Saturday 10 February 2018

Snakes and Ladders

Well it looks like asset prices don’t always go up.  Of course I’m not surprised by this revelation but the mainstream media did seem surprised with headlines such as “Dow loses 7 million points in the session” and “Worst market performance since dinosaurs roamed the earth” but then of course they need sensationalism as they’re attention seeking.  The market action even meant that it made the first news item on the radio for a couple of days.  It could almost be 2008 again.  It would be enough to scare people off investing if they did nothing more than listen to news sound bites.

What has really happened thus far?  I say thus far because the market can of course continue to fall...  Or it might flat line...  Or it might go up again...  By my calculations this week the S&P500 has fallen 5.2%, last week it fell 3.9% and the week before that it actually gained 2.2%.  In contrast the FTSE100 this week fell 4.7%, last week fell 3.9% and the week before that fell 0.8%.

This is what has happened to a couple of single indices and makes for great news items but how has this impacted a long term investor who buys, holds and rebalances a variety of global asset classes.  I like to think I’m one of those so let’s use my real world portfolio as a comparator.  This week my wealth has decreased by 2.3%, last week it decreased by 1.5% and the week before that it decreased by 0.4%.

Combining that data shows that over that 3 week period the S&P500 has fallen 6.8%, the FTSE100 has fallen 8.3% and my own portfolio has fallen 4.1%.  Now let’s put it into perspective:

RIT’s change in wealth since 2007
Click to enlarge, RIT’s change in wealth since 2007

Can you see the correction and what all the excitement is about?  Yes that’s right my wealth is now back to where it was at the end of September 2017 while the dividends keep rolling on in.

So what financial action did I take this week in response to all the news (noise?)?  Be prepared to be amazed:
  • British Land (ticker: BLND) paid me £85.73 in distributions.  I duly noted that on my spreadsheet.
  • With the new Interactive Investor (formerly TD Direct who I was always very happy with) ISA charging structure allowing quarterly charges to be offset against trading costs there is no benefit in building up economically sensible cash levels to minimise purchase expenses.  Instead I’m just going to buy a couple of times a month.  With that in mind I this week bought some Vanguard Developed Europe UCITS ETF (ticker: VEUR).
  • As I’ve done every Saturday morning since 2017, with a great cup of coffee, I updated my wealth tracking spreadsheet that has been a great friend on my FIRE journey thus far (and which spits out all the nice graphs I regular share on this blog).

This investing lark is exciting isn’t it...

As always DYOR.


  1. I must admit I'm a bit amazed by all the kerfuffle. I think the S&P 500 managed a technical correction at some point (down 10%) and the media reacted like it's the end of the world. I guess they've been starved of doom-mongering material for a while, what with the market (especially in the US) doing nothing but going up almost every day.

    I find it really annoying because, as you say, it puts sensible people off from doing the sensible thing and investing in the stock market. Instead they stay in cash or invest in property, which of course only ever goes up (not).

  2. The interesting thing this time is bonds have not made gains to compensate, as the whole thing seems to be interest rate driven. Bonds have dropped as well, just not as much as equities. Commercial property also dropped a little, gold held up fairly well considering. But in terms of defensive assets cash has been king, and cash-heavy portfolios will have held up better.

    This has bigger implications if we have a sustained bear market driven by rising interest rates, and the two major asset classes of equities and bonds tank simultaneously.
    For what its worth I think rates will stabilise over the next 12 months or so. And I will be buying intermediate term gilts eventually to get to my desired asset allocation, but for now holding a decent slug in cash is the only safe haven.

  3. Who Knows ?

    Press is full of the " Return of Volatility " and these charts and tables do show how remarkably low volatility has been in 2017.

    Fears of rising interest rates, a return of inflation and wage growth are supposed to be factors fuelling this instability.

    Disposable income is not going to increase ( even if their wages rise ) for those with variable rate mortgages ,base rate linked mortgages or those coming off fixed rate mortgages taken out 2 or 3 years ago.

    And if inflation has suddenly become more of a concern why have index-linked gilts ( ILG's ) not risen ? I know ILG's are complicated and there are "new " and "old " style ILG's - but have a look @ and ckeck out the long dated ones ( which are supposed to be most sensitive to changes in expectations of inflation ) So - was it already in the price , are the new forecasts for future inflation actually not really any different from what the ILG bond markets have been expecting ?

    As I mentioned " Who Knows ? "

    1. "Who Knows?" I agree. Of course the active amongst us will see some winners and some losers through volatility like this. On the average though they will lose against the passive trackers because of expenses combined with it being a zero sum game. The question then is do you back yourself to pick the winners over the very long term?

      I know I don't back myself so doing nothing is certainly right for me.

  4. Wise words RIT.

    Steady as she goes..

    As for having a spreadsheet as a great friend - i think you need to get out more?

