A couple of weeks ago I was asked to give a talk to the support staff at a company about their workplace pension choices…now that pension auto-enrollment is being introduced.
Everyone there was female…other than one token male and The Escape Artist. Some knew a lot about investing but most didn’t. And being women, they were happy to admit that they didn’t know everything about investing.
Having spent years in meetings with men from private equity houses and hedge funds (many of whom apparently knew everything…even after they’d just blown up another investment) this honesty was refreshing.
Fortunately, you don’t need to know much to get your workplace pension in good shape. Contrary to popular opinion, investing your own money can be made simple. So simple that its a bit embarrassing that the financial services sector creams off about 10% of GDP.
Here’s the thing: you don’t need to understand everything about something in order to use it effectively.
For example, I’m gonna let you into a secret. The Escape Artist is not very good at quantum mechanics, thermodynamics and electrical engineering. To be honest, I barely know what they even mean!
But The Escape Artist is able to bring summon great power from the forces of nature and bring light to the darkness. I can flick a switch and light up whole rooms in my house. Apparently, this uses something called “electricity”.
You will now no doubt be looking around your house for this “electricity”. Errrr…its invisible so you won’t be able to see it.
I know what you’re thinking: he’s making this shit up! You may say that seeing is believing. But I’ve noticed that sceptics as to whether “electricity”exists tend to go quiet when you drop a toaster into the bath they are taking.
So, I am able to perform miracles with electricity…even though I don’t have a clue what electricity really is…and I can’t really be bothered to learn about it.
Generally in life, ignorance and laziness are not winning strategies. But investing is a bit different to most other parts of life.
When it comes to investing, you hardly need to know anything. Index tracking funds allow you to “piggy back” off all the knowledge, hard work and analysis done by other investors and analysts. All of which is embedded in market prices. And once you’ve got your investing set up on automatic pilot, laziness can actually make you rich…as long as you respect a few basic principles.
Is The Escape Artist going to tell you those principles? Is the Pope gonna wear a pointy hat and a dress??
Of course he is!
1. This is important
Your pension fund could easily end up worth more than your house.
Think how much time and energy you put into buying a house, cleaning a house, maintaining a house, extending a house, decorating a house, filling it full of
crap soft furnishings etc etc.
So perhaps filling out one single form to make a pension fund choice isn’t too much hassle?
2. Remember Kate
You may be concerned about the looming pensions crisis in The West.
But fortunately, as well as solving the Obesity Crisis, The Escape Artist has also solved the Pensions Crisis.
Thank God I was here. It could have been serious otherwise.
You may remember Kate…but for those of you that weren’t paying attention, here’s a recap:
Kate is a bright school leaver who gets a job aged 18. Unusually, Kate does not go to university to learn how to eat vodka jelly but instead gets a job that pays, say, £16,000 and lives with her parents for the first couple of years before sharing a cheap house with roommates.
Over the next 7 years, our heroine does well and learns stuff at work that actually helps her in life. Things like how to work hard, deal with people and use basic arithmetic. And she does not spend all her salary on knick knacks. Instead she saves, paying herself first every month, setting up a direct debit to stash £167 per month for a total of £15,000 over that period.
Kate focuses on what she can control and directs her monthly savings into a low cost equity index tracker. Kate doesn’t waste time on pointless speculation about what future equity returns might be because who knows? Kate understands that shares have traditionally delivered the highest returns over long periods and can’t see why that won’t continue.
Kate saves £2,000 per year until age 25 when she stops and doesn’t touch it for 40 years. Fortunately, Kate’s TV is broken so she doesn’t see the clowns encouraging her to panic when the stock market falls. When valuations are lower, she gets more shares for her money.
Kate is lucky to start investing at a favourable point in history where people, for the most part, focus on innovating and creating wealth rather than fighting wars to colonise and exterminate each other. As a result, Kate gets roughly the same annual return (~10%) as the S&P 500 has done over the last 100 years or so.
At age 65, Kate fires up her laptop and is pleasantly surprised to see that her £15,000 of contributions have grown to just over £1 million. True, inflation means that a million pounds isn’t worth as much as it used to be. But, based on a 4% withdrawal rate, this is probably enough to provide Kate with £40,000 per year for ever.
