Why The Debt Bubble Is Due To Burst – Inspired By Ray Dalio

It’s worth understanding how debt cycles work – the periods of time between financial collapses – so that we can predict when the next one will come.

Governments and central banks need to know how to foresee debt crises and plot a successful course through them. For us investors, we just need to know how to take advantage.

The tell-tale signs are all there that we’re heading into the next in a long line of debt crises, with similar events in the run-up mirrored across history.

Whether the Great Depression of 1929, the Japanese bubble bursting in 1988, the dot-com crash of 2000, or the Great Recession of 2008 – all were showing symptoms of a debt crisis long before asset prices plummeted.

So, building on the theories of Ray Dalio, why are we heading into the next debt disaster, and what can we do as investors to prepare?

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Debt Cycles

An economy’s relationship with debt moves in predictable long-term and short-term cycles. Short-term debt cycles typically run around 12 years in length on average, with a boom-and-bust pattern of affluence and overspending, followed by austerity and bruised consumers sitting on their cash.

Long-term debt cycles run far longer, typically around 75 years, or could run the full length of a country’s rise to greatness through to its inevitable decline.

Long Term Debt Cycle - Source: Ray Dalio

A country like China would sit somewhere there on the rise, with a large but reducing inequality in its population’s wealth gap, and gobbling up credit to build infrastructure and fuel growth.

Ray Dalio puts America and the UK as over the hill, America still near the top with their still booming stock market but relying more and more on money printing to get by.

Deflationary Debt Cycles

In the West, our debt cycles tend to be deflationary, which we’re covering in this article – the crisis causes investment assets to lose value and cash to become a safe haven.

On the flip side, there are inflationary debt crisis, like what happened to Germany after World War 1, where a wheelbarrow of cash was needed to buy a loaf of bread.

Credit

What we think of as money is often not money at all, but credit. You can go into a shop and buy a nice hat with a credit-card.

The shop keeper thinks you have the money, but all you’ve really given is a promise to pay the bank that money later.

When a debt crisis hits and you can’t afford to pay off that card, the truth becomes clear for all to see. That money never existed – and has now disappeared from the economy.

Short-Term Debt Cycles

Credit used correctly is a good thing, and an essential economic tool for growth.

During the good times, people use more and more credit because it makes sense to, since growth opportunities are abundant.

It doesn’t matter that they are racking up debts too, as they can be easily managed. And the banks are all-too-happy to lend money to anyone, as there is good profit to be made from doing so.

Short Term Debt Cycle - Source: Ray Dalio

Above is what a typical short-term debt cycle looks like, taken from Ray Dalio’s book Big Debt Crises.

The bottom axis is in months and runs for 12 years, from the recovery through the bubble phase, to the inevitable decline and debt deleveraging. The red line is interest payments, but the blue line is the main one to focus on; being the total debt as a percentage of GDP.

2020 and 2021 sit in the depression phase after a good second half of the 2010s, leading up to the peak of Debt-to-GDP.

This tallies with the government’s massive printing of money during the corona-crisis.

According to debt cycle theory, we’ll soon enter the phase of the cycle when debt has to be reduced, no matter how painful, as it is unsustainable.

Note that debt typically ends a cycle higher than when it began. Several short-term cycles will balloon into a long-term cycle, starting and ending with economic catastrophes.

Ending Higher Than It Began - Source: Ray Dalio

Why Debt Moves In Cycles: Self-Reinforcing Movements

During the good times, lending gathers momentum like a runaway train that becomes unstoppable – except for a head-on collision into something solid that knocks it off the tracks.

Lending supports spending and investment, propping up asset prices and fuelling incomes.

Bigger asset prices and incomes give banks more confidence to lend even more money, as borrowers have better collateral.

But all the while, debt is building and eventually outpaces incomes. At some point, some event will happen that triggers banks to panic, who reign in their credit lines.

Projects pause; incomes stagnate; outlooks for asset price growth look bleak; bad debts mount; and banks stop lending.

This makes the problem worse, and the debt cycle spirals downward into the end-phase.

How Debt Crises Can Be Managed

There are 5 ways to manage a debt crisis:

#1 – Austerity

Cameron and Osborne tried this in 2010 after the Recession, with limited effect.

The problem with austerity is that it is deflationary and discourages growth at the same time as the debt crisis is already doing both of those things.

It does help reduce debt, but it lowers incomes too, so can be counterproductive.

