirement just like it does during the accumulation phase.

They cite evidence in favour of diversifying your retirement portfolio with:

Kitces offers a diversification bonus of +0.5% SWR for significant multi-asset class diversification. It seems daft not to take it.

The Accumulator’s layer cake SWR:

3% + 0.5% diversification = 3.5%

Dynamic asset allocation

The best way to protect yourself from sequence of return risk? Live off your bonds when equities are down.

Beyond that you can further improve your portfolio’s life expectancy by using a rebalancing method that increases equities exposure when they’re seemingly cheap, and only replenishes bonds when equities have seriously outperformed.

This is dynamic asset allocation. It’s a super-charged version of ‘buy low, sell high.’ You can read about McClung’s version – called ‘Prime Harvesting’ – by downloading a free sample of his book.

Techniques such as dynamic asset allocation will test your risk tolerance because in extreme market conditions you may eat all your bonds and end up 100% in equities. Steer clear if you’re cautious.

Otherwise Kitces awards 0.2% to your SWR for dynamic allocation.

The Accumulator’s layer cake SWR:

3.5% + 0.2% dynamic asset allocation = 3.7%

Flexible spending and dynamic withdrawal rates

Here is the big SWR cherry on top. If you can cut your spending during a downturn then you gain a massive advantage over a constant inflation-adjusted withdrawal plan.

Dynamic withdrawal rates mean you adjust your spending in sympathy with your portfolio’s fortunes. Like managing a forest, being able to conserve your resources when they’re under stress is obviously more sustainable than consuming an ever greater percentage when the rot sets in.

Flexibility is key. Retirement researchers have devised all kinds of rules that allow you to spend more when the market soars, but you must also spend less when there’s trouble at mill.

McClung does a masterful job of analysing various dynamic withdrawal rates in his book, while ERN has written a sobering series exploring how much you might have to cut back using one of the better known spending systems.

In practice, cutting back is what all retirees do if their money runs short. The risk is that extra spending early in retirement may force us to spend less later if the cookie doesn’t crumble our way.

That gamble may be easier to take if you believe that retirees spend less later in life. What do you reckon? The evidence is patchy and may not apply to you. I’ve read research that concludes retirees spend more if they have it, but spend less on average because most end up with less to spend.

Kitces’ flexible spending modifier:

  • +0.5% SWR for modest spending cuts in bear markets and/or plan to decrease spending in later life.
  • +1% SWR for substantial (10%+) spending cuts in bear markets and/or plan to make significant cuts in later life.

I think Mrs Accumulator and I can handle 20% spending cuts so I plan to use Michael McClung’s EM dynamic withdrawal rules. Our State Pensions should meet near 70% of our estimated outgoings later on. I’m gonna claim the full 1% bonus!

The Accumulator’s layer cake SWR:

3.7% + 1% flexibility bonus = 4.7%

My new world portfolio SWR

My personal SWR was creamed by negative factors in the last post. It finished up at just 3%.

Now it stands at 4.7% and I’m stunned.

What does it all add up to in cold hard cash?

Well, we’d like an annual retirement income of £25,000, so our retirement wealth target at 4.7% SWR is:

(1 / 4.7) x 100 x £25,000 = £531,750

In contrast our target at 3% SWR was £833,333, which was 57% higher.

Wow. Just wow.

If I use the ‘4.7% rule’ then we’re FI already!

The sniff test

The big question is does this layer cake business pass mustard?

The research shows that your SWR changes dynamically as you shift the parameters. I can test these moving goalposts using global historical data thanks to the fantastic Timeline app.

Timeline is commercial software created by retirement researcher Abraham Okusanya. It’s aimed at financial planners who want to model portfolio withdrawal plans.

Timeline is very well designed, loaded with great features, and delivers the Holy Grail of global / UK appropriate datasets. I think it’s worth paying an IFA to run your numbers through it if they have access.1

My 4.7% SWR achieved a 99% success rating on Timeline – success means historical me didn’t run out of money in 99% of scenarios.

The bottom 10% of scenarios did require me to cut spending drastically to actually avoid running out of money though. That may not be your idea of success.

On the other hand, every path above the 10th percentile was comfy, and the best case scenario near-tripled my income for years. I used all the layer cake assumptions – good and bad – to get the result but was able to leave our State Pensions in reserve.

However that doesn’t tell me that my 4.7% rule is safe or even sustainable. We live in the future, not the past. I won’t experience the historical data in retirement, though hopefully I won’t face anything worse.

The truth is that a lower SWR is safer no matter how much kung-fu you know, so I’m not actually going to adopt a 4.7% SWR.

4% it is

So after everything we’ve been through I’m going to choose 4%.

Editor: You clutz! You total time-waster! Is this your idea of a joke?