    1. "As for having a spreadsheet as a great friend - i think you need to get out more?" LOL. Right now a lot of my time is spent working and commuting so this FIRE lark might just be the right medicine...

  5. Sorry to disagree ROT - but it is not a zero sum game. However - it seems to be a fairly wide spread belief that it is .

    Obviously trackers and etf's score with their low costs - over years that all adds up . So a real tracker / index fund will out-perform a quasi- tracker active fund . But as far as " zero sum game " is concerned you could have a huge number of truly active funds that have not invested in some very large Mega Cap companies that have a significant effect on any index they appear in . If 2 or 3 of those mega caps collapse then active funds not holding them may outperform. Think of Neil Woodford's UK Equity Fund ( but the other way round ) . With Provident Financial , Compass and ? Carillion collapsing his fund has
    suffered a lot more than most

    You could say that any share price at any one moment is an example of a zero sum game - the price where buyers and sellers both think they are doing exactly the right thing !

    1. I'm not sure I follow stringvest. All investors in a market are the market. Therefore, any investor (whether in an active fund or owning directly) who beats the market by £1 must have somebody on the other side who has under performed by £1 (excluding expenses).

      In your example of active funds not holding a mega cap that subsequently collapses surely on the other side of that are then individual holders/active funds who were overweight. Using Carillion as an example. Maybe the odd Active Fund avoided them but I can find plenty of HYP'ers who were overweight as it formed part of a 15-30 share portfolio.

      As for Mr Woodford. His Equity Income Fund outperformed the All Share Index right up until the point it didn't.

      I think what you might be saying, but am not 100% sure of that, is that 'everybody' has the potential to be in their own unique market enabling potential out performance. Surely then though the sum of all these unique markets is the market where there are 'winners' and 'losers' based on their unique market.

  6. Hi RIT and others ( apologies for the ROT - must have been thinking of Robot )

    I think there are serious flaws in 2 of your concepts.

    Firstly - what is " the market ". Honestly - this is a fairly useless term as it will conjure up a huge number of different things to each individual . What do YOU mean by the term market ? Equities? Bonds ? Cash ? Forex ? Gold/Oil/Commodities ? derivatives of all kinds etc etc - or any combo of some of these but not others .

    I suggest you also google ( or equiv )

    1. What is a zero-sum game in game theory ?
    2. Is trade a zer-sum game or a positive -sum game ?
    3. Is Forex a zero-sum game ?

    Hopefully this might persuade you to stop using either or both ( preferably ) of these terms .

  7. @SV - i think it's pretty well understood that out or under performance of a market via active trading is zero-sum. I don't think there's a huge amount of confusion over what the term market means? I think RIT is on the money here. It's not quite clear what you're getting at?

  8. Hi RIT - The Rhino seems to agree with you . To my way of thinking you are both wrong but you seem happy with that.

    RIT - I saw this in the FT and thought it would be right up your street. Hope you can see the comments section as well.

  9. I'm never particularly happy with being wrong

    That FT link is pay-walled

    My thoughts on the subject are in line with TIs:

    maybe you're talking about something a bit more sophisticated or nuanced? We may never know as you don't seem capable of articulating it?

  10. Don't worry about being wrong sometimes RIT and The Rhino - it happens to most of us at some time.
    Sorry about the FT link - I am able to gift up to 20 articles a month but I think that has to be to an individual each time . The article was about additional fees that are added to active and passive funds without them being declared - I will post the Title and Author shortly.

    I agree with you Rhino that I am not articulating this very well but I am convinced that this zero-sum game idea is a false one.

    To propose a zero-sum you agree that some things have to be measured or compared . There are many different ways of measuring investment performance - also there are many different ways of comparing one investment's performance with another. A common way of comparing performance is to use a benchmark or a share index - and to get a realistic idea of relative performance ( over or under achievement ) it is best to choose a benchmark or index that is as similar to - or trying to achieve the same as - whatever you are measuring against.

    As we already know - even an index tracker fund ( with low trading costs and management fees etc ) will underperform the index. The index has no trading costs, no management fees , no bid-offer spreads so an index is a tool that has been created - and it is artificial. An index tracker fund can only attempt to reproduce the performance of a specific index - it will never have all the advantages that the index itself has .

    So - nothing new there - I think we all know and understand that . Moving away from tracker funds , closet tracker funds and passive funds generally ( none of which will " beat " the index unless they are using gearing , derivatives to try and make up the difference in performance ) -- can you consider a situation where ALL active funds in a particular sector outperform the index ? But that's impossible you say. Say take UK All Companies Sector. Why could it not happen that - over a defined period - all the active funds in this sector happened to choose more of the outperforming companies and fewer of the underperforming companies . And this outperformance would be sufficient to cover the bid-offer spreads , platform fees, company or fund fees so that the performance is actually greatter than the index itself.

