Time machines, asking your grandmother and insider trading.
I’ve written in earlier posts about the gains you would make if you travelled back in time and asked your great great grandmother to invest for you in 1900. In the more recent era, you could ask your grandmother, your parents, or your younger self to invest for you. Armed with hindsight, you might pick Apple and Amazon, Microsoft and Google, Facebook etc. Forewarned, you would avoid all those failed companies whose names we have long since forgotten.
But here the law of unintended consequence might kick in. Your stellar investing record might come to the attention of the authorities. How is it possible that you have picked only winners and the gold medal winners in the stock market race at that? But the authorities could not possibly prosecute you. The law has not been framed around the possibility of time travel. Yet! The SEC are ruthless, aggressive and punctilious, quite rightly, but even they haven’t added that breach to their arsenal yet.
It just goes to highlight something I have long known. It is less the case now than it was when I first set foot in a corporate finance department of a large US investment bank several decades ago. Back then, those who conceptually broke the law morally /ethically were often not breaking it in fact because the law hadn’t yet been couched to encompass the imagination of the transgressor. Note to all the lawmakers out there: just ask a financial thriller writer what people might be getting up to before you frame updates to financial services laws… I hasten to add that I was not breaking the law either in fact or ethically but I did dream up some humdinging financial crimes.
If you fancy some summer reading about financial shenanigans rich in adventure, derring do and double-dealing, then look no further than my back list, starting with the global bestseller, Nest of Vipers.
Time and money – when is the best time to invest in the stock market?
All of my missions as set out in my book, 10 Things Everyone Needs to Know About Money, and elsewhere in blog posts, is to persuade people to put some of their savings into long-term stock market investments. Then people ask me: When should I do this? They might say: Do you think next month or after the summer or the beginning of the year or the beginning of the tax year…
I can’t answer that with any degree of certainty about what exactly the markets will be doing at those times. Nobody can answer that with anything other than an opinion that can be on the spectrum from pure guesswork to well inform. It remains an opinion. Not fact.
In the absence of fact, the best we can say is sooner is better than later. In principle, today is better than tomorrow. Yes the markets might dip tomorrow and it might have been a better buying opportunity. Yes the markets might still be down in a year’s time, but, history suggests (see my earlier post on your great great grandmother) they will not be down in 10 years’ time. Plus, in the meantime, you would have been receiving dividends which if you reinvest will compound nicely.
Many people are put off by trying to time the perfect investment. This is where perfection is the enemy of achievement. Where good enough beats perfect. Lessons in psychology teach us that the quest for perfection is paralyzing. The old investors’ axiom says it best: “time in the market beats timing the market.”
Get into your time machine, travel back and ask your great-great grandmother to invest for you.
According to the Credit Suisse Global Investment Returns Yearbook, if your great-great-grandmother had invested one dollar in the US stock market in 1900, that would be worth just under $70,000 by the end of 2019, or $40,000 if you stripped out the effect of inflation (which increased by 3000% over that period.) In the UK if your great-great-grandmother had invested a pound in the UK stock market in 1900, that would be worth just under £40,000 in 2020. To invert that, £40,000 today, would have been worth £572 back in 1900. That is the power of long-term equity market investments.
You may say that actually you don’t have 120 years to play with but luckily you don’t need that long. The same Credit Suisse report reveals that over the past 120 years in the USA equities increased in value on average by 9.7% every year, and, if you strip out inflation, by 6.6% p.a. In the UK equities did almost as well increasing on average by 9.1% every year and adjusted for inflation 5.4% per year.
The average stock market return for a 10 year period is 9.2% according to Goldman Sachs analysing data over the past 140 years in the UK. The Standard and Poor 500 has done slightly better with an average annual return of 13.6%. This emphasises how important it is to keep your money in the market ideally for over 10 years.
We don’t have a time machine, but we do have today.
In earlier posts in my time and money series I talk about investing in the stock market for the long-term, ideally for over 10 years but certainly for over 5 years so that you can ride out gyrations in the markets and allow the magic of compounding to work.