That is fine for Kate who just wants enough to buy champagne from Lidl occasionally and buy presents for her grandchildren without worrying if she can afford it.
What if you are 38 not 18? Well, the best time to start investing was 20 years ago…the second best time is now.
3. Financial services companies are not your friends…
I know they say they are.
I know you’ve seen the adverts with happy couples walking hand on the beach with the nice doggie etc etc…but its all bullshit.
The good news is that we don’t have to be their friends. We just have to deal with them as counter-parties. A little bit of scepticism is in order…as if you were buying a second hand car off them.
That means you need to know what fees you are paying (see point 5 below) and which fund your money is being invested in (see point 6 below).
Under the new auto-enrollment regime, if you ignore that form from HR, your hard earned money will get chucked into a default option. Alarmingly, the insurance company may not even tell you what’s in that default option. You may have no idea where your money is going. They’ll probably put you into a “balanced” fund that contains lots of expensive bonds that yield next to nothing because that’s the “safe” option.
Safe for them, perhaps. After all, its not their money.
Safe for long term investors saving for retirement? Not so much.
4. …but market falls can be
Its a good thing for savers when the market falls. Yes, I can prove that. You’ll be buying cheap assets in the sales.
What do you do when the market falls? You don’t need to do anything other than enjoy the fact that you’ll be getting more shares for your money every month.
If you want, you can save more when the market falls and the news headlines are scary. Be warned, this is risky. There is a risk you end up with more money than you know what to do with.
What if the TV news is too scary? You do know there’s an off button right?
5. In investing, you get what you don’t pay for
You know Kate and her £1,000,000 at age 65?
She only got that because she didn’t pay a shit load of fees to the financial services industry. If she paid an extra 2% a year of fees, I’m sad to report that her fund would only be worth £457,000 at retirement.
When you buy a house, the more you pay, the more you get (all other things being equal). Not so when investing.
In investing, you get what you don’t pay for.
6. Get a global equities tracker fund
Warren Buffet recommends buying a Vanguard tracker fund that holds shares in a collection of large companies.
Vanguard is owned by its customers and usually has the lowest cost funds. In other words, with Vanguard your interests are aligned with theirs. So maybe Vanguard are your friend and we can make an exception to rule 3 above.
Now you may know better than Warren Buffet. But if you don’t, and just want to invest simply, watch this:
Lars is suggesting you could just buy something like this.
Done that? Great…you have just stuck it to The Man.
What about bonds? When you own bonds, you own a bunch of paper IOUs. They are expensive and won’t be worth so much after inflation.
So yes, you can try and be clever by adding a bond allocation of say 20% and rebalancing once a year etc. (or just let a Vanguard 80:20 Lifestrategy fund do this for you). But if you cant be bothered with that, you’ll probably do just as well in terms of returns…even if the value of your fund will fluctuate more.
7. Relax…the system works in your favour
I want to welcome you to The Rich Persons Club!
No, that’s fine…you don’t need a lot of money right now. That will come to you over time. Slowly at first, then much faster later on.
Now you’re in The Club, I’m going to let you in on some secrets!
Once you own a global equity index tracker, the entire capitalist system is working for you. When you own equities (shares, stocks) you own the system. You own the factories, the fork lift trucks, the warehouses, the brands, the cash, the accounts receivable. And all those consumer wage slave employees? To be honest, you pretty much own them as well.
The Escape Artist did not make The Rules. But he does understand them. So let me ask you…in whose interests do you think that the system is run? Is it for poor people? For the dispossessed? For the young & stupid?
Or is it set up for shareholders? the owners of assets? the people with lawyers, the people that vote, that lobby, work hard and, if necessary, fight for their interests from positions of power inside the system?
Hhhmmm, tricky one.
8. Complexity is the enemy of execution
Keep it simple.
You are allowed to read books on investing if you want. Its just that you don’t need to in order to get started.
Nor do you need to be able to back out implied volatility from option prices, value derivatives, nor know what Trump will do next, nor predict the outcome of the 3.30 at Goodwood.
9. Knowledge without action is useless
You are now ready to go…so where did you put that form?
Like I said, now is good.