The Finumus household is enjoying its first interaction with the student loan scheme in 30 years.
Our eldest is (hopefully) off to university in the autumn. Our youngest will be going two years later.
Just to keep things interesting, the government is completely overhauling the student loans system for the 2023 intake. Hence we get to do a little natural experiment with our finances.
We’ll skip over the debate about whether university is a good use of time and money. Our children are going, and that’s that.
The question for now is: “Should they borrow the money or not?”
Enter the student loan
Let’s first acknowledge how fortunate we are that whether or not to take the student loan is even a question.
Most families don’t have a choice. The only way their children can afford to go to university is with a loan. This makes the value-for-money calculation that much harder for them.
But our kids go to public (that is, private) school. The annual cost of their education will actually be marginally reduced once they are at university, compared to the current status quo, even if they borrow nothing.
So we can afford to support them – in terms of both fees and maintenance.
However we’re going to have them borrow the maximum amount of student loan.
Like everyone else they’ll be saddled with crippling student debt when they graduate!
Does this seem a bit mean to you?
Let’s look at the reasoning.
How the student finance system works
Students are expected to borrow money from the government’s student finance scheme to fund their university education.
They can borrow to cover all the fees (£9,250 p.a. ) and also some element of maintenance – ranging from about £4,500 p.a. to about £12,000 p.a. – depending on various complicated criteria, including family income.
(This is if you reside in England and are attending university in England. Otherwise the rules are more complicated).
Repayment works like a hypothecated, limited amount, graduate tax.
- Under the current scheme, you have to pay an additional 9% income tax over a certain threshold, until you’ve paid the loan back or until 30 years has passed. At that point the student loan is written off. Interest charged is roughly RPI+3%.
- With the new (2023) scheme, the earnings threshold is lower, the interest rate is lower (roughly RPI), and the term is 40 years.
Crucially, for us, you can also repay early with no redemption penalty.
According to the IFS, the 2023 changes will mean that far more graduates will repay their loan in full (75% vs 25%) but those students who would be paying it back in full under both systems (that is, higher earners) will benefit under the new scheme. This is because the interest rate is lower.
More lower earners, who might have escaped repayment under the old system, will be caught by the new lower earnings threshold. These people will end up worse off.
The change then is highly regressive – if you are measuring only within graduates.
If you’re thinking about the wider tax base, it’s not quite so clear – because arguably the change reduces the tax burden currently falling on those who don’t go to university.
The stated intent of the changes is to encourage students to read subjects that lead to higher-paying careers.
Any side effect of discouraging some from going at all the government doubtless sees as an extra bonus. After all, universities teach young people to think for themselves, and turn out lefty-liberal-remainer-voting ‘experts’.
But this is a finance blog not a political one.
Let’s take the system as we find it and – well – think for ourselves.
Gaming the system
Back in the halcyon days of positive real interest rates, low asset prices and cheap student debt – when your correspondent was at university – gaming the system was easy.
The student loan was only required to cover maintenance (fees were paid by the state – imagine) and the interest rate charged was very low.
Although my parents insisted that they didn’t want me to get into debt and hence paid for my maintenance, I of course borrowed the money anyway and used it to speculate in the stock market.
I could even have stuck it in the bank and come out ahead, too. (Admittedly you did have to avoid the temptation to spend it all in the union bar).
But things are more complicated under today’s shifting regime. The loan is dearer than it was for me, for a start.
However even if you can afford to sidestep the student loan altogether and just have your kids pay-as-you-go (PAYG), you might still want them to get into hock by maxing out their student loan, and then you (as a family) stash away the equivalent sum borrowed elsewhere.
To be clear, we’re suggesting that on graduation, our graduate will be in one of two positions:
Which one is best? The net positions seem identical.
However there are two reasons why you might prefer to borrow:
- Positive carry: it makes sense to take out the student loan if you can earn a low-risk post-tax return that’s higher than the interest rate on the loan.
- Loan write-off: if our young graduate isn’t ever going to have to pay the loan back, then that’s a win.
We’re not going to spend much time on the first reason. Earning a sufficiently high yet near-risk-free rate of return will be extremely difficult under the current scheme, although it might just be possible under the 2023 scheme, with its lower interest rate.
