Starling Bank Current Account Review – The Best UK Bank?

In this post we’re reviewing the Starling Bank Personal Current account. I’ve been using Starling for several months now and overall I’m very happy, but that’s not to say there hasn’t been any issues at all.

In this review of Starling we’ll look at the key features, what makes it so good, the few areas that make it not so good, and finally look at the cost. Hopefully by the end of this video you’ll know whether you want to start banking with Starling Bank.

Just so you know, this is a totally independent review and we’re not being paid by Starling in any way. Here at Money Unshackled we do everything we can to bring you the best customer offers on financial products, so if we do ever get a Starling welcome bonus or any other such offer, we will of course put it on the Money Unshackled Offers page, so that’ll be worth checking out first.

Right now there are thousands of pounds worth of other offers up for grabs like multiple free shares, discounts on investing services, and hundreds of pounds of free cash. Now, with that said, let’s check out Starling…

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What Is Starling Bank?

There is an old adage that an Englishman is more likely to change his wife than his bank account, and research carried by YouGov found that this may have been based on truth, with most Brits sticking with their current account for decades. 35% of people have had the same current account for over 20 years.

Not that long ago there was little point in changing your bank account. They all did exactly the same thing and there was no differentiation between them. But in recent years this has all changed with massive disruption being driven by the so-called challenger banks, of which Starling is at the forefront. Now there is every reason to change your bank.

Starling Bank is an award-winning, fully-licensed and regulated bank and in their own words, it’s built to give people a fairer, smarter and more human alternative to the banks of the past. They offer a range of accounts including personal, business, and accounts for children. You will of course be protected by the Financial Services Compensation Scheme, which protects up to £85,000 of your cash.

Starling was founded in 2014 and were voted Best British Bank in 2018, 2019, 2020 and 2021. They are also rated as Excellent on Trustpilot and has seen 2.7 million customer accounts opened.

Starling Bank Key Features & What We Like

It’s Completely Digital – Starling has been built for use on the go. There are no bank branches, and you can do everything from within the app. They do also offer a very clean and tidy website version for logging in from a computer, but we found there was no real reason to use this. In fact, I had never even logged in to the website until it came to doing this review. The app can handle it all.

And you don’t need one of those annoying card readers that so many other banks continue to impose on us.

Instant Notifications – Now this is a feature that I absolutely love. Whenever you make a payment or have money enter your account you get an immediate notification – and I mean it’s fast. Say I’m making a purchase online using my Starling card. Before the retailer’s confirmation page has even confirmed the order my phone is vibrating saying money has left my account.

One benefit of this is the fight against fraud. If money ever leaves your account without your authorisation, you’ll know immediately and can respond within seconds.

Categorised Spending Insights – All your spending within your main account is automatically categorised, so you can quickly see how much you’re spending in any given month on groceries, on transport, on bills, and so on.

There is no need to download transactions to a spreadsheet, which barely anyone ever does anyway because who has the time, nor do you need to use an external budgeting app. Starling makes monitoring your spending almost as easy as it can get.

The app ranks the categories in order of importance (that is highest cost to lowest), shows the percentage of your spend for each category as a percentage of the total, and allows you to drill into each category so you can see which retailers you’re spending all your money at.

For people who already budget like this, Starling will make your life easier, but for those who have never budgeted before, Starling’s categories will revolutionise your spending.

Spaces And Bills Manager – Okay, so the name isn’t the best. In truth, just saying the word “Spaces” makes me cringe. Monzo’s Pots gets the accolade for the best name, but the idea itself is a game changer. Within your main account you can set up multiple Saving Spaces. Say you wanted to save for a holiday, you could setup a virtual piggy bank and automatically (or manually) transfer a sum of money into the Space.

A nice gesture from Starling is that they won’t charge overdraft fees if the sum of the money in your Spaces plus your main balance is positive. For example, if you are £200 into your arranged overdraft in your main account, but you have £300 in one of your Saving Spaces then your overall net balance will be £100 and you will not be charged any fees for being in your arranged overdraft.

Moreover, these Spaces are much better than just a standard savings account because towards the end of 2021, Starling introduced what they call Bills Manager. This new feature allows you to pay Direct Debits or standing orders directly from each Saving Space.

