The Investor is unwell, I mean on holiday. Definitely not too drunk to write his column this week. Nuh-uh. No way, Jose. Nope.
Hi! The Accumulator here. Just covering while my good friend The Investor is having a nice rest.
OK, links is it? I’ve got loads. Because we’ve been planning this for weeks. Sure have.
Anyway, one article that sobered me up this week is a penetrating critique of defined contribution (DC) pensions written by the esteemed William Bernstein and Edward McQuarrie.
They elegantly show that most people relying on DC pensions to provide for a successful retirement need:
- Much higher savings rates than is commonly admitted
- 100% stock portfolios throughout their entire investing lives (accumulation and decumulation combined)
- A dose of luck: in the form of a benign sequence of returns and average historical return rates (Woe to thee if you’re below average.)
The savings rates required to retire on a portfolio of low-risk assets (e.g. index-linked government bonds) are just not doable for most people. From the article:
Grim indeed: using historical data, our analysis shows that not until the savings rate approaches 25% does the saver have more than a 50/50 chance of success, and to approach certainty requires savings rates in the 40% range. Lower savings rates require a market return that has seldom been on offer.
To bring savings rates down to something half manageable, it’s 100% equities all the way:
It turns out, counterintuitively, that only one maneuver improves the success rate, and that’s a 100% stock portfolio both during accumulation and retirement.
Even then you need a 20% savings rate to push down your chance of retirement ruin to 4%.
How likely is it that the majority can achieve that? We’ve known for a long time that the median UK pension pot is ridiculously underfunded. And those who struggle to save likely face bleak retirements, or a working life that stretches far into old age.
Bernstein and McQuarrie’s prescription:
The current system doesn’t need more nudges; it needs dynamite and rebuilding from the ground up on the DB [defined benefit] model.
That isn’t going to happen here. Nor in the States. Indeed, the authors’ aim seems to be to push back against libertarian forces who seek to dismantle all forms of social insurance, and leave individuals at the mercy of the market.
Whatever you think of the politics, the underlying research paper by Bernstein and McQuarrie is a clear-eyed education in investing risk. Most of all, it relentlessly strips away the many myths that comfort us when we look at a global equities returns chart and notice that it’s done pretty well for fifty years.
Have a great weekend.
From Monevator
FIRE-side chat: after the rollercoaster – Monevator
SIPPs vs ISAs: battle of the tax shelters – Monevator
From the archive-ator: Bear market recovery times – Monevator
News
Crypto ETN ban could be lifted for UK retail investors – Which
Revenge tax menaces foreign holders of US assets – FT
Pension reforms ahoy. Just what we need! – This Is Money
UK Tesla car sales down by a third: analysts stumped – Guardian
Another fintech snubs the London Stock Exchange – FT
Source: This Is Money
Tesla price plunge: a textbook case of idiosyncratic stock-risk – This Is Money
Products and services
Banking switch offers are hot right now – Be Clever With Your Cash
Best mortgage rates for first-time buyers – This Is Money
Hack: How to ‘spend’ on your debit card without spending – Be Clever With Your Cash
Avoid these travel insurance nightmares – Which
UK property hotspots – This Is Money
WASPI women: watch out for scam websites – Guardian
Get up to £1,500 cashback when you transfer your cash and/or investments to Charles Stanley Direct through this link. Terms apply – Charles Stanley
Care-home fee black spots – This Is Money
Get up to £100 as a welcome bonus when you open a new account with InvestEngine via our link. (Minimum deposit of £100, T&Cs apply. Capital at risk) – InvestEngine
Nintendo Switch 2 review – IGN
Homes for sale in cultural hotspots, in pictures – Guardian
Comment and opinion
US safe-haven status in peril – Paul Krugman
FIRE sceptic rethinks their biases – Morningstar
How to avoid the big investing mistakes – Behavioural Investment
How to rationalise dreadful investment losses [Satirical] – Acadian
The UK doesn’t have a productivity puzzle – FT
Investors do better in target-date funds – Morningstar
Does small cap value improve your safe withdrawal rate? [Plus ERE vs The Golden Butterfly portfolio] – Early Retirement Now
Value is working quite nicely outside of the US – Morningstar
Sage investment wisdom from Benjamin Graham x Jason Zweig – TEBI
Common FIRE traps not to fall into – The Purpose Code
The dangers of home bias versus the UK growth agenda – Archie Hall
Choosing where to live after financial independence [Slides – US but translates] – Harry Sit [Video version – Harry Sit via Bogleheads]
Naughty corner: Active antics
To earn the big bucks you’ve got to take the big losses [Research paper] – Morgan Stanley
Using ChatGPT to optimise your trading strategy – Quantpedia
Don’t bet against AI stocks say Wall Street analysts – Sherwood
Hedging AI risk – AWOCS
Life is harsh (and short) for underperforming funds – Jeffrey Ptak
Bitcoin ETFs are up! – Humble Dollar
Pudgy Penguin NFT ETF = End Times – FT
If you love risk, you’ll love Bitcoin treasuries – This Is Money
Kindle book bargains
How to How the World by Andrew Craig – £0.99 on Kindle
The Algebra of Wealth by Scott Galloway – £0.99 on Kindle
The Big Short by Michael Lewis – £0.99 on Kindle
Skunk Works: A Memoir of My Years at Lockheed by Leo Janos – £0.99 on Kindle
Or pick up one of the all-time great investing classics – Monevator shop
Environmental factors
Green-hushing: ESG survival strategy in the Age of Trump – Semafor
Why batteries make a renewables-powered energy grid affordable [US but translates] – Construction Physics
Hybrid electric vehicle sales rocket in the US – Sherwood
Robot overlord roundup
How AI is infiltrating the movies – Vulture
Why AI isn’t leading to mass sackings (yet) – Dwarkesh
Not at the dinner table
Trump vs Musk: Gasbags at dawn – CNN
Apparently we’re at war with Russia – Guardian
Reaction to the UK Strategic Defence Review [Podcast] – Chatham House
Trump family get into bed with crypto bros [Voms] – WSJ
Off our beat
How Ukraine’s audacious drone attack stuck it up Putin’s bombers – CSIS
The genius myth [Paywall] – Atlantic
Contrarian views on the big five mass extinctions [Paywall] – New Scientist
And finally…
“Owning the stock market over the long term is a winner’s game, but attempting to beat the market is a loser’s game.”
– Jack Bogle, The Little Book of Common Sense Investing
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