#2 – Debt Cancellations

Just cancelling the debt is not great, as the lenders lose out and this reinforces a downward spiral of deflation, but the crisis can be so severe that it might be sometimes necessary.

It’s widely believed that this needs to happen to solve the Greek debt crisis in the Eurozone, ongoing since 2009.

#3 – Slash Interest Rates

Slashing rates makes it easier for people to pay the interest on their debts, at the same time discouraging people from hoarding their money in a bank savings account.

In this way it encourages investment into the economy again.

#4 – The Magic Money Tree

The central bank just prints more money.

This only works if the country’s debts are in their own currency, but it does encourage growth and spending in the economy which really does help get things moving again.

But is this storing up a currency problem for a later day?

#5 – Raise Taxes

Raising taxes may be necessary eventually to pay for the country’s debts. But raising taxes whilst in a crisis is a big mistake.

This makes everyone poorer at a time when you need money to flow freely again.

The tax hike doesn’t even help the less-well-off, as the money is not being invested to help people, but wasted on debt payments.

However, this is the inevitable final destination for a country in ever rising net debt.

Long-Term Debt Cycles

Remember that each short-term debt cycle leaves the country a little more indebted than it was before, and after many short-term cycles the problem adds up to result in a mega crash like the Great Depression in 1929.

Many of the levers that were pulled by central banks to resolve the last several short-term crises become less effective each time.

After the 2008 recession, we lowered interest rates to almost zero. Even a decade later, rates have not recovered, so that lever cannot now be pulled again.

And the UK is now in over £2trn of debt – over 3 times higher than in 2008!

Where We Are Now In The Debt Cycle

It has been over 12 years since the start of the 2008 Credit Crunch, also now called the Great Recession.

The UK recovered: unemployment went to historic lows, the banking sector was reformed, and city centres underwent massive renovation projects.

But debt built up, and the kindling of the next debt crisis was waiting to be lit by something, and the coronavirus was more of a flamethrower than a match.

Now, we’ve seen banks pulling low LTV mortgages at the height of Covid.

We’ve seen the Bank of England base-rate slashed to 0.1%, businesses forced to shut down, and people forced to stop spending, taking credit out of the economy.

We believe we’re in the end-phase of the short-term debt cycle.

But as for the long-term cycle, 2008 might not have been the end-phase that some people assumed it was. It was a body blow, but is the knock-out punch still to come?

The levers that were pulled at the time to resolve it have been exhausted and haven’t recovered since.

Austerity has already cut back public spending as much as is politically tolerable; taxes have been raised by stealth to what we feel is the upper limit of what can be tolerated by most families; and interest rates have been slashed to the max.

Perhaps worst of all, the money printing was not rolled back at all over the last decade, and was then increased dramatically in 2020.

There is little room for manoeuvre when the next debt crisis hits. We may be just years away from a full blown 1929 style disaster.

Can Investors Take Advantage Of A Debt Crisis?

During good times of growth and demand, productive investment assets like stocks and property are favoured.

During debt crises, these assets stop being as productive, and money runs into cash and precious metals like gold and silver.

It may be too early to say, but crypto currencies like Bitcoin should logically do well during a debt crisis as well, as they act in many ways like a digital version of gold.

We’ve said before how cash itself should be given respect as an asset class in your portfolio, with perhaps a 10% allocation, and perhaps a further 10% to precious metals, and some of you may even want a small portion in crypto currencies.

During times of deflation, cash is naturally well placed to outperform, as many other assets lose value relative to it.

We’ll still hold the vast majority of our portfolios in well-diversified equities and other productive assets, but to ignore cash and precious metals entirely is to ignore the real risk of a major debt crisis coming down the road.

As long as the government keeps on printing magic money, that day keeps getting closer.

Are Debt Crises Unavoidable?

Almost. As Ray said, lending is never done perfectly and tends to be done badly.

The short-term rewards of funding faster growth with credit helps governments to justify the rising debt, and it is politically more popular to let people have easy credit than to take it away.

What politician would impose austerity and tighter restrictions on the voters during good times, before a crash had even happened?

Are you worried about the debt bubble? Tell us your take in the comments below.

 

 

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Budget Like A Pro – The Complete Guide To Budgeting The Lazy Way

The thought of budgeting is enough to make the eyes of most people glaze over in boredom. We hear you – it’s not the most exciting of subjects, which is why we’ve never covered it until now; and will be a big reason why so few people can commit to it.

But we think our approach is better than the usual penny-pinching approach touted elsewhere.