Okay look, it’s thousands of words later and I’m as aghast as anyone, but I’m not using that 4% rule.

  • I’d have to use a 3% SWR to live with naive, constant inflation-adjusted rules.
  • But 4% with all the layer cake trimmings works with McClung’s system and it comfortably performs in Timeline.

In short, I am only happy to choose 4% because it leaves me room for manoeuvre when allied with the withdrawal techniques we’ve touched on in this series.

I also have – and must have – a Plan B.

Maybe my ability to use complex techniques will ebb through my eighties and nineties? Maybe I won’t even make it that far – a big problem given Mrs Accumulator’s interest in dynamic withdrawal rates continues to hover around zero. (“But look, they’re dynamic!”)

Plan B is to switch to a simpler, safer Floor and Upside strategy when our State Pensions kick in and annuity rates tip in our favour.

Aside from that we’ll maintain an emergency fund, there’s always the house to sell or reverse mortgage, and there are side hustles to hustle if we have to.

More than anything, digging into the research has taught me that a SWR is a very personal number. Like inside leg measurement personal. And it’s probably not even a number.

Really, it’s a floating set of coordinates that give you something to aim for. Your final destination can only be known when you arrive.

Take it steady,

The Accumulator

  1. For a fixed fee of course.
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We’ve not one but two of our favourite bloggers guest posting today. What’s more they’re going at each other head-to-head! Roll up, roll up, for a bare knuckle cage fight – personal finance style! Okay, not really, Mr YFG and Fire v London are too polite for that. But we hope you enjoy their gentle jousting nonetheless.

There’s a divisive issue that has been tearing the nation apart forever. Bloggers are at odds over it. Family members squabble over it. Maybe you’ve even put off retiring because of it.

No, we’re not talking about Brexit. This is a far more ancient disagreement than that mere whippersnapper!

We’re thinking of the age-old question as to whether your home is an asset and an investment. And even if it is, whether you should count it as part of ‘the number’ you need in order to declare yourself financially-free and able to retire early, should that float your boat.

Parliament isn’t getting a great rap at the moment, but we see merit in a serious debate. So let’s have at it!

At the end you’ll even get to give your (indicative) vote.

  • Proposing the motion “This house believes it deserves to be included in your net worth” is FIRE v London, who is here to make the argument FOR including your home in your Financial Independence (FI) net worth figure.
  • Opposing the motion is Mr YFG, who will make the argument AGAINST.

And are you sitting down, dear reader? Because there’s a twist…

Warren Buffett’s wise sidekick Charlie Munger once said:

“It’s bad to have an opinion you’re proud of if you can’t state the arguments for the other side better than your opponents.”

We’re going to put this to the test: Each debater is arguing the opposite of what they believe.

Let’s see if we change anybody’s mind. (Maybe even our own?)

We now call upon FIRE v London to get proceedings underway.

FIRE v London: Property should be counted in your net worth

Gentle readers, the argument I am putting forward today is nothing short of simple common sense.

Property is big!

Property is the biggest type of asset out there. In the UK it is 51% of our net worth, dwarfing all other types of asset.

Why would retail investors like us FIRE1 types ignore the biggest asset class?

Of course not all properties are residential properties. And not all residential properties are your home. But what we are discussing in this debate is your primary home – where the FIREr lives – and whether this home, and any associated mortgage, counts in the Net Worth calculation you tend to do for FIRE.

The average home in the UK is worth around £250k. In London it’s more than £480k.

For most people, the savings needed for Financial Independence are around £1m. So in that context, the house you live in is an important number – potentially half of the total assets required.

Why would we possibly exclude the most important asset from the calculation?

Big as an asset but also big as an expense

Of course, property is also the biggest cost for most households. It is around 22% of disposable income in the UK on average, and a lot more for #GenerationRent – who in London pay on average more than £1,600 per month to rent a home.

From the point of view on somebody on the FIRE path, this is important. To be Financially Independent one needs to be able to meet all your living expenses, and this obviously includes housing costs. If you own your own house outright, with no mortgage, you’ll have a significantly lower cost of living.

So, in fact, this house believes not only that your primary home, as an asset, should be included in your net worth, but that your housing costs should be included in your assessment of FIRE. You can no more disentangle your primary home, as an asset, than you can forget about paying for electricity and broadband.

So far, so much common sense.

Rent vs buy? An important side question

In fact once you move beyond common sense, there are good practical arguments for considering both your asset and your housing costs in your FIRE deliberations.

It may even be that – counter-intuitively – renting rather than owning turns out to make FIRE more achievable.

Certainly in parts of London with low rental yields, renting may prove significantly cheaper, especially if you can obtain decent investment returns on the freed up capital.

This house might be better off sold! But you won’t know if you don’t consider it in your net worth.