You might typically use this to pay all your regular fixed monthly bills, which is exactly what I do. At the start of the month you can automatically transfer enough money into one or more of your Saving Spaces from your main account, and through the month all your bills can be taken from these, making budgeting super easy. With all your bills now being handled from a ring-fenced Saving Space, everything that’s left in your main account is for discretionary spending.

No Fees Overseas – One of our bugbears is when companies take advantage of their customers. And many banks see holidaymakers as ripe for the taking, charging rip-off foreign exchange fees and charges because they know they likely won’t switch their bank account just for this. Money Saving Expert calls them ‘the debit cards from hell’.

For financially savvy people there are ways around this such as by getting a special travel credit card. But for most people applying for a credit card just for a 2-week holiday is too much bother.

Decent banks like Starling have a done away with nasty fees. They won’t charge you for adding money to your card, withdrawing cash from an ATM abroad, or spending transactions on your card. You get the real exchange rate provided by Mastercard.

It’s also worth noting that when shopping online some websites price their services in a foreign currency like US dollars, so with Starling you can rest assured that you’re paying what you expect.

Round-Ups – This is a feature we would personally never use as we think saving should be intentional and planned, but we accept that many people like the service. Roundups will automatically round your spending up to the nearest quid and put that spare change in a Space. We tested it on Starling for the purpose of this review and it works well. As soon as the transaction takes place the change is instantly taken and put aside.

Connected Card – If you need someone to spend on your behalf such as a childminder, a carer, or even just a friend – maybe you’re disabled, and someone does your shopping for you – you can give them a card that is assigned to one of your Spaces. This is capped at £200, so you’re always in control.

Starling state that this is currently free but the fact that they even mention the word ‘currently’ sounds like they are leaving the door open to charge for this feature in future – let’s hope we’re wrong.

This is not a feature I have had to use myself, but we think it’s a fantastic innovation. There are many more great features that we’ve yet to mention but in the interest of keeping this review short and concise, let us now move on to:

What We Don’t Like

Very Low Interest – Talking of interest, Starling pays a measly 0.05% at the time of making this video and this is something that they obviously don’t display prominently on their site as they do with their other great features. Most banks pay zero interest on current accounts, so we can’t complain too much. However, that also means that your savings in your Spaces also earn just 0.05%, whereas other banks will usually pay closer to the Bank Of England’s base rate for their savings accounts.

Recurring Payments And Card Payments Cannot Be Spent From A Saving Space – This has to be the biggest drawback and we’re being very harsh but it kind of reduces the usefulness of the Saving Spaces. Many companies like Netflix and Spotify bill you monthly by charging your long card number – this is known as a recurring payment.

Annoyingly there is no way to have the money taken from a Saving Space. The same is true whenever you use the long card number over the internet or for a purchase in a retail store, so as it stands, for some transactions they must still come from your main account.

Backdated Transactions – For a few months I was having 1 monthly payment from my mobile network being backdated to a prior month. For example, an October payment would appear in my July transactions, then the November payment would also appear in July. This was shocking as you can’t just have transactions appear in the past as how often do you check your banking history? – never!

Starling blamed my mobile network and said it was an issue with the way the payment was being processed by Voxi, my network provider. Either way, this was not an issue I had ever come across before and I would expect Starling to have some sort of error handling in place to prevent this. Having said all this, it was eventually resolved, and it doesn’t happen anymore – for me at least.

Failed Transfers Don’t Repeat – Our final complaint is that automatic transfers between your main account and a Space that fails due to lack of funds are not re-attempted later in the day, nor is the timing adjusted for bank holidays.

For example, say you have £1,000 sent on a monthly basis from your main balance to a Space for your bills but first you’re relying on your salary to arrive in your main account. Due to a bank holiday or even a weekend your main account has not received this money, so the automatic transfer to your Bills Space fails. Unless you are vigilant your bills will start bouncing as there is no money within this Space.

How Much Does A Starling Bank Personal Account Cost?

All the features we’ve discussed so far, incredibly, are free. This might be the most feature-packed banking app there is that doesn’t charge for most of what they offer.

For many people they will never need to pay a dime to Starling but there are some other features that they do charge for. Oddly they charge £2 per month for a child’s account that is linked to yours. It’s a cool feature to offer but it doesn’t seem logical or fair to charge for children’s banking.

I can’t say we’re experts on child accounts, but Ben’s (MU Co-founder) daughter’s bank account is with Santander and is fee-free and we suspect most other banks would be too.