We suspect that the inability to stick to a budget is partly due to how you’ve been taught to do it. We’re guessing that previously you’ve been told that budgeting involves tracking everything you spend down to the penny.

You’ve also probably been incorrectly told that you must go over your last 3 months bank statements and also heard that you need to deprive yourself from everything you enjoy in life. It doesn’t have to be this way.

We’re not going to lie and say budgeting can be fun – it can’t! But hopefully in this article we can show you the techniques we use to keep it as simple as possible – and hopefully they’re ones that you can stick to as well.

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Why You Need To Budget

It’s no coincidence that those that don’t budget never have any money left at the end of the month. They live paycheck to paycheck.  We’d go further and say there’s a clear rich/poor divide between those who budget and those who don’t.

Many people might find this surprising, but it makes little difference how much money you make. We know many people who earn what most people would consider to be awesome salaries and yet they struggle financially.

Even in fields like accounting you would expect these people to have some financial sense, but you’ll be amazed just how many struggle – many of whom are counting down the days to payday just like someone who is on minimum wage.

Even premier league footballers and other celebrities who have earned millions end up broke!

Despite earning a massive £20m from his football career, famous England goalie David James declared bankruptcy in 2014, and ended up selling signed shirts to pay the bills.

Why do people have this problem? In many cases it’s because they fail to budget properly. You need to control your money, or it will control you.

When people earn more money what generally happens is their expenses quickly follow suit – bigger houses, faster cars, better holidays, fancier restaurants, private schools, horse riding lessons… you know.

Some lifestyle creep or lifestyle inflation is perfectly fine. It’s okay to reward yourself and enjoy the fruits of your labour.

But without a proper budget you are likely to let this get out of control and don’t really know what you can and can’t afford. This is where a budget comes in handy.

Pay Yourself First

A phrase you have probably heard us and every other financial commentator utter. It’s one of the most important things a person can do when it comes to managing finances and taking care of your future.

When we started paying ourselves first it really did change our lives. If you take away anything from this read, let it be this.

Paying yourself first means buying assets such as shares, gold, property and so on as soon as you get paid. Bestselling author Robert Kiyosaki calls these investments your asset column.

Paying yourself first allows you to spend the rest guilt free knowing that your financial future is taken care of.

How much should you pay yourself and what can you afford? This is what a budget will tell you.

By paying yourself first and then living on the remainder, you’ll know whether you can afford something or not. It will force you to tighten up in that month if you’re over-spending.

It’s amazing how simple this is and how effective it can be. It’s very important that you never dip into your investments – if you do it means your budget is failing and you’re stealing from your future.

Avoid Bad Debt

Sadly, a lot of people are not in the position yet to pay themselves first because in many cases they chose to use debt to plug any gaps between their income and expenditure. This means they have to pay their creditors first.

While this is not ideal it just means you have to clear this first before working on your own asset column.

Whether you’re paying yourself first or paying down your debts our budgeting techniques will help you take control of your finances.

Why Budgets Fail

We’ll get to the specifics of how to budget very soon, but first let’s look at why people usually fail with their budgets.

#1 – Tracking All Expenses

A lot of budgeting advice says that you need to track all expenses. This is time consuming and, in most cases, unnecessary. In theory this is the best way to budget and companies themselves do this; but they have entire accounting departments doing the work – you don’t!

For most people, this complex and time-consuming work is the cause of them jacking in the budget entirely. It’s better to focus on the important bits if it means you will stick with it and we’ll show you exactly how to do this.

The less affluent you are, and the tighter your budget, you will have to go into more granular detail than those who have a higher income. That’s because the cost of a coffee is more significant to them than for those with higher incomes.

You’ll work out for yourself the amount of granularity that you need to track to, but you don’t need to track everything.

#2 – Irregular Expenses

Another major reason why budgets fall down is because you’re often told to look at your last few months bank statements to work out what you spend.

This won’t work on its own because it does not include irregular expenses. A lot of what we spend is not monthly but is often yearly or even once every several years. At this point their budget fails and they quit. Our budgeting technique which we’re about to cover handles this.

Moreover, this often leads people to spend what they call their savings on these irregular expenses. Therefore, these people’s saving are not savings at all – they’re delayed spendings.

How To Budget Like A Pro

These are the steps that you want to take as soon as you get paid your salary:

1)            Pay yourself first i.e. Invest

2)            Transfer money for bills into a separate account (using a standing order)

3)            Transfer money into a provision account for delayed spending (using a standing order)

4)            Live on the rest

This means you will have a bank account that you get paid into, an investment account (probably a Stocks & Shares ISA), a separate current account for monthly bills, and a separate savings account (or accounts) for building up a delayed spending provision.