Your required rate of return also depends on your individual tax circumstances. It’ll be harder if you’re already filling up everyone’s ISAs and SIPPs to the max, for example, because your return will be taxed. You’ll have to do your own maths, based on your personal circumstances.
Borrowing also adds unnecessary complexity and leverage to the family’s affairs, so that’s a demerit.
All things considered, for us the positive carry argument doesn’t stand on its own.
It comes down to the second reason. Are my kids really going to have to pay the loan back?
Reversible decisions
As Jeff Bezos famously pointed out in his 1997 Amazon shareholder letter, it’s much easier to make reversible decisions.
The student loan can be paid back at any time. This means borrowing the money is an easily reversible decision.
At any time after graduation our family can collapse the ‘Borrow’ row in my table above into the ‘PAYG’ row. We simply take money from our savings and write a cheque to the Student Loans Company to do so.
However we can’t go the other way round. Once we’ve not-borrowed the money, there’s no going back and asking to borrow it again.
Therefore, we should borrow the money. It’s what’s known in finance parlance as a free ‘real option’:
We’d be foolish not to take it.
Little darlings
If you’re in a position to make a decision like this, you’re likely over-estimating the probability that your child will have to back the loan in full.
We know that between 75% (current scheme) and 25% (new scheme) of graduates won’t repay the loan in full.
But of course, your kids will, right?
You’re likely a high-earning university graduate yourself.
So you imagine that your children are going to have fulfilling, well-remunerated careers.
They may well do so. But they might not.
Stuff you don’t want to think about
I was fortunate enough to attend one of Britain’s most elite universities – the sort of place that churns out Prime Ministers and Fortune 500 CEOs.
At a recent gathering of some old college friends, conversation turned to the range of outcomes that our cohort of about 150 had experienced. This led me to consider whether we all would have paid back the student loan if we’d been borrowing under today’s rules back then.
In our sample there’s a large rump of successful middle-class high-earners, a few centimillionaires, and a bus driver. All of them would likely all be paying back their loans.
Then we have people who have worked their whole lives for charities on fairly low pay – mostly women. Some had a fairly short career because they decided to prioritize family. Others became artists or poets.
They likely wouldn’t be paying back their whole loan.
We also have a few who wouldn’t have had to repay any of the loan at all. The ones who suffered mental and physical health problems, addiction, family break-ups, legal problems, or just unlucky employment choices that materially impacted their ability to earn. Their careers sort of petered out before they really got going.
Finally, and I’m sorry to bring this up, but it is a reality – we have those who didn’t make it at all.
One didn’t get to graduation. Three died before they were 30: traffic accident, drowning, cancer.
I concede this is a set of anecdotes, not a representative sample. But there it is. Sometimes things don’t go to plan. It doesn’t matter how middle-class you are, how good a university you go to, or how much money you have. Nobody is immune to these possibilities.
More happily, we also had a few who permanently emigrated. They wouldn’t need to pay back their loan. (I know nowadays in theory you would, but in practice if you’re permanently emigrating then what are they gonna do about it?)
They’ll change the rules
So there you have it. As a family, you should have your children borrow the money, while you squirrel away in a savings account whatever you would have spent. Then simply decide later whether to pay it back.
You could choose to repay the loan the day they graduate or a decade later. Taking out the student loan is an easily-reversed decision that provides a fairly low-cost insurance policy against bad outcomes for your child.
Finally there’s the other side of the equation. The rules will change – probably for the worse, but possibly for the better.
The whole system could be replaced with a graduate tax, which they’d be paying anyway. This would likely incorporate some sort of forgiveness of the existing debt as part of the process.
The fact is 30-40 years is a very long time. Anything could happen. The US paused loan repayments during the pandemic. Some politicians are now advocating student loan forgiveness.
Just whatever you do, don’t let your spunky offspring splurge the borrowed money away in a future resurgence of YOLO madness.
If you enjoyed this, follow Finumus on Twitter or read his other articles for Monevator.
What caught my eye this week.
Another miserable week in the markets. Thanks in part to shocking updates from US retail giants Target and Walmart, the all-important S&P 500 index briefly joined the growthier Nasdaq in bear market territory on Friday, having dropped 20% from its all-time high before a mild end-of-day rally.
Meanwhile inflation in the UK hit 9% and the Bank of England won both plaudits and wooden spoons for candidly admitting there’s not a lot it can (constructively) do about it.