What is probably Starling’s biggest money spinner is the interest charged on overdrafts – but having said this, they seem quite reasonable compared to the rest of the market. They charge interest rates of 15%, 25% and 35%. Presumably the higher risk you are considered to be, the more they will charge.

One feature we didn’t mention earlier is international money transfers. We suspect most people will never need this but it’s very handy if you do. For this they charge just 0.4% plus a flat fee depending on the currency. This can be as low as 30p.

So, that wraps up the review! Let us know down in the comments what you like and dislike about Starling, and if you’re still unsure, feel free to ask us any questions. We do our best to answer as many as we can.

Written by Andy

 

Featured image credit: Ascannio/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

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State Pension Will Surely Be Shut Down – Act Now!

In this post we need talk about the impending catastrophe that is the state pension. We’ve said it before and we’ll say it again, don’t expect the state pension to be around when you retire. Even if the state pension is not completely scrapped it will be heavily cut by at least one of many methods available to the government. It’s practically a certainty!

We’d assume that most people who watch our videos have some money invested, even if it’s just a little. Well, you guys should be especially concerned about future changes to the state pension because its people with money who will be most in the firing line.

We don’t think the impending retirement disaster gets anywhere near the amount of coverage that it needs. Our guess is that the media don’t mention it because it’s a story that’s been slowly growing for a generation, and it always seems like tomorrow’s problem. But if the media don’t mention it the government won’t feel the pressure to act.

The whole country is always preoccupied with more pressing issues – a few years ago it was Brexit, then it was Covid, and right now it’s war and rising inflation and the cost of living. How much longer can we kick the can down the road?

Today we’re looking at the importance of the state pension, why it will almost certainly be scrapped or changed for the worse in some way, what will likely happen in our view, and how you can prepare for the inevitable. Now, let’s check it out…

The video version of this post was sponsored by Penfold. Penfold is a fully digital pension service and offers four investment plans, with their most popular being the Lifetime plan, which automatically adjusts the risk level of your investments over time as you approach retirement. Open an account with penfold via the link found on the MU Offers page and you’ll get a £25 bonus added to your account. T&Cs apply, and as with all investments your capital is at risk.

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Why The State Pension Matters

From April 2022 the state pension will be around £185 a week, which is £9,628 a year, or about £802 a month.

According to Which? research two people would spend £26,000 a year to achieve a comfortable retirement, which buys you some lower-end luxuries, such as European holidays, hobbies and eating out. A couple would need £41,000 a year if you included luxuries such as long-haul trips and a new car every five years.

We’re going to largely ignore what Which are saying is needed for an Essential lifestyle (£18,000), which allows no luxuries whatsoever, as merely surviving is no way to live. We imagine nobody watching our videos would be content with so little. But it’s interesting to note that a couple could theoretically survive with just 2 state pensions and no savings of their own. According to research by unbiased.co.uk, one in six people over-55 have no pension savings whatsoever, so the state pension is a lifeline to them.

Running with the £26,000 figure for a comfortable retirement would likely require an investment pot of £650,000 by our calculations. Let’s be frank, most ordinary people have no chance of ever achieving this.

But if we take into account the 2 state pensions that a couple would receive that means they only need to fund £6,800 a year from their own investments.  This lowers their required investment pot to just £170,000, which is much more achievable, and means the state pension for a couple is effectively the equivalent of a £480,000 investment portfolio for the income it provides.

Essentially when combined with private pensions the state pension has the power to lift people out of poverty and into relative comfort. The state pension is not just a safety blanket – it’s transformational, turning a basic retirement funded by private pensions alone into a comparatively lavish one.

Going forwards people are likely to be even more dependent on the state pension than what these numbers suggest. The research carried out by Which was conducted by speaking to existing retirees but based on generational changes we’re predicting that peoples’ finances on average will be far worse than the existing crop of retirees.

For a start, if you are retired and own your own home outright, then you don’t need to worry about paying any rent, but can this achievement be assumed to be replicated for those still of working age today? Housing costs make up a huge portion of your budget, so all those numbers we just discussed should be hiked upwards for those who won’t own their home.

This is super important because there are decreasing numbers of young people who own homes. In 1991, 67% of the 25 to 34 age group were homeowners. By 2011, this had declined to just 43%. More recent data showed that people in their mid-30s to mid-40s are three times more likely to rent than 20 years ago.