Budgeting is about looking forward. It’s about knowing what you will spend, so that you can avoid bad debt, live comfortably, and build a freedom fund or retirement pot – whatever you want to call it.

The best way to assess your current spending is to look at bank statements and also make reasonable assumptions about irregular expenses such as an annual holiday. Don’t forget that irregular expenses occur very infrequently, like a new car.

What we suggest you do is come up with a list of categories for your spending. This will probably include: Mortgage or rent, council tax, energy bills, phone and tv bills, food, clothes, entertainment and so on.

This list needs to be comprehensive. You should absolutely include things like Christmas spending, car maintenance, a provision for buying your next car, and new furniture such as a new mattress. It needs to include everything.

Don’t worry too much if you miss the odd thing. It’s not likely you will get it perfect first time, but do your best and always continue perfecting your budget.

How Much To Pay Yourself First/ Invest

This is the last part you can work out from your budget. Calculate what you can invest but make sure the action to invest on a monthly basis is done first. We use standing orders on pay day to automate this and we suggest you do the same. As long as you are disciplined you will make sure you never exceed what you put aside for living on.

You should aim to invest as much as you can here, but not to the point that you deprive yourself from having any fun.

If you calculate you can invest £100, try £150 and squeeze other areas tighter. It all helps Future-You.

Transfer Money For The Bills Account

Bills are usually consistent every month and are normally taken by direct debit or standing order. This usually includes the mortgage, utility bills, council tax, tv subscriptions, gym membership or sports clubs, and so on.

This means you should be able to budget for these with a great level of accuracy. Transfer the total spend into a separate bank account on the day you receive your salary and then you don’t need to worry about them not being paid.

If you could individually arrange for all of these to be paid at or near the day you receive your salary, then you can forgo the separate account. But you will probably have so many – with little control on the payment dates – that it’s best to have a separate current account for monthly bills.

Delayed Spending

Irregular expenses are not as straight forward. They need to be broken down into monthly equivalents. For example, an annual holiday costing £1,000 let’s say, should be split into 12 months, so that £83.33 is put into a separate delayed spending account. It’s what an accountant would call a provision.

The same should be done with Christmas. If you normally spend £600 on Christmas, then it makes sense to put aside £50 a month (£600 /12 months) to prepare.

You should do this with every irregular expense. These might be saving for a new car, new house furniture, a boiler replacement, redecorating the house, etc.

This exercise might highlight that what you thought you were saving before was actually just all delayed spending. It might be demoralising to have to set so much aside for expenses which won’t happen for another year or so, but you should feel proud to be finally getting a grip on your finances.

Over time you will build up sizable pots and you will also run them down as you spend.

For example, over the course of a few years you may have built up a large pot for a new car, and then you deduct from this pot whenever you buy one.

It’s the best way to remove any guilt from spending as you know it’s all been planned for.

We tend to record each category on a spreadsheet and record each time money is added or withdrawn from the category. You probably want to aim for just several different categories, so you don’t overcomplicate things:covered

Budget categories example

These might be Car, Holiday, Clothes, House, Presents, Big Items, and Other to mop up the rest. What we’re showing is just a simplified version of what it might look like.

Earlier we said that budgets often fail because they tell you to track all expenses. The method we are proposing only tracks irregular expenses, so is far less of a burden.

In the past we’ve tried to track all expenses and quit almost immediately and yet we’ve been able to track irregular expenses without fail using this method for years.

Some people with spreadsheet phobias might prefer to set up multiple savings accounts instead – one for each delayed spending category. Or there’s always the old-fashioned notepad and pen method! Do whatever works for you.

Live On The Rest

The remaining money in your main bank account is for you to live on. It means you can spend it as you please, as long as you don’t run it down to below zero before next payday.

Your expenditure here might include supermarket food, meals out, petrol or train fares, coffees, small purchases, nights out and whatever else you buy frequently.

What To Do If Your Budget Is Failing

Over time you will perfect this budget – and we expect it will take a few months of tweaking – but at first it might go wrong. In the first instance it would be okay to access your emergency fund or even your investments if it got to that stage.

If your boiler breaks and you had forgotten to put money aside for this in your delayed spending account, you do have a genuine emergency. Just make sure you replenish the emergency fund asap – and adjust your budget to add in future boiler breakdowns.