Getting on for a year into this regime change, and some readers continue to insist there’s nothing to see here. Nor in the bond market, which has endured its biggest, sharpest sell-off for decades, if not ever.
I’m not sure why the denial, apart from the currency weakness that I talked about last week clouding the picture. I think we can agree markets rose an awful lot in 2020 or that super low interest rates spurred some ‘questionable’ antics without downplaying the reality check that’s now taking place.
Veteran commentator Josh Brown describes it as:
one of the most treacherous environments I have ever seen, and I traded during the dot com meltdown, 9/11, Enron and Tyco and WorldCom and Lehman and LTCM and Madoff and the debt ceiling downgrade and the Asian currency crisis and the European debt crisis and Gangnam Style and the pandemic lockdowns and Zika and Ebola and SARS and Bird Flu and Hoof and Mouth and all sorts of other shit.
Not just traded for myself but answered to others about their money, in real-time, during all of it. Those environments were tough. This one’s impossible.
I even spotted the once famously bearish hedge fund manager Hugh Hendry making waves on Twitter, like some wintry White Walker reappearing from legend in Game of Thrones.
Hendry was appropriately uber-gloomy. The last time he got a mention on Monevator it marked the bottom of the financial crisis crash. But I’m not confident of a repeat, omen-wise.
(For one thing: has anyone seen the especially portentous Nouriel Roubini?)
Once upon a time
In that last big bear market I wrote a lot about how and why I bought stocks in downturns.
Eventually, those investments turn out to be among the best you will ever make.
But it can be hard to see cheaper prices as your opportunity to profit when your portfolio is shedding ballast faster than the Met issuing fines in Downing Street.
So I thought I’d point newer investors to a comment I uncovered while digging for this week’s Archive-ator link below.
Doing so, I came across 2008-era-me offering unsolicited advice as usual, only this time on someone else’s blog: Accumulating Money.
At the time, January 2008, that blogger’s household net worth was just shy of $72,000.
Accumulating Money knew buying at lower prices should be good, long-term.
But they also recognized they faced a challenge after a ‘brutal start’ to 2008.
The Goldilocks scenario
I was there in 2008 and it was indeed tough going. The year got a lot worse before things started getting better, too.
But we have an advantage, sitting here in 2022. We know how the story ended.
In fact, it turns out we can skip to the most recent net worth update from Accumulating Money, March 2022, where we learn their number is now…
…$1.5 million!
Yep, despite the gloom in 2008 and a lot of terrible headlines in-between, A.M. has multiplied their wealth more than 20-fold. And that’s despite the market mauling their retirement accounts in recent months.
To be honest I’m not surprised by this figure. It more or less tracks my own trajectory over the past 15 years.
But I thought perhaps those who haven’t yet lived through a few stock market storms might be reassured, by seeing what’s come before.
Are you sitting comfortably?
Of course every market downturn is different. To me this one looks more challenging for the likes of Monevator readers, at least with hindsight, thanks to its higher inflation and rising interest rates.
I expect both to start coming down, but that’s partly because I expect demand destruction and at least a mild recession. (As do a few of those sellers of Target and Walmart shares I’d wager.)
On the other hand, if inflation and rates do keep on rising indefinitely… well.
Either way, we know the playbook. Try to earn more. Live below your means. Save as much as you can without derailing your life.
Then invest in equities for the long-term, probably through low-cost global index funds.
Just promise to come back in 15 years to tell us how it went!
Take these time-tested steps towards financial freedom and I believe your tale will also have a happy ending.
As the rising cost of living outstrips real incomes, how can we maintain our quality of life? There are plenty of good tips out there on saving money, but they only get you so far.
Most people quickly reach a point beyond which more cuts feel like self-deprivation.
But instead of praying for mercy in the budgeting dungeon, you can escape the money trap by focusing on quality of life, not quantity of spending.
The trick is to cut your mental link between spending and happiness.
The payoff? Less worry about scarce pounds – because they’re being better spent on the things that really matter to you.
There are three steps for someone who’s not a natural saver (and that includes me):
- Break the connection between spending and self-worth. This will take time.
- Eliminate discretionary spending on anything that fails to move your happiness needle. This takes experimentation.
- Start small and build up your momentum. Belief and confidence turn from a trickle to a flow until eventually better spending is second nature.