These trends are likely to have a double impact: more people will be forced to pay rent throughout retirement, perhaps requiring an extra 10 grand a year of pension income to reach a comfortable lifestyle; and they are likely to save less during their working years as rent payments always rise over time. The inevitable result of which is them needing the state to bail them out in their old age.

Why You Can’t Rely On The State Pension

The age you receive the state pension depends on when you were born; the age will rise to 67 by 2028, and according to the government’s own prediction it should rise to 68 by the mid-2030s, and 69 by the late 2040s. The age is already being slowly increased, so it seems a given that we should expect further rises.

The current cost of providing the state pension is greater than the money being collected in national insurance contributions, and according to FTAdviser the difference is being funded by Treasury grants that are limited to 17% of the year’s expenditure, and even with these payments the Government Actuary’s Department estimates that the UK’s state pension fund could run dry by 2033.

The cost of the state pension is now at £100bn a year and is rising rapidly year-in, year-out. The country is underfunded in so many areas such as the NHS and policing (and everything else come to think about it) that you have to wonder how the government can continue paying out such an expensive benefit.

With rising tensions and a clear threat from a changing world order it’s very important that we spend more money on our military. Not doing so would be dangerous and irresponsible. Cuts elsewhere will need to be made.

The state pension is effectively a gigantic pyramid scheme. When you pay national insurance, this isn’t put aside for your future, no, no, no. This is spent immediately on existing pensioners. Your future state pension relies on future generations paying for you. With the current setup you’ll likely be relying on kids who haven’t even been born yet to toil in factories and office buildings to pay for your retirement with their hard effort. We’ve never heard of a pyramid scheme that can continue indefinitely. Sooner or later the whole thing comes crashing down.

There are 1,000 contributing workers supporting every 310 claiming pensioners. By 2036, this is expected to rise to 1,000 workers for every 360 pensioners. Why do you think the government does everything in its power to keep the population growing? They proclaim to desire to reduce immigration but ensure they do nothing to prevent it, or else risk toppling the pensions pyramid.

The situation is made worse by the fact that the money paid to pensioners increases by the triple lock, whereas national insurance contributions increase in line with earnings. Following a period of low wage increases and low inflation, the pension cost will climb and become even more excessive. One of the guarantees of the triple lock is that pensions increase by an arbitrary minimum of 2.5%.

Pension Replacement Rates

It’s commonly claimed that the UK has the worst state pension among developed countries, based on data published by the OECD as seen in this chart. UK pensioners who were average earners can expect just 28% of their annual career earnings from the state pension. Interestingly, many countries like Austria, Portugal, and Turkey can expect to replace almost all of their job earnings with their state pension.

The UK launched the auto enrolment scheme some years back. Many people might consider this to be a top-up to the state pension, but we think it’s been brought in to lay the groundwork for a future government to finally slash the state pension by claiming that these people don’t need it.

The suspension of the triple lock during 2022 is another incremental step towards the government’s end goal. Once seen as untouchable, the triple lock was temporarily removed, citing a “statistical anomaly” caused by Covid. Sadly, this demonstrates that even an ironclad guarantee like the pension triple lock can be broken! And when it has been done once it acts as a precedent in future for further cuts.

And finally, and perhaps one issue we have never even considered until recently is the possibility of a total collapse of the country. A few weeks ago, a situation like this might have been considered so unlikely that it was nothing less than sensationalist panic, but the Ukraine crisis is a terrible reminder that we can’t take anything for granted.

The humanitarian crisis created by Russia’s invasion of Ukraine has caused millions of people to flee. One consequence of this is that these people are likely walking away from any state pension they might have earned. We can’t imagine any Russian puppet state will honour any pensions that were being accrued, and likewise should Ukraine repel the invaders their country will be in such a dire state it will take decades to recover.

We’re not saying this exact scenario will happen to the UK but it’s worth taking stock of what shocking events can happen and how severe the consequences can be.

What Will Likely Happen To The State Pension?

Avoiding any catastrophic events, one option is some sort of means testing that takes effect in the future. Considering that old people vote, and young people don’t it seems plausible that the government will eventually draw a line and say there will be no further automatic entitlement to the state pension. Past entitlements would likely be honoured as otherwise there would be riots in the streets – and the nursing homes.