As this should be a planned for event, typically this would not be an emergency and so don’t get comfortable doing this. This is where your self-control comes into play.

We don’t normally advocate using debt for everyday spending, but if you have not yet built up an emergency fund, then using a 0% credit card might be a short term solution until you can plug the hole in your budget. Avoid payday loans and overdrafts like the plague!

How do you budget, and will you be adopting any of the techniques discussed today? Let us know in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

Should Debt Be Cancelled? Debt Jubilee

Across the pond, there’s been talk that the new US president Joe Biden could cancel or forgive up to $10,000 of student debt per borrower, and some Americans are even pushing for far more.

This might sound crazy but is it? Does the cancellation of debt have benefits that outweigh the cost?

Here in the UK, our student loan debt already has a ticking expiration date.

This date varies but if you took out a loan between 2006-2011 then it’s only 25 years before it gets written off.

But the topic of debt cancellation, also known as a debt jubilee, goes far beyond just student debt.

Since Covid decided to rear its ugly head there has been renewed attention for debt cancellations for crippling household debt, as well as the national debts of countries both rich and poor, including the UK.

The UK’s public debt is way over £2trillion now and growing fast and this will be a burden that our generation and our kids and grandkids will have to carry!

In this article we’re going to look at the possibility of debt cancellations for both UK household debt and the UK national debt, why it should and why it shouldn’t be cancelled, and how it might be done.

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Does Britain Have A Debt Problem?

Before we even look at the need or feasibility of a debt cancellation, we should first look at whether the UK has a debt problem in the first place. This debt problem can be split into 2 broad categories: national debt, and household debt.

National Debt

It’s widely believed that high national debt is bad for growth and most countries seem to be doing their utmost to keep a lid on the potential ticking time bomb, at least they were before Covid.

However, there are many interesting theories out there that say the UK national debt doesn’t really matter.

Jubileedebt.org point out that one-third is owed to the UK government itself – the Bank of England – and another 45% is owed to other people and companies in the UK, such as pension funds and savers.

Only 20% is owed to those outside of the UK, and the UK government’s foreign debt payments are just 3% of its revenue, one of the lowest levels of any ‘rich’ country.

So, based on this, it does seem that the debt problem has been slightly misreported on, but still we don’t understand the argument that debt is less important when it’s owed to people and companies in the UK.

If you lend money to the government in the form of a gilt, then you want your money back just as much as a foreign lender would.

Another argument that says the national debt doesn’t matter is the ability of governments to print more money.

The fact that a country like the UK can seemingly print money at will means it can always just pay off debts by turning on the printing presses.

We’ve seen this with the amount of Quantitative Easing that has occurred since 2009 and more recently in 2020. They’ve magicked £895bn into existence and this is likely to increase further.

Before Covid we had been told that Britain’s finances were at breaking point but clearly the magic money tree has been found – even if it was then stripped down to the roots in 2020.

National debt cannot be allowed to spiral out of control because debt enslaves countries as much as it enslaves individuals.

It places limitations on how a country can react to opportunities and threats. Would the UK be less willing to spend on infrastructure or education knowing it will struggle to pay for it? We think it would and therefore damages growth.

And then there’s the argument that it doesn’t matter how big the national debt is, as long as the interest payments can be met.

In this age of rock bottom interest rates, the government feels it can spend at will, because debt costs almost nothing.

Of course, governments that take this view are being short sighted – but this is a recurring problem in democracies. The Opposition, whoever it is at the time, can always clean up the mess when they are next in office.

Household Debt

The general public definitely do not have magic money trees, so arguably this is far more worrying.

According to the latest data from finder.com, total household debt in the UK was £1.7 trillion or almost £32,000 per adult. This debt could include a mortgage, credit cards or short-term loans.

These figures don’t tell the whole story because not all debt is created equal. There is good debt, which is when the debt is matched to a productive asset such as property or stocks.

Then there is wicked consumer debt, which is most commonly from credit cards, overdrafts, store cards and payday loans. According to finder.com this now stands at £206bn, of which £61bn is credit card debt alone. Per household this is round £2,200 of credit card debt.

Why Debt Should Be Cancelled?

National Debt

Quite simply, if the country wasn’t in debt, there would be more money available to pay for public services like the NHS, education, transport, police and everything in between.

A debt free nation would help to raise the living standards of everyone, as the money that was spent on interest could be directed instead towards the stuff that matters.