    I agree this situation is unlikely - but it is theoretically possible. To me - this refutes the idea of a ' zero-sum game "

    Maybe what I am understanding as the meaning of the term may be different to yours - but I keep seeing terms like - for every winner there must be a loser . That is plainly incorrect.

    1. Who owns all the underperforming companies? They're the ones who are making up the zero sum game in the market. If it's not the active funds (as you say they all own the outperformers) it must be individuals who by definition must be holding more underperformers (as the number of total shares are a finite number in the market) and because of this are then active investors.

      I agree the trackers will also own some of it but they can't own all of it as they are market weighted so will just hold the outperformers and underperformers in the right proportions.

    2. First of all - trackers are not all the same . Some try to replicate the composition of the index exactly - others miss out some companies ( espec small ones ie those that only have a small representation in the overrall index performance ), others " sample " the companies that make up the index and others use derivatives . Then these so called trackers start to deviate from the index and want to try to beat it by
      using various other criteria for their company selections - so these trackers start blending into smart beta funds.

      " it must be individuals who by definition must be holding more underperformers " Individual investers represent a very small proportion of shares listed on UK stock exchange . The big holders are pension funds , life insurance companies , companies themselves ( sometimes in the form of stock options ) - other companies holding aa proportion of shares in companies in the same sector ( with a view to preventing a take over bid from that company - or to enable them to increase their holdings in the future to trigger a take-over bid themselves ) - then some companies that invest in a broad range of other companies like IT's then funds like OEICS , unit trusts, UCITs - then hedge funds , private equity etc etc.

    3. The price of an individual company is at any point reached by the " market makers " pricing that company so as to trade it ( they don't make any money if no one is buying or selling ) So if the view is bearish on a company and sellers outnumber buyers the market makers will reduce the price so that at some point buyers are attracted back into trading as they view the company as having become too cheap . Do you regard this as a type of zero-sum game ? If you do - and despite price gyrations the long term trend is for that company's share price to rise - does that potential profit negate the " zero-sum " ? infavour of the holders of the shares as compared to those that have sold out ? However - those that have sold out may have missed out on the share price rise after they have sold - but may have used their sale proceeds to invest in another company that has performed better. How does that scenarion fit in with your zero-sum concept ?

    4. Agree trackers are not all the same but provided they track whatever index they are supposed to track less expenses then I'm happy to call them a tracker. If they are missing out companies of an index then provided they declare this as their index and measure themselves against it then I'm good with them being a tracker. So the FTSE100 minus Carillion tracker is a valid tracker providing it is declared and measured against. No skill for expenses is being claimed here.

      As soon as they start saying they intend to beat the FTSE100 minus Carillion (and start piling the expenses on that goes with that) then they're active. To me it doesn't matter if they are an OEIC or a hedge fund or an individual and it doesn't matter if it's held by a pension fund or an individual directly they're still active. They're claiming skill and charging for it (unless it's all done by the individual of course).

      I think my question still stands - who owns all the underperforming companies in your example?

      This might be of interest

    5. Thanks RIT . Which example are you referring to ? I have mentioned quite a few - so which one is the relevant one for your Q " who owns all the underperforming companies " I am assuming it may be the example I quoted of all the Active funds ( OEICS ) outperforming the relevant index . If it is that - what about all the pension funds , life insurance companies , IT's , companies themselves , hedge funds and private equity owning the underperformers ?

    6. "what about all the pension funds , life insurance companies , IT's , companies themselves , hedge funds and private equity owning the underperformers" They can only be trackers (inc pseudo trackers) or active. As far as I'm aware there is no other investment type in this category. The sum of all of them are the market.

      So if a pension fund underperforms a benchmark index by one (less expenses) and an OEIC outperforms by one (less expenses) then to my mind that's zero sum. I don't think the wrapper type or product type is relevant but rather just is it a tracker (so tracks a pre-declared index) or active (states it's going to beat a pre-declared index).

    7. Hi RIT - just had a quick look at the Morningstar link .

      The results look impressive - in fact so impressive they are almost " too good to be true "

      How has this come about ?

      The charts are based on a judgement of success . Admittedly they declare on what basis they judge success but I think their methodology is flawed ( leading to the squewed results )

      They have included in their analysis all the funds that started off at the beginning of the time period under review . Inevitably some of the funds that did not last the full period of time should be completely excluded - but they have not done this . They have assumed that a fund that disappears must be classified as a failure . As Morningstar declares this indeed is an assumption - assumptions should not be part of a strict analysis.

      Morningstar's main reason for making this assumption are flawed . They could have overcome this obvious criticism by doing another analysis only including funds that survived the full 5 years .