Young people, say those under 25, will be less affected by this run-off because they should have a lifetime of saving into the auto enrolment scheme. Somebody who is auto enrolled into a workplace pension earning £30k for 40 years with typical investment growth might end up with a pension pot of £235,000 in today’s value of money and a couple could have double this, approximately replacing the purchasing power of the state pension.

A less decisive option they will continue to take is to keep gradually increasing the age you can claim the state pension. In theory this keeps people working longer and therefore continuing to pay into the system, and simultaneously reduces the number of people taking from the system.

They might also change the rules so that you need more NI qualifying years to qualify for the full state pension. Currently you need to have been paying NI for 35 years, but this was only recently changed from 30 years. This could be increased in steps to, say, 50 years.

Think about this, you may still choose to retire at 55 because you have the private retirement savings to do so, but you would be sacrificing your entitlement to the full state pension by not working the full 50 years.

But questions need to be asked about how feasible increasing the age you can claim is. Many jobs cannot have an average 65-year-old doing them. To be a bricklayer you need to be fit and strong, so it’s clearly not a suitable job for Albert and his bad back.

What You Can Do It About It

Relying on the government (or anyone for that matter) is a recipe for disaster. Nobody will care about your wellbeing as much as you do. Our suggestion for you is to pay the maximum that your employer will match into your workplace pension. Because you never see this money in your bank account you get used to living on your take home pay, which is one reason why saving for retirement like this is so effective.

Many workplace pensions will only match the pathetic statutory minimum, so you should also pay more into a private pension and/or a Stocks and Shares ISA.

A pension has age access restrictions, which on the face of it may seem limiting but for ordinary people who might be tempted to spend this money this restriction can be a blessing in disguise. Discussing the merits of ISAs vs Pensions would be an entire video/post in itself, but we discuss how best to use both accounts in tandem here to efficiently save for retirement.

How much should you pay in total to retirement savings? There’s no better way to estimate this than to play with an online retirement calculator. This one will tell you how many years you have until you can retire, and you can change all sorts of variables such as investment returns, your age, your earnings and expenses, and your withdrawal rate.

The rule of thumb has always been to save 10% of your earnings for your entire life but we feel this is too low. You should be looking to put at least 15% away. And if you’re young the more you can invest now, you might be able to take the foot of the gas later. We can’t stress how liberating it is knowing your future is already taken care of.

Barring any disasters and assuming investment growth will be consistent with long-term historical returns, both Ben and I (MU Co-founders) have already achieved investment pots that will pay for our retirements, just through diligent monthly investing during our 20’s and early 30s. Pretty awesome!

What retirement investment plans have you made? And what do you think the fate of the state pension will be? Join the conversation in the comments below.

Written by Andy

 

Featured image credit: Photographee.eu/Shutterstock.com

Also check out the MoneyUnshackled YouTube channel, with new videos released every Wednesday and Saturday:

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My Leveraged Losses

One request we get quite frequently is to do an update on our leveraged strategy – and if you don’t know what this is, not to worry, we’ll give a quick summary to catch you up. At first, we were reluctant to do this update so soon because the strategy’s performance will basically return the same as the market multiplied by whatever leverage was applied, which in our case was a very risky 3x.

But given recent events in the markets driven by the atrocities in Ukraine by Russia we wanted to address any worries you may have if you were implementing the leveraged strategy for yourself.

We had always wondered how we’d react if and when the markets tanked, and we were nursing big losses. The war is the first serious threat to our portfolios in a long time, which is scary enough when you just invest in ETFs or stocks but is downright terrifying when you are leveraged.

We won’t be covering the awful humanitarian crisis and the horrors of the war in this post but instead will focus on the stock market impact. This is in no way to downplay these serious issues, but these are well covered elsewhere in the news and social media.

We are going to revisit the risks of our leveraged strategy and consider whether we should reduce the risk in light of real-world events. Our backtesting had previously warned that we may face losses of up to 90% at 3x leverage.

We’re going to look at my overall performance so far (early Mar 2022) and also break it down by the component parts of the portfolio, which was the S&P 500, long-term US treasury bonds, and gold. We’re going to talk about what’s worrying us right now and the reasons still to be bullish. Now, let’s check it out…

FYI: £50 cash bonuses and FREE stocks listed on the Offers Page.