Household Debt

Debt acts as a vice, preventing the indebted from acting in a way that benefits them and society to the fullest. Large swathes of the British public struggle month in, month out to service their debt obligations and feed themselves and their family.

For each and every person struggling to look after themselves there is an opportunity wasted. They are little use to society if they can’t properly contribute.

A country benefits most when the most number of brains have access to the most number of opportunities. Opportunities – no matter how small – arise everyday, but have to be declined or ignored as the indebted cannot take risks.

A free man or woman who isn’t living pay-check to pay-check may take the opportunity to retrain and could end up inventing or doing something that changes the world – the next Jeff Bezos, Tim Berners-Lee, Elon Musk or Martin Luther King.

This may sound unlikely but when millions of people are liberated from debt, all it takes is one.

A cancellation of debt would close the opportunity gap. As it stands now, the poorest of people are likely to stay poor, and in many cases it can be a seemingly small sum of debt that entraps them.

To us, credit card debt of £2,200 might seem inconsequential, but to someone in poverty it can be the chains that enslave them.

Another argument for the forgiveness of debt is that some debt is, in a way, forced upon you without being properly educated about it, such as student loans.

There does need to be a level of personal accountability but student debt is practically given to kids without proper direction. Nowadays we consider ourselves well versed on money but at 18 we didn’t have a clue. Is that fair?

Another example of when debt is practically forced upon you is through mortgage debt.

We all need to have a roof over our heads and yet UK governments have allowed housing costs to spiral out of control.

Successive governments of both parties have not done enough to increase the housing supply, which would have kept the cost of a house down to more affordable levels.

As a result, people are enslaved to mortgage debt though most of their adult lives.

When everyone is indebted, they are unable to spend, forcing trade and the economy to grind to a halt.

How Can Debt Be Cancelled?

There are many ways that debt could be cancelled, both directly and indirectly.

The direct way would be that you no longer have to pay the debt and it is simply written off. It’s probably safe to assume that the lender would not be too impressed with this as they would lose out. We think this is a non-starter.

The immediate damage it would cause would likely destroy our economic system, which we’ll get to soon.

A more plausible solution would be to cancel the debt but at the same time have the government reimburse the lender.

In effect this would be a hidden tax, as personal debt would be lowered but public debt increased. Public debt is owned by everyone and the middle classes would bear the biggest burden through likely higher taxes.

On the other hand, if the magic money tree of Quantitative Easing can be sustained a little more this could be one way to do it – at least to pay off some of the debt. Let us know in the comments what you think about this.

An indirect way would be for the government to gift money to everyone to spend on what that want as they have done over in the US with their stimulus cheques.

Large numbers of people would choose to spend this on paying down household debt but like the previous idea, this has the problem of increasing public debt, which as discussed some people consider not to be a problem at all. We certainly consider public debt to be the lesser of the two evils.

Why Debt Shouldn’t Be Cancelled?

Someone will lose out. The borrower owes money to the lender. That lender expects to be paid. If the lender loses out, then they will never lend again, or expect excruciating interest rates when issuing loans, to factor in the additional risk of debt cancellation.

This would cause a collapse in our economic system, which is why it’s a non-starter. Without the option to borrow it would cause a momentous slowdown in the economy.

It’s the lenders who finance business and entrepreneurs. These businesses and entrepreneurs create the jobs and opportunities but if they lose out, the jobs go, the wealth goes and the opportunities go.

Even if the government reimburses the lender, the British taxpayer has to pick up the bill.

Why should someone who hasn’t incurred the debt and has not had the benefit of it be forced to pay the cost? In the case of student loans, why should someone who didn’t go to university pay for those who did?

Perhaps the most important reason not to cancel debt is because it would set a dangerous precedent.

Currently, we all know that if we dig ourselves into a hole we have to dig ourselves out. We all must take accountability for our actions. This might be a painful lesson but it’s worth it.

If there was one debt bailout, then people would expect it again. It would encourage wasteful and frivolous spending, and the forgiveness of debt would teach people all the wrong lessons.

Has There Ever Been A Debt Jubilee?

When doing the research for this article, most of the articles we came across were rambling on about debt jubilees that took place in biblical times, as if it had some sort of relevance.

What we want to know is have there been debt jubilees in the times since we lived in straw huts and traded 2 cows for 1 camel.

Well, there have been modern-day debt jubilees. According to moneyweek.com, one took place in 1948, when the Allied Powers replaced the Reichsmark with the Deutsche mark.

They wiped out 90% of government and private debt and paved the way for West Germany’s economic miracle.