Stick your investment away, select automatic reinvestment of all dividends to supercharge the compounding effect, and forget about it. This is known as the Robinson Crusoe approach. Invest money in anticipation of being marooned for years on a desert island with no electronic devices. Whilst you’re stranded your investment can do its own thing and grow, unimpeded, for you. And, if you invest in the UK via an ISA, gains and dividend reinvestments are tax-free. You don’t even need to trouble your island idyll by worrying about the taxman.
This poses the question – are we really worker bees whose job it is to stimulate the economy, as if the economy were a ravening beast that perpetually needs to be fed? And perpetually wants more…?
Yes, I get that it generates wealth which benefits or should benefit all of us but… where is the work life balance here?
Maybe the retirement age will be raised. I hope it is not and I hope that if it were to be raised, it were not done in the way that has impoverished millions of women who saw their threshold rise from 60 to 65 but who had not had adequate time to prepare. So what can we do about it?
Plan our own self-funded pension. Whether or not our retirement age is raised this will stand us in good stead, especially since many of us will enjoy the high-order problem of increased life expectancy compared to previous generations.
Increase our workplace pension to its maximum levels.
Invest wisely so that we can amass a capital sum which will provide dividend income and/or capital drawdown to feather our older age.
To do either of these latter two things we will need to invest in a more aggressive portfolio than standard retirement planning advocates, which will vary depending on how close to retirement we might be.
What this means is more equities, more alternatives and fewer bonds.
Beware the risks of reckless conservativism a.k.a. going broke slowly where the avoidance of risks associated with equities and alternatives consigns us to a future where our capital sum in cash is eroded by inflation and is in no way protected by the paltry returns on cash.
You can read more about how to invest and the perils of reckless conservativism in my book 10 Things Everyone Needs to Know About Money. [Discover it at bit.ly/10thingsmoney]
Let’s hope retirement age is not raised. Let’s hope we get to choose when we scale back. The more proactive we can be now, the greater will be our freedom of choice. Time isn’t free. To amass the means to pay for it when the time comes, we need to act now.
Money, time, investing and survivor bias. What time travel could teach us.
‘Oh’ we might say to ourselves, ‘if only we could travel back in time and buy Apple and Amazon, Microsoft and Google, Facebook and so on.”
But, for every Apple and Amazon there are a hundred names that none of us have ever heard, or could ever remember. The companies who didn’t make it and who have been consigned to the dump of history.
This is known as “survivor bias.” You remember the survivors but not those doomed to Darwinian death. This can give us a false sense of the promise offered by stock market investing, let alone early-stage investment, venture capital or angel finance.
If we are going to do any of the above, and I personally do all of them, it would be as well that we disentomb these failures and recite their names in the same wistful breath as we intone those oh so conspicuous survivors who could have made our fortunes a million, a billion, or even a trillion times over. And let’s not even start on Bitcoin.
The moral of the story? Picking winners is supremely difficult unless you have a time machine, unless it is your full time job and even then it remains supremely difficult.
In the absence of a time machine or professional career as an investor, the best you can do is to pick a diversified fund. The old do not put all your eggs in one basket adage. Most of my Investment Portfolio is in such diversified funds. Individual stocks, venture capital and angel finance make up a small percentage of my portfolio.
What would you pack in your time machine to travel back and also possibly forward in time?
In the UK, 97% of our money exists only as squiggles on a computer screen. Governments effectively wave the magic wand of belief to give value to otherwise worthless pieces of paper and metal, and in another step removed, to their electronic incarnations, in what is akin to the biggest confidence trick of all time. Think of this as financial abracadabra.
Without the magic spell of belief, fiat money is worthless. If we travelled back in time to the 18th century armed with one of our twenty-pound notes and a debit card and attempted to buy a pail of milk, we’d likely be thrown in the stocks and pelted with potatoes. The note and the card would be useless because they’d have no context: neither king, government nor citizens would recognise them. No one would believe in them and this lack of belief would render them worthless. And as for the Swedes with their payment-enabled embedded microchips, paying for public transport with a wand-like wave of their hands, they’d likely be burned at the stake.
But if we took back a few gold coins, we’d be received with glad cries because gold is a recognised, useful and coveted commodity. Everyone in 18th Century Britain would know all about gold, they’d all believe it could be used to buy goods and services as well as to make valuable jewellery.