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As always, check out all the offers for free cash, free stocks, and discounts to many investment services and apps at the Money Unshackled Offers page. We’re always updating this with more goodies and bonuses, so if you’ve not visited in a while check that out!

A Quick Catchup On The Leveraged Portfolio

Essentially, we’re borrowing money to invest with the goal of making massive profits. History tells us that we could make up to around 33% annual profits less any fees. This might sound super risky, but the risk depends on what return you want and the amount of leverage you use, and there are some solid reasons why borrowing a small amount of money to invest can actually lower your overall risk and increase your returns.

The leveraged portfolio breakdown

The portfolio we’re both using is 60% S&P 500, 30% Long-term US Treasury Bonds, and 10% Gold, and applying 3x leverage. We ran some extensive backtesting on this portfolio to see how it would perform with no leverage and benchmarked it to an index consisting of just US large caps, or in other words the S&P 500.

Backtesting of the portfolio

Over 43 years the unleveraged portfolio returned nearly 11% per year, not that much lower than the 12% from US large caps. However, it did this with significantly lower risk, measured here by the standard deviation, which is the volatility. Volatility is what usually kills investors using leverage, so we want to keep this down.

Note, that despite the small difference in annual returns, over 43 years the difference between the final balances is huge.

In a nutshell, this is why we are using leverage to improve our returns because every little increase to your annual returns will have a colossal improvement to your overall gains.

The portfolio’s worst year was a loss of just 17% compared to a massive loss of 37% for US large caps. And the max drawdown, which is the total decline from peak to trough was just 29% for the portfolio vs. a whopping 51% for US large caps.

Remember that these percentage gains and losses will be multiplied by the leverage factor you use. With a max drawdown of 29% this would be a nearly 90% loss with the 3x leverage we’re using. For a full guide on how we use leverage check out our Spread Betting posts, here, and here.

My Performance So Far

Since June 2021 I have deposited £12,400 and I have been drip feeding this money in on a bit of a sporadic basis – usually every month or two. With this cash I have opened up positions that at their peak were worth about £39,000.

I don’t record my profits or losses daily, but I do tend to value the portfolio about once a month. During December I was sitting on nearly £1,500 profit and at the time I had only invested £10,000, so I had made a huge profit in just 6 months.

Amazing! At this rate – with this strategy – we’ll all be millionaires in no time. Sweet!!!! Hang on, hold your horses, this is a leveraged strategy, so any downward swing will hit the portfolio hard and could easily erase all those gains. And it was about January or February time when things started to get bad.

First, we had inflation worries. Energy prices were surging, food prices were going up, and inflation was hitting highs not seen in 30 years. Inflation is particularly bad for speculative stocks because the value of those future profits is worth less – and the US market is full of these types of stocks. Some US stocks were getting hammered and the overall market began to fall – with the S&P 500 going from around 4,800 to around 4,300 – about a 10% decline.

The leveraged portfolio would surely be okay though, right? It’s got 30% allocation to treasury bonds after all, which are purposely in the portfolio to hedge stock market declines. Well, the bonds have been getting hammered too.

The usual way to tackle inflation is to raise interest rates and even just expectations of this will cause bond prices to fall as they have been doing over the last few months. Rising inflation is worrying but it’s the sort of thing that we would expect Western economies to be able to handle and therefore we weren’t overly concerned.

However, stories were also coming in that Russia was building up troops, tanks, planes, and all the military support that would be needed to mount an invasion of its neighbour Ukraine. The stock market was getting jittery.

By this point my near £1,500 profit had swung into a £500 loss, and I believe it was a £1,500 loss on the first day of the invasion. The point we’re trying to make is that the success of our leveraged spread betting strategy cannot be measured in such a short time period as massive gains (percentage wise) can become massive losses in a matter of days.

In early March 2022, my position in the S&P 500 had fallen just 1.2%. This seems so low because many of the investments were made months ago when the S&P was much lower than its peak.

The treasury bonds have fallen 5.3% but Gold however is up 6.5% and earns its place in the portfolio. Gold was intentionally included to save us in the event of a crisis, which at time of writing we certainly look like we’re in.

Why We’re Worried

We have a few big problems with our leveraged investment strategy. The first is the limited backtesting that we’ve run. Unfortunately, for these assets we can only test performance going back around 43 years using the resources available to us.