Breaking the link between spending and self-worth
It’s no secret that status is heaped upon those with conspicuous wealth. As status-driven primates, we’re easily sucked into the consumer arms race.
Capitalism monetises our insecurities and presents ‘solutions’ in beguiling forms: a car, a pill, a handbag, a workout, a membership, a nose job, a super yacht.
We want things that fulfill our self-image. So in order to want things less, you need to change your self-image.
That means you need a new story that appeals to you more than world-class marketing.
The story can take many forms. Here are some examples.
A greater goal
For example: I’m saving for financial independence, or buying less as my contribution to the fight against climate change.
Savvy consumer
For example: I’m not a capitalist zombie-drone who buys crap because some influencer told me to. Or, I don’t follow fashion because I’m curating a capsule collection of timeless classics.
I see through the illusion
For example: status goods don’t make me happy or solve my problems. I want to live a simpler life founded on family, friends, community, and connection.
Personal challenge
For example: I want to achieve a 50% savings rate. Or save a house deposit in five years. Or run the heating no higher than 17 degrees. You can gamify yourself using targets and tests of resilience.
Choose your own adventure
You’ll already have a strong notion of the stories that mean something to you. Develop them and they can become anti-spending countermeasures that overlap like armoured plates.
Your new, positive stories absorb the impact of consumerist messages and redistribute their negative energy away from your sense of self.
Controlling spending is now no longer a tale of denial. It’s a sign of self-empowerment grounded in your personal values.
Shifting the narrative helps you design more creative and daring solutions against the rising cost of living.
Because now you’re beating the system, not being beaten down by it.
Eliminate spending on things that don’t make you happy
Wander round your house and look at the things you used to think would be amazing but now you barely notice.
Once they were an answer. You slid them out of the box and they seemed to whisper: “You complete me”.
Now they’re just wallpaper.
Use those items as consumerist memento mori. Their withered significance is a reminder to focus on real priorities.
Forget ‘sparking joy’. Your old tat sparks revelation. Specifically the insight that the next must-have will soon be as washed up in your affections as an aging pop idol.
With this mindset, it becomes easier to take a Zippo to those persistent outgoings that bleed your finances like ticks.
Burn off anything that makes you no happier than before you ever had it.
That’s easier said than done, of course. Loss aversion stabs us with vile psychic pain out of all proportion to acquisition’s pale pleasure.
Possession is like caffeine addiction. It can turn us into mini Gollums:
If your Gollum is too strong, try just putting an expense on pause for a month and see if he notices. If it doesn’t feel so bad, do without it for three months and promise yourself a review.
By then the habit could be broken.
Pick your cost-cutting battles
Substitution is the methadone of budget cuts.
Swap something in and we don’t have to give anything up. Instead we take away the pain by using a cheaper version.
Done right this can be liberating and the stuff of happy memories.
Let me share some personal anecdotes.
A family fish and chip night is way more fun than going to a posh restaurant. Everyone loves fish and chips. And it doesn’t matter if you squirt ketchup all down your front.
I’ve spent many a happy lunch hour walking around the city with friends and colleagues. Just talking, chugging coffee, and moving our legs instead of boshing an expensive lunch. Maybe they’ll show you a part of town you didn’t know.
The best work night out I ever had was playing frisbee in the park one summer evening instead of nursing pints in the company’s local.
A downgrade can often be an upgrade because it’s easier to relax in low-key, informal settings.
It always works if you suggest ideas that are universal crowd-pleasers. Often everybody else is relieved to be doing something different, too.
Super sub
Substitution is a classic technique for dealing with the rising cost of living and personal inflation.
Academic literature on inflation will cite consumers switching from steak to pork, for example.
I’ve had some success eating less meat altogether just by chopping 20% off the helping I’d normally heap on my plate. Or by exploring some of the amazing vegetarian food available.
As a lifelong carnivore, I find it easier to give up something I love by tying it to a bigger win:
- Like trying to be a better global citizen in the face of the climate crisis.
- Or eating a healthier diet to boost my chances of living a full and active life into my dotage.
Cycling is another rising cost of living winner. Fuel costs drop, gym costs drop, and it seems to boost your immune system. Handy in this era. But I still have to make an effort not to just jump in the car.
My point is substitution is a learned skill, so you need reasons to stick with it. But your abilities turn from puny to powerful the more you practice.