So thinking of what we might arm ourselves with, what we might pack in our time machine, can give us insights into the value that humankind has placed and may continue to place on different asset classes. Find out more in my latest book: discover it at bit.ly/10thingsmoney
Ad agencies know better than to use that loathsome expression to exhort us to contort, distort and “ought“ our body into their conception of how it should look. That was more about the superficialities in buying whatever product they were flogging than about our underlying health anyway.
I’ve come up with an alternative:
How to get our finances beach-holiday ready.
But we can return to the analogy. This is not a question of deprivation, punishment and then binge. It’s more about balance throughout the year, mindful spending, mindful investing and mindful saving. It’s about consciously avoiding loathsome comparisons, whether about our body, what we clothe it in or what home /holiday /vehicular backdrops we choose or don’t choose for our social media shots.
So how do we get our finances holiday-ready?
First off, set a realistic bar. Resist social spending, keeping up with the Joneses. This holiday is for you not for your platform.
Once you’ve set your bar and given yourself a goal, you’ve taken the first decisive step as the act of having a goal will help us achieve it. There’s a ton of research to show that saving towards a specific goal is much more effective than just random saving (although that’s good as well!)
Next, in terms of reaching that bar, think step-by-step. Try and maintain balance, not depriving yourself excessively which can actually set you up for binge-spending.
One way of increasing a holiday budget very simply is to have a “sinking fund” where we transfer money out of our monthly income into a dedicated bank account. That is great but I would not let it sit in that bank account unless you’re going to use it within the year. If you’re planning for holidays in several years then take money from that dedicated bank account and invest every month in the stock market, via an ISA if you haven’t already hit your £20,000 annual upper limit. [Have a read of my book for different stock market investment strategies and time horizons: discover it at bit.ly/10thingsmoney .]
This also has the advantage of what is called “pound cost averaging.” This is where you are not attempting to time the market by picking the perfect moment but just steadily investing month by month and riding out the shorter term gyrations while taking advantage of periodic market dips.
In this way, you can plan for holidays in years to come by putting your savings to work, not just amassing cash in the bank where its value will be eroded over time by inflation. And yes, gyrations in stock market values can also erode the value of your savings which is why you might want to split them into cash saved for next year’s holiday and cash invested in the stock market or in “alternatives” for holidays in five years’ time.
Another way of saving for future holidays is via “alternatives” like casked whisky or fine wine or coins. Any increase in the value of these assets over time has the advantage of being free of capital gains tax as they are classed as “wasting assets.” Saving coupled with investing in this way gives our holiday budget a positive double whammy in helping us to live within our means and making our means go further.
That, my friends, is how we get our finances beach–holiday ready or mountain-holiday ready or spa-holiday ready or whatever you have in mind.
Why did I decide to write 10 Things Everyone Needs to Know About Money?
What makes it different?
What is its special alchemy?
Sometimes books are the fruit of a long obsession, of years of dreaming, plotting, planning.
Sometimes they’re born of a throwaway remark, a chance encounter, a lightbulb moment when you think what if.
This book, 10 Things Everyone Needs to Know about Money, is all of the above.
There are lots of ingredients in this creation of mine.
I’m interested in the subject of money, personally and professionally.
I studied economics (along with politics and philosophy at university) and as the daughter and the sister of economics professors I was fairly well versed in the subject academically.
I worked for eight years in the heart of the money machine, as an investment banker, in London, New York and Eastern Europe, and I have continued to work in the financial services sector as a consultant and investor.
I’ve written a series of financial thrillers portraying the shenanigans, the glamour and the dark side of money, as well as the nature of the people who work in the money-world: their motivations, the temptations they face and how they navigate them.
I hadn’t written non-fiction about money since my university days but a few years ago, I decided to write a Preface to a new special 20th anniversary edition of my first bestselling book, Nest of Vipers. I decided that I would write about the main developments in the financial world over the previous 20 years. One of the main events was the global financial crisis. As I wrote about it, I developed a growing sense of outrage. I discovered a new voice speaking within me, bubbling up to the surface.
I also, in 2018, spent a term as the inaugural Writer in Residence at my old Oxford college, St Edmund Hall. There I spoke with my old professors and new academic friends about all things money.