      That would still have included inevitable and possibly significan changes in the fund in many ways : fund remit ( eg a chang of benchmark to be measured against , no longer considering income so disqualifing it from being an equity income fund and becoming an All Companies fund ,fund charges , fund's manager(s), funds borrowing and cash holdings, dividends or yield , executive board , non-execs , liberalisation or tightenening of the kind of investments that are " allowable " within the fund, performance record of the manager (s ) which may have improved dramatically or fallen short ( some managers outperform in rising markets and underperform in falling , what I look for is a manager who outperforms consistently whatever the market is doing )

    8. But your " zero sum " then only applies to the one pension fund in question and also only the one OEIC in question . Don't you see how ridiculous that argument is ? It doesn't mean anything , it does not help clarify what investing is all about - it is irrelevant.

    9. "They have assumed that a fund that disappears must be classified as a failure." Thanks for that, most interesting and food for thought. You can't just include survivors either, as you suggest, as a simple thought experiment would give outperformers a better chance of survival so would skew the data in the other way.

      Another thought experiment though. I'm a superstar active fund manager and I outperform the market for 10 years. Why would I close my active fund? If I owned it and wanted out I'd either sell it on or get someone else to manage it and if I didn't own it they'd quickly get someone else to manage it. Then it's a question of can the new guard also outperform.

      I guess it's likely something that's actually impossible to measure but I personally would back a fund closing due to underperformance rather than overperformance. I have no data to back that statement up.

    10. " does not help clarify what investing is all about". You are right that this is definitely what is important. Getting the best total return for a given risk profile.

      With this in mind do you back yourself to pick the active investment/s that is/are going to outperform the market for the next 40 years? I know I don't and that's why I diversify across countries and markets for the least cost I can.

    11. When you're wrong as often as I am it does become a cause for concern.

      Is it possible for all active fund s to outperform the market? Yes but only if those active fund are a sub set of all market participants.

      Is it possible for all market participants to outperform the market? No, that is impossible. As for every transaction there is both a buyer and a seller meaning that in the future that transaction must be associated with both a winner and a loser.

      I think if you strip back all your additional considerations to these simple central facts it becomes clear outperformance of a market is a zero sum game?

      I doubt I will convince anyone with this post as my powers of articulation are also woeful. One of the key reasons I don't write a blog

    12. "I doubt I will convince anyone with this post as my powers of articulation are also woeful. One of the key reasons I don't write a blog."

      It hasn't stopped me... English grammar and articulation have never been my strong point. I think I can spell ok though. Learnt that by rote.

    13. Hi RIT and The Rhino ( and anyone else who's still there ) . No - I don't back myself to pick the active investments to outperform the market . I pay someone to do it for me - but I give them quite a hard time with my quest for information , evidence , strategic thinking and links to articles and access to their own research .I think you can probably believe that ( about the hard time ! ) My portfolio is almost entirely in funds and collectives - some of which are not quoted on the London S.E. and a lot of the OEIC's are in Institutional units which have lower on-going charges . Also I have investments in funds that a private individual could only purchase with a very large sum unless doing so via a broker .So - you might think I am losing by having high expenses - but I don't see it as losing as I have peace of mind. I am now 68 and retired - I used to manage my own investments. I am very happy with my broker / adviser / manager ( the same person ) I am fortunate that I do not have to make the pips squeak as hard as you do ( and are probably going to go on doing ) RIT.

      I urge you to have a mind for your medium to longer term health. I don't know how you manage to produce the data that you do RIT - and my worry is that with more time on your hands you may devote even more time and energy on " your investments " just to try and squeeze a little more return and carry a little less risk . I would call that a zero-sum game - as you would be avoiding your health ( as well as your family's health )as an important factor in the " sums ".

      Best of luck.

    14. Haha - writing is hard! Thats why I'm rarely surprised when smart people take a long time to write books, and am completely perplexed when not so smart people bang out amazon e-books at a rate of a several per day.

    15. "No - I don't back myself to pick the active investments to outperform the market . I pay someone to do it for me - but I give them quite a hard time with my quest for information , evidence , strategic thinking and links to articles and access to their own research"

      Ahh, I think the penny is dropping on the zero-sum argument? I'm reminded of the Upton Sinclair quote,

      “It is difficult to get a man to understand something, when his salary depends on his not understanding it.”


  12. Your comment about the spreadsheet that’s your companion on the FIRE journey made me smile.
    I have a whole herd of spreadsheet friends so I totally get what you mean :)

  13. A speadsheet is something is use occasionally but really something for wealth, assets and key discretionary expenses would probably focus my mind. I will buy a laptop a get on really, I will. My work laptop is great but I need to start my independence from work.

    Cash is king for me today but you know my 'off set' position with mortgages so I can afford a 5% drop never mind anything else. But if the FTSE hits 4000 I might review.

    When I retire I will dabble directly in shares fairly modestly and those speadsheets will be vital.

    Stay well....oh, don't forget to retire :)

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