The substitutions that make sense to you are almost certainly different to mine. But if you keep experimenting, you’ll unlock more and simpler pleasures that work for you.
(I’d love to hear more ideas from Monevator mavens who’ve already mastered this art!)
Upgrades
I advocate spending more not less on something for two reasons:
1. When it’s truly core to who you are
I know a photographer who’s taken out a small mortgage to own the camera of his dreams. He pours his heart and soul into photography. He’d be sad as a deflated party balloon without it. He economises elsewhere to focus his spending here. I’d never argue he’s making the wrong choice.
2. It’s worth spending more when that helps you spend less
I bought the best, most reliable, energy-efficient boiler I could after living with cheapo burners for years. The only reliable thing about budget boilers was that they’d reliably break down in the middle of winter and reliably need hundreds of pounds worth of repairs.
My walking boots are another example of extravagant luxury disguising investing smarts (honest). After continually wrecking £50 jobs, I spent ages researching a repairable, German hiking boot that may be the last pair I ever buy if I look after them.
I love them. That and the ridiculous expense means I’ve committed myself to a meticulous programme of maintenance to ensure I haven’t mugged myself.
In short:
- Upgrade things that bring you genuine pleasure and that you will look after.
- Downgrade things you don’t care enough about to research and maintain.
The rising cost of living: quicker fixes
This is a post about making choices with the money you have. It’s not about making choices nobody should have to make – like choosing between feeding your family or heating your home.
The rising cost of living is pushing some people into poverty. Debt charities like Step Change offer targeted help for anyone in that position.
If you’ve never systematically trawled your bills and switched to cheaper providers then check out Money Saving Expert’s money makeover programme to save a packet.
Everyone has to start somewhere. As I’ve mentioned before on Monevator, I used to spend money as if it burned my fingers.
The most important savings tips I ever used were the first ones I followed. They set me down a better path to making my own choices.
Now controlling spending is the air I breathe. I’ve never regretted it because it’s made me happier.
Take it steady,
The Accumulator
Credit cards can punish those who spend recklessly by sinking their finances into the red. But deployed in the right way, a credit card can equally be a powerful financial tool.
Consider a sharp knife. You wouldn’t be without out one in the kitchen – but you also have to respect the risk of causing yourself an injury.
In my early 20s I wouldn’t touch our allegedly flexible friends with a barge-pole. I thought they were for spendthrifts, or for those careless with their money.
I’ve since changed my tune. I now believe anyone who is confident they can responsibly handle credit (i.e. debt) should consider getting a credit card.
Let’s find out why.
Why use a credit card?
Stick with cash or debit cards and you’ll be missing out on the many advantages of using a credit card.
Perhaps the biggest benefit that comes with spending on a credit card is the free Section 75 protection you get when making purchases (which I’ve raved about before).
Put simply, buy something on a credit card costing between £100 and £30,000 and your card provider becomes equally liable for the purchase. So, if something goes wrong, you’ve another party to go to in order to seek a refund.
This can be a huge boon if the item you buy is defective and you come across a retailer reluctant to pay up. It can also turn out to be powerful protection if you buy from a company that later falls into administration.
Another advantage of credit cards is they can boost your credit score.
Lenders determine your creditworthiness based on your previous behaviour. If you’ve got little in the way of a credit history, you can use a credit card responsibly – paying back what you owe and not exceeding your credit limit – to reassure lenders by building up a solid credit record.
How else can lenders know you’re not just looking to borrow to bet on the 15:30 at Kempton?
Depending on the type of credit card you have, putting your spending on plastic can also allow you to earn cashback, rewards, borrow at 0%, or spend overseas at no cost. More on all that below.
How to choose a credit card?
The number one rule is that there’s no ‘best’ credit card for everyone. That’s because there are a number of different types of credit card.
For example, if you’re after cheap borrowing then a 0% purchase credit card will do the trick.
Patchy credit history? A specialist ‘credit card for bad credit’ is your best option.
Alternatively, if you’re paying interest on existing credit card debt then you could look for a 0% balance transfer credit card (with the aim of getting your borrowing under control, not to increase your debt further!)
How many credit cards should you have?
There’s no set answer to how many credit cards you should have. You’re allowed to hold as many as you wish, though some providers will limit how many of its cards you can hold at any one time.
