Transforming personal finance since 2011

#56 — 100 minus your age... / Part II


January 20th, 2020

By Andrew Craig

Reading time: ~ 15 minutes

In my last article article I covered various aspects of the “100 minus your age” rule. I explained the basics of the idea and then suggested you might use it to think about how to split any investments you have between “aggressive” and “defensive” holdings (rather than just between “equities” and “bonds” which is the original version of the idea).

Today I wanted to pick up where I left off. In today’s article, I want to re-visit some key thoughts about investment more generally. I will then be writing a third article where I look more specifically at what you might do with that proportion of your portfolio you have decided to earmark for “aggressive” investments: That is to say – ones with higher risk and, hopefully, a higher reward as a result.

(NB – if you want to remind yourself what this is all about then please do go back and have a quick read of the first part of this series. This will explain how the “100 minus your age” idea can help you decide what percentage of your investments to position “defensively” vs. “aggressively”).

There are obviously many, many thousands of things out there that you could invest in that could be described as “aggressive” or higher risk / higher reward. This is a very big subject – which is why I’m sharing these thoughts in a three email series.

Given how many options there are here, there is a serious risk of “paralysis by analysis”. I have seen so many people fall foul of this over a twenty-year career in the city of London and in the nine years since I founded Plain English Finance. One of the biggest enemies of investment success is inertia and the fact that this prevents so many people from actually doing anything. Having far too many things to choose from so often causes people to give up and do nothing – with disastrous results for their ability to get rich over time.

Keep it simple!

Another mistake people make - right at the other end of the spectrum – is to massively over-complicate matters. I have lost count of the number of rookie investors I’ve interacted with in the last many years who have yet to set up a regular savings plan or put any money in an ISA account yet who have spent untold hours trying to learn incredibly complicated trading strategies and / or who have lists of dozens or even hundreds of investments that they’re following and / or that they might invest in one day. In recent years this might have included, for example, a vast number of weird and whacky “alt-coins” (often called “sh@t-coins”) in the crypto space. More often than not, these people have been egged on, more or less cynically, by a bunch of self-proclaimed financial educators selling them get rich quick dreams of what trading or crypto might bring them – (none of whom are regulated by the FCA by the way – something that it is worth considering before you take any kind of advice from anyone).

What is really depressing is how often these sorts of people have about £2,000 in their “trading accounts” yet have probably paid several hundred pounds to self-proclaimed and entirely unqualified “experts”. Learning how to “trade” before you have really quite significant liquid assets is most usually a complete waste of your time and effort at the most fundamental level. It is also very likely a big waste of your money if, for example, you’re paying some expensive and invariably un-regulated “financial guru” a meaningful percentage of what you have saved in the hope that you’ll make “life-changing” returns. It is perhaps worth paying someone £100 a month or even more than £1,000 for a course if you have significant assets such that these costs constitute a small fraction of your wealth, but almost certainly not worth it if you currently have only a few thousand pounds saved. Paying 50% of your savings to someone to teach you what to do with those savings is a very bad idea. I have seen far too many people fall into this trap in recent years – particularly in the bitcoin and crypto world.

…and whilst I’m at it. Please, please, please IGNORE THE NEWS!

One other point I wanted to make before we continue is how important it is for you to COMPLETELY IGNORE THE NEWS when it comes to investment. I cannot understate the importance of the big picture and the long game when it comes to investment and, more importantly, investment success. …and “the news” is essentially entirely irrelevant to the big picture and the long game.

To elaborate: Nearly every week someone gets in touch with me to say something like:

“Thanks so much for your book. Having read it, my wife and I really want to start investing but we are worried that now is probably a bad time because of Brexit (or Iran or Trump or Australian bush fires or a possible stock market crash etc… etc…). When do you think we should start investing please?”

My answer is always the same – basically STOP THINKING ABOUT THE NEWS and stop thinking about any kind of “RIGHT TIME” to invest. The right time for you to start investing, if you haven’t done so already, is almost certainly RIGHT NOW, with few exceptions.

Brexit is a big story. Iran is a big story (as was North Korea two years ago by the way – remember that? And the Syrian refugee crisis before that!). An ongoing ‘sort of’ trade war between the US and China is a big story. But, truly, if you were to go back through every single year since journalism was invented, you would realise that there are similarly ‘big stories’ week after week, month after month and year after year. Every year. Without fail. Because this is how the media makes money.