I plunged deeper into the money-world, and so insistent was this new voice, and so carried away did I become, that I ended up writing over a quarter of a million words.
There is no point writing even if you think the content is good, if nobody is ever going to read your book because it’s too dense, too impenetrable, too wordy.
And so I started cutting and pruning, what Stephen King called killing my darlings, as I pared down the book, as I conceptualised it around the framework of 10 things everyone needs to know.
Because the thing is, our knowledge of money, our financial literacy, is surprisingly limited.
We’re not taught it at school.
We don’t like to talk about it – see my section on the money taboo!
We’re not as fluent as we could be.
As we need to be.
We cannot afford NOT to speak money well.
Money is one of the most important languages on the planet and in this book I want to help everyone understand and speak it better. I want to explore how global financial systems impact our everyday lives, what we can do about it, how we can improve our own and their family’s financial literacy.
I also wanted the book to be vibrant, eye-catching, to speak to people…
In the midst of all this, a friend came to stay: the artist Nick Bashall.
Nick is a very old friend of my husband, Rupert, and had gifted us a couple of hilarious cartoons on the birth of two of our three children.
Nick is by training and profession a portrait painter and war artist but he is also an exceptionally gifted cartoonist.
And this is where the throwaway comment comes in.
Nick had mentioned years earlier that he would like to illustrate and write his own esoteric version of the Asterix books, but life had rolled by and he’d never got round to it.
So I thought to myself what if Nick illustrated my money book? The eccentricities, pretensions and excesses of the money-world make it ripe for satire. Sometimes a picture can speak a thousand words. Nick also happens to be a former corporate lawyer and so he understands that world very well.
I put it to him:
Would you like to illustrate my book?
We had a number of discussions which culminated in me saying to him, bearing in mind he is an artist with all the attendant issues relating to deadlines, free-spiritedness and general anarchy:
It’s all right if you say no (I was fervently praying he would not say no) but if you say YES, you need to deliver and you need to deliver on time.
To my delight, Nick said yes!
I’ve never worked on a book with anyone else before, other than with editors (often but not universally a pleasant experience).
But, working with Nick has been a joy.
It has also brought a new language into play.
Seeing my concepts, my arguments, my words, transformed via Nick’s glorious artistic alchemy into images has been unique, thrilling and powerful.
As I write this I have the book open on my desk and I look at his cartoons, at the faces in particular, and I smile.
Many people have told me how much they enjoy the cartoons and the whole approach of the book. Yes, money is serious, yes, it is important, but we learn as we smile and laugh, as we read and see.
In my quest to help people speak and understand the language of money, I have deployed the language of art and humour along with words and numbers.
The three key psychological hacks financial fraudsters deploy.
Not for them the glinting knife in some dark back alley. The tools of their trade are Savile Row suits and exclusive golf club membership. As we saw in the case of Bernie Madoff.
He defrauded thousands of investors out of tens of billions of dollars over the course of at least 17 years. How did he do it? By hiding his fraudulent activities in plain sight. By joining the finest golf clubs, by being seen at all the right charity high society parties, by becoming Chairman of NASDAQ. He consistently returned 1-1.2% month on month, year on year for decades. Too good to be true? You bet!
Madoff deployed three key psychological hacks: greed; not wanting to appear ignorant; and wanting to belong.
He appealed to greed, not obscene greed such that people would disbelieve him, but a low level, steady, gateway greed – returns of between 1 and 1.2% per month, year on year on year on year. And, really, no one achieves that over a sustained period of time unless they are a vanishingly rare genius or, more likely, they are fraudsters.
He spun in lots of references to clever derivative products that he used, blinding people by science. No one wants to admit that they don’t understand something, further, investors never want to look too closely at the golden goose, so it seems that nobody questioned him in great detail, certainly not enough to expose his fraud. And then there was the third thing: exclusivity, membership of a club for the rich and well-connected. Madoff would not allow anyone to invest in his fund with less than a $1 million stake. It was reassuringly expensive to people used to inhabiting this high-stakes world.
He exploited these three things, and parlayed them with his dark, corrupt alchemy into a billionaire’s life of high living until inevitably it all came crashing down.