However, while you can technically have as many credit cards as you like, it’s often a bad idea to apply for them like there’s no tomorrow.
Every application you make is recorded on your credit file, whether or not you’re accepted. Make lots of credit card applications, especially in a short amount of time, and you may be giving lenders the impression you’re desperate. This could – reasonably enough – harm your credit score.
There’s also ‘credit utilisation’ to keep in mind. This refers to the ratio of credit you use.
For example, if you’re given a £5,000 credit limit and you only utilise £3,000 (60%), it will probably be seen as healthy. In contrast, make use of the full £5,000 and you could be giving lenders the impression you’re struggling. That could impact your chances of getting accepted for other cards.
So while there’s nothing inherently wrong with holding more than one card, first consider why you want multiple cards.
For example, you may wish to spread out the cost of a planned and budgeted-for purchase. Then, later on down the line, you may wish to earn cashback on your everyday spending.
In this case, having both 0% purchase and cashback options in your wallet wouldn’t be reckless.
What are the different types of credit card?
Now I’ve touched on their benefits, let’s take a closer look at the different type of credit cards.
What is a money transfer credit card?
With a money transfer credit card you’ll have the power to shift cold, hard cash to your bank account.
In the past, these types of cards were crucial for those wishing to stooze.
Stoozing involved exploiting 0% deals, and then stashing the borrowed cash into a high-interest savings account.
Nowadays money transfer deals typically come with a hefty fee, and so they’re no longer as attractive as they one were. (That’s even before considering the fact that interest rates on savings accounts are pitiful right now.)
What is a 0% purchase credit card?
A 0% purchase credit card allows you to undertake interest-free spending. Spend on a 0% purchase card and you needn’t repay your balance until the end of the interest-free period.
You will however have to pay back at least the minimum payment and stick to your credit limit to keep the 0% deal.
What is a cashback credit card?
A cashback credit card will – clue’s in the name – pay you cashback for any purchases you make on it.
The most generous are typically issued by American Express. Some of its cards offer an introductory 5% cashback bonus. If you get one it’s worth setting up a direct debit to repay your balance in full each month.
Cashback cards rarely come with any sort of 0% deal.
If you’re a particularly big-spender, you might consider paying a fee to get your hands on the most generous cards. But with these cards it really pays to do the maths.
What is a reward credit card?
Reward cards work in much the same way as their cashback close cousins. The difference is here you typically earn rewards – such as Nectar or Avios points – as opposed to cash.
If you shop a lot at a particular supermarket or you’re an Avios collector, say, then they are worth considering. The rewards may well be more generous than the cash equivalent.
What is a 0% balance transfer card?
If you’re paying interest on an existing credit card debt, then a 0% balance transfer card can be the ace up your sleeve.
These cards enable you to shift debt to them. You then don’t have to pay interest for the duration of your new 0% deal.
In other words, when applying for one of these cards, anything you owe is transferred to your new card. This gives you a new 0% period in which to clear your debt.
To keep the 0% deal on these cards you have to pay at least the minimum monthly payment.
What is a ‘dual use’ credit card?
Spend on a balance transfer card and you’ll probably face high interest on new purchases. At the same time most 0% purchase credit cards won’t let you shift debt to them at all.
So if you want to borrow AND shift existing debt, you might consider getting one of each type.
If you’d rather not have two cards, though, then a ‘dual use’ card may be for you. These cards allow you to spend at 0% and move existing debt to them, so they’re a sort of ‘hybrid’.
Beware: the interest-free periods on these cards are rarely market-leading.
What is a travel credit card?
A travel credit card enables you to spend abroad without you having to pay extra for the privilege. Some travel credit cards also allow you to withdraw cash overseas at no cost.
If you’re looking to save money on travel, one of these cards should be at the top of your list.
What is a ‘credit card for bad credit’?
Credit cards for bad credit – also known as a ‘credit repair’ cards – are for those with poor credit scores. For this reason the bar for acceptance is typically low.
If you are rejected when you apply for a market-leading ‘normal’ credit card deal, a credit repair card offers a way to boost your creditworthiness.
Get one, use it responsibly, and you’ll have a better chance of being accepted for more competitive options in future.
Cards on the table
Perhaps you’re surprised at the number of different kinds of cards there are out there?
That’s probably a good thing!