“Blood sells.” Which is why essentially all newspapers and TV channels focus 99.9% of their attention on the 0.1% of bad things that are happening in the world today. This gives everyone a massively distorted view of the state of the world as a result – and, by extension – of financial markets. It is actually incredibly stupid and unhelpful feature of modern society when you stop and think about it.

About three years ago I wrote an article where I said:

“People who have taken no time to study it or really understand it, think that the stock market is horribly risky. This is perhaps unsurprising given that the media goes bananas every time there is a ‘massive crash’ and that is most people’s ‘reality’ when it comes to investment. The 99% of the time that a sensible, diversified portfolio will gradually and entirely effectively build your wealth doesn’t make front page news…"

I also wrote about how human beings are hard-wired psychologically to focus on the extraordinary to the exclusion of the unremarkable and how this reality is particularly relevant to investment and part of the reason so many people fail at it. When financial markets crash, you will see lots of headlines like "£120 billion wiped off shares in a day.”

What you will never see is a headline that says: “UK stock market alone has created nearly £1 trillion of value since 2009.” The gradual and significant increase in wealth that comes from investing over many years and sticking to your guns never, ever makes the front pages of our newspapers and no television anchor ever says “Great news - the stock market has increased by 3% this month…”

As a result we all have a horribly distorted view of and understanding of financial markets and this is incredibly damaging to most people’s chances of becoming wealthy. The most effective antidote to this reality is to understand it. Which is why I started Plain English Finance and spend hours of my time writing this stuff. 😉

Your best reaction to this state of affairs, therefore, is to ignore all of these stories completely... Truly!

I have written this before, but as near as we can calculate it – the world economy as a whole was worth about $32 trillion in 2000. In the nearly 20 years since then, we had the ‘cataclysmic’ dot.com crash and then the global financial crisis of 2007-2009 and countless other terrible news stories about war, famine, terrorism, global warming and on and on. Yet by the end of 2019 the world economy was worth about $90 trillion – i.e. about 180% more than in 2000!

Cars are better. Planes are better. Smart phones have been invented. Global travel had massively increased. Comfortably more than a billion more people had been lifted out of poverty and the world is actually, factually by far the most peaceful it has ever been in history and by a significant margin. The list of positive developments is remarkable but few if any of them ever make it into our news.

Anyone invested in this reality has done extremely well. For what it is worth - I would also argue that anyone invested in this reality who has also had the self-discipline to ignore “the news” along the way has also very likely enjoyed wonderful peace of mind and a generally sunnier disposition.

Following the news is actually why most people do so badly with investment!

To really understand how bad it is to let the news affect how you invest, consider this statement:

“For the twenty years ending 12/31/2015, the S&P 500 Index averaged 9.85% a year. A pretty attractive historical return. The average equity fund investor earned a market return of only 5.19%...”

Here is a bit more from that article to explain why this is:

“Study after study shows that when the stock market goes up, investors put more money in it. And when it goes down, they pull money out. This is akin to running to the mall every time the price of something goes up and then returning the merchandise when it is on sale - but you are returning it to a store that will only give you the sale price back. This irrational behavior (sic) causes investor market returns to be substantially less than historical stock market returns…”

This article is a few years old – but makes the point sufficiently well (and, frankly, I found it very quickly with a google and didn’t have time to find a more recent example). If anything these numbers are probably worse today given that the S&P is up another 65% or so since December 2015!

Here is a great little graphic that makes this point far better than I can:

Source: The Irrelevant Investor

There is a great deal of academic and real-world evidence that you should totally and utterly ignore the news when thinking about investment. Whatever may or may not be happening in Iran at the moment, the evidence of history is very consistently that you really don’t need to worry in the slightest about 99.9% of the news stories of the day such as Brexit, Trump or trouble in the straits of Hormuz (again). To live a good and prosperous life, with far less stress than most people seem to be suffering these days, you need only arrange your financial affairs to benefit from mankind’s inevitable progress in a vaguely sensible and well thought out way.

Five-year reviews

If you do this - I would then argue that you need only review these arrangements every five to ten years – perhaps on the occasion of your 30th, 35th, 40th, 45th etc… birthdays. Every five years or so you might sit down and spend literally just an hour or three ensuring that your financial arrangements are sensible and, preferably, on auto-pilot, perhaps make a small tweak here and there and then forget about it for another five years.