Should debt be written off and if so, how? Let us know in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

How and To Invest In China Stocks From The UK

One in six people on earth live in China, with populations of each of China’s mega regions by themselves the equivalents of other major countries. But their stock market is overlooked by western investors.

In 2020, Chinese companies’ market capitalisations hit $10trn USD, in second place behind America’s $38trn. Despite this, China typically only gets allocated around a measly 5% in world tracking ETFs.

A lot of this is to do with the shadowy way in which the Chinese government controls the stock market, keeping the volumes of shares that are available to foreign investors artificially suppressed.

But with China expected to be the world’s biggest contributor to economic growth through to 2030, it is not a region to be side-lined. But how should you invest in China and ride this wave? Let’s check it out!

Don’t forget to scoop up free stocks, cash and other discounts when you open an investing account through any one of our many partners on the Offers Page. These include Freetrade and Stake, who are giving away free stocks!

Why You Should Invest In China

China has exploded in the last couple of decades, mostly thanks to the government’s creation of city hubs and massive investment in infrastructure, including skyscrapers, road networks, air and rail transport and massive expansion of factories and fossil fuel harnessing.

And even staunch communists have found a way to embrace capitalism, with American consumer products, internet access and smart devices helping millions to join the middle classes.

China went from a nation of cyclists to the world’s biggest car market in a matter of years, and are now also the world’s largest smartphone market, and set to surpass the US as the world’s biggest retail market by 2021.

Endless Growth

China’s growth is seemingly unstoppable. While the rest of the world embraced recessions in 2020, China went ahead and found the V-Shaped Recovery that had eluded everyone else.

China is expected to be the only G20 economy to grow in 2020.

V-shaped recovery found in China

The global economy is expected to contract by around 4-5% in 2020 according to the IMF – the worst downturn since the Great Depression. China, meanwhile, has bounced back strong.

But despite sweet growth and a strong economy, its stock market remains underdeveloped.

How You Can Invest In China

Investing in China poses a logistical problem. Their government wants to control foreign ownership of Chinese companies, and makes it tough for outsiders to plough money into their stocks.

Of course, this damages China and holds it back, but you can’t expect communists to fully embrace capitalism overnight. They’re slowly getting better at running a stock market, but they have a long way still to go before they reach Western standards.

In their efforts to smush together 2 opposing ideologies, they’ve come up with a complicated class system of shares, with some tightly controlled, and others open to everyone.

The main types, A-shares and B-shares, are the shares of China-based companies that trade on the two mainland Chinese stock exchanges, in Shanghai, and Shenzhen.

A-Shares and B-Shares

Historically, China A-shares were only available to mainland citizens, due to China’s restrictions on foreign investors.

This is still mostly the case, with exceptions now for big institutional foreign investors like banks and fund providers, including our favourite ETFs providers – iShares, Vanguard and Invesco.

These big institutions have something called an RQFII qualification, which allows them to buy A-shares.

The other share classes in theory are open to everyone these days, and can be bought by foreigners, though you may struggle on UK platforms.

These include China mainland B-Shares, as well as H, Red Chip and P Chip share classes which trade on the Hong Kong stock exchange.

ADRs

A modern development is that many of those elusive A-shares can now be bought indirectly through American exchanges, using American Depositary Receipts, or ADRs.

Note however that this is a certificate from a bank that represents the stock you’re buying, not the physical stock itself.

A qualified U.S. bank will purchase the real A-shares from the Chinese exchanges, and hold onto them, but list ADRs for that stock on the NYSE or the Nasdaq – which you can then trade.

One other convenient option you have to get exposure to China is to buy an ETF – more on this shortly.

Some Of China’s Biggest Stocks

The Great Firewall of China has long kept out Western technology companies from getting established within its borders. You won’t find Amazon there, but you will find Alibaba and JD.com.

You won’t find Google, but you will find Baidu. Instead of Facebook and Whatsapp, they use Tencent’s QQ and WeChat.

The point is, these companies are as important for China’s 1.4bn people as the FAANG stocks are for us in the West, and at least the following 3 should make their way into your portfolio in one way or another.

#1 – Tencent [SEHK:700] (Market Cap $416bn USD)

If you’re investing in Facebook for the potential that social technology has to shape the future, then you should want to own Tencent as well.

Facebook serves 2.7 billion people – Tencent similarly serves another 1.2 billion people, with almost zero overlap between the two. A portfolio including both of these giants covers most of the world’s adult population.