It’s safest to assume the financial services industry creates products for its own benefit first and ours second. The proliferation of card varieties over the past few decades is no different.
But provided your guard is up, you can find useful financial tools here. Just avoid going into long-term debt – or if you must, definitely don’t do it by spending on a high-interest credit card!
Have I missed out anything important? Let us know in the comments below.
What caught my eye this week.
The Litquidity video below is in horribly bad taste. I believe the Normandy landing scene in Saving Private Ryan is a truth-bomb for humanity. Every Twitter keyboard warrior should watch it a dozen times before venturing more views on Ukraine, Russia, and NATO.
On the other hand even my saintly co-blogger The Accumulator found it funny.
And as the ‘boomer PM’ you’ll spot 59 seconds in, I found it cathartic:
Saving Capital Markets – coming soon to a theater near you pic.twitter.com/pd17DZD4TT
— litquidity (@litcapital) May 11, 2022
(Follow those links to watch the video if you can’t see it embedded here.)
Talking of The Accumulator, he’s been even more of a rubbish trench buddy than usual in 2022.
Don’t get me wrong, he’s exactly the sort of comrade-in-arms you should really want.
The Accumulator ignores the market. Doesn’t sell. Barely knows whether shares are trading today.
But for an active investing junkie like me, his ignorance of the gyrations can be infuriating.
The Accumulator hasn’t even been spooked by his starting FIRE a year ago.
Sequence of returns risk might as well be a 1970s prog rock band for all he cares.
Pump up the volume
Besides his eternally doughty disinterest in short-term market movements, the other reason for The Accumulator’s stoicism is probably that he’s a British investor.
Because one thing missing from Litquidity’s meme-fest video is the weakness of the pound 1.
More than 60% of a global tracker is in US assets. So UK investors have been cushioned from some of the slide that kicked off six months ago – even if their portfolios are free of home bias.
Here’s a chart crime graph plotting USD/GBP against UK and US flavours of Vanguard’s global tracker fund (as of my writing this on Thursday afternoon):
As you can see, UK investors in Vanguard’s All-World tracker (yellow) have been superficially spared much of the pain, thanks to sterling’s fall.
I say ‘superficially spared’ because our spending power really has shrunk – compared to our American cousins – over the period. We’re poorer on the global stage.
The cost of living crisis will be made worse by our weaker currency.
But I’d still take superficially over definitely any day.
Always on my mind
Where I do see many Monevator readers getting angst-y is with their bond portfolios.
UK government bonds are sterling-based, obviously. No cushioning here as yields have risen with higher inflation and rate expectations.
Further, investment grade and higher-yield bonds losses have lately been compounded by recession worries. (An economic downturn is bad news for indebted companies.)
Below we can see how bonds have sold off this year:
Prior to a sharp bounce this week, the picture was even worse. And people really hate seeing their bonds go down. Much more so than stocks.
Understandable. For years no long-term investor has bought bonds expecting much in the way of a return (even though that’s actually what they got, at least until recently).
Rather, bonds were for buoyancy in the bad times. Yet now they’ve been taking on water – just when we’d want them to float.
Unfortunately this was pretty inevitable.
Global yields hit multi-century lows after the financial crisis. Sooner or later they were likely to rise.
The snag was everyone who ever said ‘sooner’ was wrong – up until the past six months. Now we have to pay the piper.
Worse, the same issues roiling the bond market are also what’s pulling at least some of the strings of the stock market. Hence shares and bonds falling together.
The good news is lower bond prices mean higher yields, and hence higher future returns.
That’s little comfort if you already own a bunch down big. But the declines are starting to make government bonds half-attractive again, and reinvesting your bond income will help eventually.
All presuming, of course, that central banks get inflation back under control.
You win again
Anyway if your biggest problem in 2022 is that your bond fund has fallen, pat yourself on the back.
It suggests you’ve probably been doing everything right.
Because nearly everything riskier you could have bought has gone down – bar some value, commodity, and energy plays.
The video above wasn’t exaggerating.
Please note: nobody need hurry to the comments to tell me I’m overreacting and everything is calm in their mill pond.
If you’re a passive investor feeling unruffled, I get it. That’s the whole counterpoint to this article!
In contrast every active investor I know – including the UK-based ones who invariably fish in the mid and small cap arena – has been dragged through a hedge backwards.
