Weekend reading: Beat the market by saving more

Good reads from around the Web.

The US investment advisory firm Research Affiliates made headlines this week when it predicted that American savers have a 0% chance of hitting their desired 5% or greater annual returns from a standard 60/40 portfolio over the next decade.

From Bloomberg:

Research Affiliates’ forecasts for the stock market rely on the cyclically adjusted price-earnings ratio, known as the CAPE or Shiller P/E.

It looks at P/Es over 10 years, rather than one, to account for volatility and short-term considerations, among other things.

Research Affiliates is a respectable outfit, but I’m not convinced that anything that spits out a ‘zero’ probability for investment returns should be taken as gospel. (I’m also somewhat skeptical of the utility of CAPE these days, but that’s for another article.)

What I’m sure of is that trying to do better by investing in active funds will serve most US thrill seekers poorly.

Yet as markets have climbed that has been the industry’s siren call (even as the data piles up showing ever more money ignoring them and migrating to passive funds).

Don’t beat yourself up

Remember, active investing at the stockpicking level is a zero sum game.

It’s true in theory that particularly perspicacious managers could sell out of some markets and move into others and generally juggle assets to receive better than 5% returns, but the evidence is very slim – well, non-existent – that more than a handful will manage it.

So the odds your chosen active manager will be one of the few are extremely poor.

By way of illustration, the average hedge fund returned just 0.7% in the decade ending 2014. Indexing guru Larry Swedroe has pointed out that means they under-performed every single major equity and bond asset class in existence.

Josh Brown at The Reformed Broker offered his usual robust retort to the chatter from active managers who claim passive investing “sheep” are about to be slaughtered:

If you’re a purveyor of high-cost, high-tax, high-transaction, high-bullshit, wannabe macro-genius strategies, you might want to look into the things you have so much to say about before mocking others who are doing the best they can to save and invest rationally.

You’re either pretending not to understand this in an attempt to mislead others or you’re genuinely uninformed yourself.

Save the day by saving more

As a long post by the robo-adviser Betterment spells out, the rational approach to low expected returns is not to try to find the next Warren Buffett, but rather to save more money.

It says doing better than average by even 1% a year through investing returns would require a fund investor to pick one of the one-in-three funds that beat the market in a particular year, and then successfully do it again and again for the next 10 years.

For those for whom maths is not a strong suite, let’s just say the odds of achieving that are not worth discussing further.

On the other hand, saving more is guaranteed to boost your final pot, compared to if you’d spent the money instead.

In their worked example, increasing the savings rate by just 8.5% delivered the same outcome as achieving that wildly improbable run of annually switching your money from winners to winners for a decade.

Same difference

Remember, these people are all commenting on the US market. I think our stock market looks cheaper personally and our bond market more stretched – but as always what do I know.

Anyway, many sensible passive investors are in world market trackers these days, and they are massively weighted towards the US market. So the outlook is relevant.

The bottom line is saving a few more quid probably isn’t going to hurt. The alternative responses might well do.

Note: Remember the clocks go back tonight!

From the blogs

Making good use of the things that we find…

Passive investing

• Start now – The Reformed Broker
• Think different to be less fearful of investment drawdowns – Portfolio Charts
• Technology and scale driving Vanguard’s success – A Wealth of Common Sense

Active investing

• Commodity and finance companies clobbered the FTSE 100 – The Value Perspective
• The US market looks cheap – Antonio Fatas
• Are Apple shares a bargain? Not really – Jesse Felder
• The fat pitch – Investing Caffeine
• Interview with UK Value Investor [Podcast] – UK Value Investor
• A deep dive into hedge funds [Podcast] – The Investor’s Field Guide

Other articles

• Living in multiple timeframes – The Irrelevant Investor
• Three simple heuristics – Oddball Stocks
• Don’t let chasing ‘The Number’ get in the way of happiness today – Khe Hy
• Central Bankers and Henry VIII’s court – The Value Perspective
• No news is good news – The Escape Artist

Product of the week: With inflation looking set to rise towards 3%, the new two-year 0.98% re-mortgage rate from Yorkshire Building Society seems a real bargain. (Real! Geddit? Apologies.) ThisIsMoney points out that high upfront fees and a large deposit requirement means the eye-catching rate won’t be right for everyone though.

Mainstream media money

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

Passive investing

• 99% of active US funds under-perform… [Search Result] – FT
• …so no wonder the pool of actively managed money is shrinking — Bloomberg
• Why not just buy Warren Buffett’s Berkshire Hathaway: Revisited – Mutual Funds
• Swedroe: Trend following strategies work [Nerdy…] – ETF.com

Active investing

• Investment trusts are back in fashion [Search result] – FT
• A bunch of charts scaring Wall Street types – Bloomberg
• The Italian banking crisis could get ugly – ThisIsMoney
• 37 years watching the oil markets – Interactive Investor
• The spate of big M&A deals might signal a market top… – CFA Institute
• …then again, IPOs in London are at a four-year low – ThisIsMoney

A word from a broker

• Neil Woodford on the weak pound and interest rates – Hargreaves Lansdown

Other stuff worth reading

• Beware this leasehold trap on new-build property – The Guardian
• Save money in the hour you get when the clocks go back – The Guardian
• In praise of auto-pilot investing – Morningstar
• How to protect your home: Tips from a burglar – ThisIsMoney
• The frugal American footballer and multi-millionaire – ESPN
• Lucy Kellaway: Being early has everything going for it [Podcast. Search result] – FT
• Wall Street’s push to hire great coders – Bloomberg
• Elon Musk is trying to prettify rooftop solar power – Los Angeles Times

Book of the week: I’m a bit suspicious of the growing legion of Marcus Aurelius fans, but as a long-time reader of the Roman emperor’s Meditations it’d be hypocritical of me to complain. Not least because I found them via Russell Crowe’s Gladiator! Anyway, it was Bason Asset Management’s turn to riff on Meditations this week, with insights for investors. The author suggests you go for the modern translation, so here’s a link to it on Amazon UK. I’m always wary of popular things. Perhaps this stoic bubble is an (over) reaction to the financial crisis, and it’s time to go long Caligula?

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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”.

from Monevator http://monevator.com/weekend-reading-beat-the-market-by-saving-more/