Investing Demystified 4 – Implementation
Today’s post is our fourth visit to a book that is popular with passive investors in the UK – Lars Kroijer’s Investing Demystified.
Lars Kroijer
Lars Kroijer’s book is increasingly popular on the UK finance subreddits.
- He has an economics degree from Harvard, and an MBA from the business school there.
Until 2008, Lars was a hedge fund manager.
- He now works at Alliedcrowds.com, which “aggregates alternative capital into the world’s lower-income countries”.
Investing Demystified
Here’s a recap of what we’ve covered so far:
- Lars is a 100% passive investor and pushes what I would call a “Lazy Portfolio” of only two funds.
- These are suboptimal, particularly for investors with larger portfolios.
- I see the appeal of lazy portfolios to novice investors, but that’s not the same as saying they are the best option.
- Lars thinks that markets are quite efficient, and the majority of people are not able to outperform them.
- Truly efficient markets would not exhibit simple outperformance factors like your own benchmark that reflects the likely composition of your portfolio
- Lars is against home bias, and I am not.
- He is however in favour of “Away Bias” – a large allocation to the US.
- Lars objects to the idea that the future will be like the past.
- I would say that it’s the best data we have, and what is the alternative?
- Lars targets returns of 5% pa real from equities, which I think is a little optimistic.
- We agree on equity volatility of around 20%.
- Lars notes the great losses that are possible in stock markets, with two falls by more than 50% in the Dow since 1900, and another 6 falls between 40% and 50%.
- Recovery times for buy and hold range from 25 years for the 1929 crash to four years for the 2000 dot com bubble and the 2008 crisis.
- Of course, the Japanese market hasn’t yet recovered from the 1990s crash.
- Lars reiterates the importance of diversification, though he points out that it works least when you need it the most (correlations increase during crashes).
- Non-listed assets need to be taken into account when assigning portfolio weightings.
Plans
Lars covers the basics of working out how much money you will have/need in retirement:
- How much you start with
- Your contributions
- Returns rates
- Costs and taxes.
He looks at some examples using Monte Carlo analysis.
- I’m not a massive fan of Monte Carlo because it ignores sequencing effects in real-life equity returns.
But this is not a massive issue during the accumulation phase of investment.
Lars’ main point is that equity returns can theoretically lead to wide variations in outcomes over several decades.
- I’m not sure that focusing on these extremes is helpful.
In practice, the variations from a well-diversified portfolio will be lower.
- And during accumulation, investors can contribute more or less than planned to stay on track.
We can also accept a lower income in retirement, or allocate a higher proportion of our money to equities.
- Decumulation is much trickier, but we have the fail-safe withdrawal rate (just over 3% pa, for a portfolio that is 75% equities) to fall back on.
Lars also makes the point to have enough of a buffer so that you don’t need to sell during a crash like 2009.
Lifestyling
Lars believes in lifestyling – increasing the proportion of bonds in the portfolio as you age.
- He suggests the “age in bonds” rule, or alternatively the “years to retirement in equities”, which would mean you had 90% bonds when ten years from retirement.
I think this is a relic of the past, from a time when people were forced to buy an annuity when they retired.
- This practice left them open to severe sequencing risk in the years before retirement.
A few bad years might undo the good work of decades of saving.
- With the introduction of drawdown in the UK, this risk has disappeared.
Even into retirement, the optimum long-term portfolio (in terms of the maximum withdrawal rate that it can support) contains 75% equities.
- See our series on the work done by ERN on SWRs for more details
Lars also believes in the 4% rule for withdrawals.
- This is not good advice – even those with a high equity allocation should not withdraw much more than 3% pa.
There’s more on this here.
And Lars believes you should take a risk tolerance questionnaire, to work out what your exposure to equities might be.
Expenses
Chapter 11 is about expenses, or as I call them, costs.
And that taxes matter.
Products
As you would imagine, Lars favours ETFs and index funds (a subset of OEICs) for implementing his portfolios.
- I prefer ETFs because I like to use listed assets with real-time pricing.
ETFs should be liquid, tax-efficient and low cost.
- Liquidity is often related to size (market cap).
He has a list of suggestions for his lazy portfolios.
He also lists some sites where you can research ETFs but omits my favourite – justETF.com
- And he lists some brokers, but again omits the two that I would use for ETF portfolios – iWeb and X-O.
Rebalancing
Lars recommends threshold rebalancing, with 10% bands.
- I recommend 20% bands, checked every two weeks.
He stresses that cashflow rebalancing is best.
- I would add that you should only sell stocks when you are above your target allocation (few people are) and you should use a Conclusions
That’s it for today – we’ve now covered twelve out of fifteen chapters.
- I’ve found the last few chapters very frustrating, as they make quite a number of recommendations that I can’t support.
It’s always disappointing when popular books don’t give the best advice.
The final chapters of the book will cover pensions, insurance, apocalypse investing and a wish-list for improvements to the financial sector.
- Until next time.
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Mike Rawson
Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 35 years, with some success.
Article credit to: https://the7circles.uk/investing-demystified-4-implementation/
