Why investing beginners should consider stock markets

FIRE v London6 Comments

I am fortunate to know a lot of smart people.  Many of these smart people are successful, and make decent money.  Many of those have significant positive net worth.  But a surprising amount of them – I would guess over half – don’t choose to invest in publicly quoted equities. They are investing novices, and proud to admit it.  This blog post is for them, and their friends/family.

Imagine you are under 50, and have £1k to add to your savings. I don’t mean in your pension, which I think most people handle differently to savings.  I mean ‘put aside’ but retrievable on a rainy day / for a house deposit / for school fees / similar.

Where would you put your next 1k of savings?  Or more to the point, £10k of savings? Or £50k of savings?

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April 2017: elections & returns

FIRE v London3 Comments

I returned to London from my Easter break to the surprise announcement that Theresa May has called a general election on June 8th.  Normally I love elections and am a news junkie about them. Personally I think the PM has missed an opportunity to lance the Scottish nationalist boil by calling a simultaneous #indyref2.  So instead of that excitement, I find myself agreeing with piece in The Sunday Times today arguing that for once a foreign election, in France, is more exciting than the anticipated Tory landslide in the UK’s general election in June.

Certainly Macron’s win in the first round of the French election lifted European stocks considerably. The European index I use as my proxy for ‘international (i.e. non UK/US/Oz) equities’ rose 3.5% in April, well ahead of the English-speaking stock markets.  While we can’t ignore the prospect of a Le Pen win, it doesn’t appear likely from opinion polls. Much as people are knocking pollsters right now the only result they got wildly wrong in the last few years was the 2015 UK General Election result (where First Past the Post makes predictions particularly tricky). So most likely European markets are going to get better rather than worse.

2017 04 returns by asset type.jpg

The other big news in the markets for Brits was the jump in the pound, attributed to the prospect of ‘stronger and stabler’ UK leadership post the general election. Forex markets clearly haven’t clocked that the European leaders who do best in EU negotiations are those with credible domestic oppositions to appease, not those with autocratic majorities. In any case, the pound is still below $1.30 so the Brexit Brainfart hasn’t blown away yet.  But the pound rose against the whole basket, particularly the AUD (+5.8%). This led to FTSE, a foreign-dominated stock market, dropping about 1%.

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How to become an ISA millionaire

FIRE v London11 Comments

This is the third in my annual posts about my ISA (tax-free) portfolio.  I’ve written before about how there is an outside (~10%) chance of my ISA portfolio reaching $100m, if I live for another 40+ years.  Yet, as of my last post a year ago, the total FvL ISA pot was worth ‘only’ £355k (~$500k, back then!).  So how am I feeling about multiplying my ISA 200x?

My $100m assessment was based on a scenario analysis over the next 40+ years.  Making various assumptions (no withdrawals, regulation changes, etc), if I maintain contributions at £20k x2 per year, and achieve an ‘Above Average Risk’ level of return (>9% per year average, quite a high level of volatility), then in about 10% of predicted outcomes my total pot would reach $100m.

There are a couple of simple mental tricks that help me get my head around this growth. First of all, contributing £20k x 2 per year is quite a lot of money; over 30 years this is £1.2m.  To make it easier to think about the growth of this annually-topped-up portfolio, let’s simplistically assume it isn’t annual top ups, but instead is a lump sum of £600k ($750k) in year 14.

Secondly, remember the rule of 70.  Assuming I average returns of 7% then my portfolio doubles in 70/7=10 years.  At an average return of 10% it takes about 7 years to double.  So if I start with $0.5m, and averaged 10% return, after 35 years I have doubled 5 times, and I’m at $16m.  But if I add (see previous paragraph) $750k in year 14, this $750k then doubles three times; this adds a further $6m.   The two together get me to $22m in 35 years. Now assume I last a further 14 years , which takes me to the average life expectancy for UK males of my age, and I double my combined $22m pot 2 more times.  $88m.  Not quite $100m, but not far off.

Before you say that 10% per year is unrealistic, I am citing everything here in nominal ‘money of the day’ figures.  This is before allowing for inflation.  Historic returns for a diversified portfolio can easily achieve 5% per year on top of inflation.  This works out as 7-8% per year in nominal figures. 10% is high, I will accept, but not absurdly so. If you have significant fees then you can forget it, but if you hold low-cost passive trackers this is not that unusual.

In the meantime, there I was a year ago with £355k.  At today’s exchange rate this is barely $450k.  How have I fared since then?

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