(Important exception being the faultless Monevator house troll who will tell us in the comments he sold everything and put it all into shares of BP on 3 January and who can doubt him?)
For most of 2020, picking stocks was like shooting fish in a barrel.
In 2022 it’s been like being the barrel.
It’s a sin
The sell-off began with the raciest growth stocks, as I flagged up in December. Even the best of these have continued to fall.
Many of the highest-fliers are now priced below where they started 2020 – despite having doubled or tripled their revenues over the past couple of years.
Winning the pandemic turned out to be a curse:
Source: AWOCS
More recently the tech behemoths were pulled into the vortex. Apple, Amazon, Google and Facebook – the engines of global markets for a decade – are down around 20-30% or more. 2
Cryptocurrencies have been hit for six. A leading (so-called) ‘stablecoin’ came apart, evaporating billions. (See the links in Crypt-o-Crypto below).
As for the frothiest shares – almost anything floated via a ‘SPAC’ in the mania of 2021 – it’s becoming a case of “dude where’s my decimal point?”
Falls of 80-90% are widespread.
The blue chip Nasdaq 100 was down nearly 30% by the worst of the midweek sell-off. The US S&P 500 was only a few tenths of a percent from the definition of a bear market, at least until stocks bounced on Friday.
Unusually though, UK large caps have held firm.
The FTSE 100 comprises long-despised value dinosaurs. Having survived the growth investing meteor strike – for now – they’re finally having their moment.
Stand by me
As the self-styled Tom Hanks wannabe on this metaphorical battlefield, I’d love to say I saw all this coming and I dodged all the pain.
Unfortunately like him I’m here getting shot up too.
By luck or judgement I got some things right. I saw the big and little clouds in 2021. I later sensed regime change and took fairly decisive action (not least with an eye on my interest-only mortgage.)
But as usual I also started buying apparent bargains too early.
Some of the cheap growth stocks I picked up in what I thought were the Christmas sales have since been cut in half or worse.
I almost always buy too soon. But I usually also buy ‘too good’ – I invest in higher-quality defensive companies at the bottom of bear markets.
In time they bounce, but they are far outpaced as the riskiest firms left for dead rise like a phoenix.
It’s hard to avoid fighting the last war as an investor.
So this time I deliberately looked to buy back into fallen angels like Shopify and PayPal and Square, after what seemed like decent declines.
Yet they just kept spiraling down.
Never gonna give you up
I blame the autocrats.
In late 2021 I expected inflation to have peaked by now. But China and Russia threw a spanner into that forecast, albeit in different ways.
Hence the bottom was just a trapdoor.
Is there further to go?
If we see a recession without an easing of inflation and rate expectations, then who knows when the wider market will stabilise.
Plenty of cyclical and value stocks that have done well could suffer in a stagflationary environment. The last prop would be kicked away from the indices.
That said, I’d like to believe we’re closer to the end than the beginning, at least for the better growth firms. Perhaps I’ll do a naughty active investing post about it. (Bring on our membership area so I don’t have to worry about inflicting such views on sensible passive investors!)
But wherever we go from here, we knew the pandemic market party had to end.
And end it has – with a bang.
The most important thing is to keep pushing on. Just keep buying, as the man said.
Long-term sensible investing is nearly-always rewarded eventually, whether you do it passively or via a coherent active strategy.
Short-term meme stock pump-and-dump traders can win for a while. But eventually most pay for their ride.
Indeed a lot of newer investors are getting off the rollercoaster feeling a bit sick and wondering where they lost their wallets.
I hope they’re not put off investing for life.
As I said the other week, I also wonder when all this will reach the real economy.
We’ve seen a hint with rate rises and the cost of living squeeze.
I suspect central banks have been talking especially tough because they want to scare the markets into tightening conditions for them, to try to avoid excessive real-world pain. Jawboning up tighter market conditions may reduce the direct discipline they need to mete out via actual rate rises, or even forcing a recession to choke off demand. (Not that the latter will help with borked supply chains.)
But usually something big blows up in the real-world anyway.
We’ll see. Enjoy the weekend!
p.s. Alas we didn’t win in the British Bank Awards, although apparently it was close. However the organizers were kind enough to send me some of the comments (without names) you submitted in support of your votes. And they made our week! Far better than any prize to hear such generous reviews of Monevator and its impact on your life. Thanks so much to everyone who took the time.