Back to “100 minus your age”

I would then argue that the whole idea of “100 minus your age” is incredibly helpful for how you go about doing this. Twice a decade or so, on or around your birthday, you can use “100 minus your age” to help you work out whether you’re in the right mix of things and on the right track. This approach will make you far less likely to make the mistakes that so many people make that are born of panic and silly headlines from a press that focuses 99.9% of its attention on the bad things that only happen 0.1% of the time.

As John Stepek, editor of MoneyWeek magazine, put it rather brilliantly in one of his articles a while ago:

“There are many roads to ruin in the markets – some of them longer than others – but one sure-fire way is to set out as a buy-and-hold investor and then attempt to turn into a market timer during a bout of market panic. This will do more damage to your portfolio than following one approach or the other...”

To be very clear, everything I’m suggesting here concerns what you do about INVESTMENT. This is different to TRADING. Investment is all about putting in place a sensible set and forget strategy for saving money and building wealth throughout your life. People who have followed my output for any length of time will be aware that if you do it properly, you will have a very high chance of building a seven-figure sum over time. Trading is a very different thing.

Investing vs. trading

Many of you will hopefully recall that the last two chapters of my book are called "Keeping it simple" and "Taking things further". The first of these explains a set and forget, low stress / sleep at night approach to investing that should grind out high enough returns and protect the downside enough such that you will have a very good chance of getting properly wealthy over time.

The second, gives you a number of ideas, tools and resources to use to start on the road to becoming more of a “trader” - i.e. making more regular purchases and sales of financial products and giving consideration to investing in individual shares or other assets.

The further down the road I have gone on this journey, the more I have realised that the "Keeping it simple approach" is very likely the best approach for the VAST MAJORITY of people. I explicitly made this point at the beginning of the "Taking things further” chapter in the most recent edition of the book - under the header “Automation best for most?” (page 274).

The main reason for this is actually quite simple. Becoming a good trader / investing in individual companies or even funds, is incredibly hard and incredibly time consuming.

First - to learn the skills required to do it well to begin with: I believe that the road to becoming a half decent trader is at least an A-Level’s worth of work and, actually, probably more like a degree’s worth before you will get properly comfortable and consistently good. Even then, there is no guarantee you will ever get there.

Secondly - even once you have put in that initial work - the amount of time and effort required to actually do it on an ongoing basis is also very significant – and prohibitively so for most people - particularly busy parents for example.

Thirdly - unless you have significant net worth – you are not going to be able to deploy enough capital at a low enough risk to make all that extra work worthwhile in absolute terms. You’d be better off spending time on things that earn you money and saving and investing 10% or more of that into your investing arrangements.

This is why SO many people fail at this, why it is a completely inappropriate activity for the vast majority of people and why so many trading educators, whilst potentially teaching viable skills (the best of them at least), don't actually help people improve their finances in the real world.

Simple, regular investing by direct debit into a fund or funds that are sensible is a vastly better idea for most people and until you are really quite wealthy. This is also a set and forget approach to succeeding which only really needs to be looked at again every 5 or even 10 years to have a massively positive impact on your chances of becoming wealthy as I have said.

When you then become wealthy (let’s say in your 30s,40s or 50s realistically - depending on how early you start) - that is the time that you might deploy some of that wealth into trading strategies and single stock investment (including crypto for e.g.). Before then, it is very likely a waste of your time and money.

Without wanting to sound too boring - truly the hours you might spend trying to learn how to trade forex or glued to Crypto trading groups etc… would almost certainly be better spent becoming better and more valuable at your day job (and getting paid more as a result) or, if you hate your day-job, figuring out what else you should do, acquiring the skills to do it and making that move…

Investment success is about admin

This is why I so often argue that long-run investment success is probably 90% about admin’ and only 10% about the investments you buy (within reason). What I mean when I say this, is that if you start early, set up the right saving and investment habits into the right accounts and invest in almost anything vaguely sensible, there is a high chance that you will make some exceptional forward progress with your finances over time. You will very likely become a millionaire if you do this from, say, the age of 30 until the age of 60. You will also find it much easier to sleep at night!

This having been said, you do of course have to make some decisions about what to actually invest in. As I covered in my last article – I think that using the “100 minus your age” rule to decide how much to allocate to “defensive” vs. “aggressive” is a great first step. I then covered a couple of ideas about what you might use for the “defensive” bit of that process.

In my next article and the third and final one in this series, I will have a look at some of the “aggressive” assets you might consider for the percentage of your investments.