UK property has important tax benefits

But never mind the size of it, look at the quality. Property is not just a large asset, it is also – especially as your primary home – one of the best assets. Particularly here in the UK.

In the UK property holds a special place in the heart and mind of everybody – not just those Englishmen whose ‘home is their castle’.  In Britain, property investment is ‘safe as houses’. Property is a ‘one way bet’. Stocks and shares? That’s ‘gambling on the stock market’, whereas you can put your trust in ‘bricks and mortar’.

As you can see almost every week in the Sunday Times’ Fame & Fortune column, where successful people make these arguments all the time. And they are successful people, so their arguments must be right, right?

In the UK, the taxman agrees with Fame & Fortune. Property is taxed differently to other types of asset. Crucially, there is no capital gains to pay on your primary home. If you pay off your mortgage, live in your home rent-free, and ultimately have no capital gains to pay, your primary home – the single biggest chunk of wealth for most of us – attracts no tax.

As in most places, here in the UK property is also arguably the key asset that it makes sense to borrow to buy. This means that you can get leveraged returns on it. This means you’d be crazy not to – especially for your own home, where mortgage rates are particularly low.

So, property is different. It is a large and obvious asset for retail investors to buy. In owning it you eliminate rent as a housing cost. There is no tax to pay, and you can leverage up your returns. You’d be foolish not to invest in it.

Let’s hear no more nonsense about excluding it from your net worth. Property is too big to exclude, and too attractive to exclude. That’s why this house believes it deserves to be included in your net worth!

But now I turn to Mr YFG, who is going to oppose the motion.

My YFG: Does my asset look big in this?

Whilst my honourable friend is right to call our home big, the case for it being an asset is less clear.

That’s because our homely abodes don’t generate any income or cash towards our FIRE target.

As Robert Kiyosaki of Rich Dad, Poor Dad fame points out, a home creates a negative cash outflow. For example, a mortgage, maintenance costs, bills and taxes. That makes it a liability!

My friend and rival also correctly points out that whether you should rent versus own your own home is a serious question to ask. This follows from the above. A bigger, more valuable house means you need to hold greater and greater amounts of other assets to balance out the cash outflow.

It also means leaving money on the table. The research shows that in the UK, investing in the stock market has beaten investing in property.  Money in your house is money out of the market. Money out of the market is the lost returns needed to finance FIRE.

Overall, the bigger your house, the harder it is to reach FIRE!

Alternative facts

Putting aside whether a house is an asset or not – can we even claim it’s big?

Valuing a home is very difficult. Unlike shares in an ETF (or FIRE bloggers), no two houses are alike. Sure, we can get a valuation from our local slick-backed-hair estate agent. But the ‘true’ value is only known when you come to sell.

Those mansions in Florida were quite valuable until they weren’t. Likewise the owners of former homes in Dunwich thought little was safer than houses… until the North Sea developed a taste for bricks and mortar.

This means that if you include your own home in your assets column the number is a little bit ‘fake news’.  It’s not a ‘real’ number like the cash in your bank account. It may never be realised.


The main point of our FIRE stash is to fund our living costs. All those craft beers and avocado on toast won’t pay for themselves! And this is very difficult with a house.

As mentioned above, a home generates negative cash flow. But even thinking in capital terms, it’s tricky to realise capital amounts, too.

Unlike stocks and shares, we can’t just sell piecemeal amounts of our own home into the market as needed. Nobody would be interested in buying a quarter of my guest bedroom, and not only because of the mound of bric-a-brac I’ve stored in there.

To realise money from our own house we have to sell it all or else take out big remortgages. That makes your own home a really bad investment for funding living costs.

Mums and their sons

My honourable friend is quite right: An Englishman’s home is his castle. I love my home. And this level of emotion makes it very difficult to stay rational.

My home is the best home. Just like my mum’s son is the best son in the world.

So when it comes to my home, I have a huge blind spot. I’ll always be tempted to bump the value of my home up in a way that I can’t with my index fund investments.

My home is more than a number in a spreadsheet. As a rational accountant I must guard against that, and discount whatever value I magic up for my home.

In summary my case is this: we can’t categorically say a home is an asset as it loses money. Whilst it’s a big expense, it’s hard to put a real number on it. Any number we do conjure up is contingent on a future star-crossed home we’re in love with making it rain in our bank account. And even that number is probably unrealistically high because who doesn’t love their home?

My case rests.

Who is right? You decide

Well, there you have it. Two opposing points of view on a key question facing any ambitious seeker of Financial Independence.

What do you think?  If you rent, is buying your own home part of your financial plan? If you own already, what will your financial independence look like in the future? What arguments are we missing?

Please vote in the poll and expand your thoughts in the comments below!

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