This might sound like a lot, but this time period does not cover all the events that could happen. Inflationary cycles, economic booms and busts, deadly pandemics, natural disasters, and war, amongst many other things, may not have happened during this time. Yes, we have had a pandemic, but Covid is not exactly the black death.

We honestly thought that World War 3 would never happen but based on recent events you can never say never. Is nuclear war a real possibility? We don’t know but what we do know is that events like this are not factored into our use of 3x leverage.

Other than the small exposure to gold, the portfolio is entirely dependent on the US stock market and bond market, and even though the stocks will have global exposure it is still very risky to put all your eggs in 1 basket, or market in this case.

On the day Russia invaded Ukraine, Russia’s stock market plunged 33% in a single day but it’s intraday low was a crash of 45%.  If we had been doing our leveraged strategy with Russian indexes we’d have been wiped out. Who’s to say that a freak event couldn’t do the same with the US market? Yes, this seems much less likely, but we have to acknowledge that it’s always a possibility, no matter how slim.

The second problem that concerns us is bond prices and the low yields. Bond yields have already been rising recently due to high inflation and anticipated interest rate hikes, which causes bond prices to fall. It seems unlikely that bonds will provide the same level of insurance to the stock market as what we’ve experienced in the last 40 years or so. Over this time, the US Fed interest rate has come down to record lows. The only direction it’s going now is up and that’s bad news for bonds.

This is hardly news to us, which is why we added gold to the portfolio despite gold not having any significant effect over and above the insurance properties of bonds in our backtesting. So far, our gut feeling to include gold has paid off but recently we came across this chart that could change everything.

Russian gold reserves

The chart shows the gold reserves of Russia since the year 2000. Up until the financial crisis around 2008 their gold reserves were flat. Since then, they have more than quadrupled. With a bit of hindsight our guess is that they were preparing for war.

You could argue that the Ukraine invasion has been 14 years in the making. Wars are expensive and what better way to fund a war than to raise money by selling your gold. Gold is real money and always has a buyer. So what does this mean? Our guess is that there will be tonnes of gold flooding the markets if Russia needs to raise money, which will put huge downward pressure on the price of gold.

To put it into context, there is approximately 34,900 tons of gold reserves in the world and Russia’s central bank has 2,300 tonnes – that’s 6.6%. Conversely, gold has always been a safe haven in times of panic, so the price could in fact rise even if Russia were offloading their reserves.

My third concern is whether I could stomach big losses to my leveraged portfolio. So far, having only put in just over £12,000 I wouldn’t be devastated if I lost the lot. In the grand scheme of things, it’s not that much money and I’m still young, so could rebuild. However, as I continue to build my leveraged portfolio there will probably become a point where the risk of loss is too much. I don’t know yet how much money I would need invested to start feeling uneasy.

Why We’re Bullish On This Strategy

We’re not going to repeat what we’ve said in other videos because you can go back and watch them but let’s look at some other key points:

Firstly, the risk of losing your original capital is much higher at the start. But in theory when you’ve been running the strategy for a long time, say 15 years, losses will likely just eat into your gains. And even with what would seem like a catastrophic decline you would still likely have way more money than what you could get from an unleveraged investment.

Portfolio values and returns after various theoretical declines

Say you had £10,000 and earned 30% leveraged gains for 15 years, but then suffered a 90% decline. Your original £10,000 would still be worth an awesome £51,000, which is still an 11.5% compound annual growth rate despite the massive loss at the end. The table you see here is the annual growth rates earned after various declines. There is a lot of assumptions in this, but it goes to show that time with this leveraged strategy reduces your risk to your original capital significantly even if it doesn’t play out exactly like this.

We’re also bullish because new contributions reduce your overall amount of leverage. Say you had invested with 3x leverage, and the market fell, and your portfolio was now 6x leveraged. When you add more money at 3x leverage you dilute your existing portfolio, bringing it slightly closer to your target leverage. This is a key reason why we continue to add to our leveraged portfolios even when the market is down.

And what’s more, this strategy is very different to dumping money into high-risk stocks or crypto because we’re investing in whole indexes of stocks, bonds, and gold, in a precise mix that has been designed to weather any market crash, and to massively increase in value over time. Those other strategies rely on hope. Ours relies on data.

What do you make of our leveraged strategy? Are we bonkers or geniuses? Join the conversation in the comments below.

Written by Andy

 

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