Tencent Holdings does not have an ADR listing in America, so look to the bigger platforms like Interactive Investor to buy Tencent shares on the Hong Kong Stock Exchange.

#2 – Alibaba [NYSE:BABA] (Market Cap $495bn USD)

Alibaba is the e-commerce company in China, their equivalent of Amazon as a one-stop-shop for everything.

And similar to Amazon, they are also leading the way with their cloud computing service, Alibaba Cloud.

They also own a large stake in Alipay, a major payment processing service used by 700 million people in China.

If one company personified the Chinese march towards the middle class, it would be Alibaba. You can find it listed on the NYSE as an ADR.

#3 – JD.com [NASDAQ:JD] (Market Cap $73bn USD)

A fierce rival to Alibaba is JD.com, far smaller in market cap but poised to grow, with a logistics and delivery service the equal of Amazon’s.

They offer a same or next day delivery across China, and have similar warehouse robotics and drone technology.

JD and Tencent operate as close partners, allowing JD to use Tencent’s social media apps as part of its shopping network. JD is listed on the NASDAQ as an ADR.

The Risks Of Investing In China

There are risks when investing in foreign countries: currency risk, regulatory issues, transparency, volatility, corruption, and possibility of war, to name a few. China has 3 key risks.

#1 – Political

The shady communist government could nick your money. It’s not likely, but it’s not inconceivable either.

Another way it could upset your portfolio is through its ability to crackdown on companies at will if they step out of line.

This happened to software company Momo in 2019 who had its Tantan dating app forcibly removed from app stores.

#2 – China Has An Underdeveloped Stock Market

But… it is improving, and there has been real progress in the last several years. China itself doesn’t have much of an institutional investing sector, and it’s A-shares market used to be 99% owned by normal people – retail investors – which led to the Chinese stock market behaving like a casino.

Now it is around 18% owned by institutional investors since throwing open the doors to approved foreigners, and is gradually becoming more stable.

This still stands in stark contrast to truly open markets like Hong Kong, the US and the UK, which are dominated by big investment banks.

Institutional investors are less reactive to short-term news, have better analysis tools and move in and out of positions slowly to manage profits, by keeping prices from moving too fast – in this way bringing order to a stock market.

While retail investors often trade on rumours, causing stocks to be significantly under or overvalued.

A study by Bloomberg in 2015 found that more than two-thirds of new Chinese investors failed to graduate high school – many investing with borrowed money based on faith in the government.

#3 – Problems Analysing Chinese Stocks

China has very different reporting standards to the UK and US, so understanding a stock’s balance sheet is trickier.

There is also believed to be a higher potential for fraud in their financial system, so less trust can be placed in a set of accounts.

The Best Way To Invest In China

We believe the best way to invest in China is through an ETF, and to forget individual stocks.

To get proper exposure to the China market, the right ETF can buy you ownership of all major stocks, including A-shares.

The MSCI China Index

There are a great number of ETFs and indexes that focus on parts of China, but this index gives us the full coverage we need.

It covers large and mid-cap China A-shares, B-shares, H-shares, Red chips, P chips and foreign listings such as ADRs. With 714 constituents, the index covers about 85% of the China equity universe.

ETFs that cover this index are few and far between. The cheapest one for UK investors is the Lyxor MSCI China UCITS ETF (LSE:LCCN), with an OCF of 0.29%.

MSCI China performance

Look at that growth. China is classed as an emerging market, but has been significantly outperforming the rest of the emerging markets.

MSCI China momentum

This chart shows that China in blue has much higher momentum behind it than emerging markets as a whole, the yellow dot. A higher momentum means investors are backing China.

The MSCI Emerging Markets IMI Index

Another, cheaper way to get this same coverage is by investing in an ETF which tracks the MSCI Emerging Markets IMI Index.

China makes up 37% of the index, and the China part is an exact copy of the MSCI China Index which we just covered.

The ETF we use is the iShares MSCI Emerging Markets IMI ETF (EMIM), with an OCF of just 0.18%, and a typical spread of just 0.11%.

You may want to hold the Emerging Markets ETF, and top it up a little with the China ETF if you felt like you needed more China in your life!

ETFs and China

Although institutions can buy A-shares, many index providers choose not to include 100% of their value, as A-shares still pose a trust and volatility problem.

MSCI EM Index (China evolution)

It was as recently as 2018 that MSCI started adding China Large and Mid-Cap A-shares to its Emerging Markets and China indices, increasing the holdings by many hundreds.

It is adding them in on a gradual basis, starting at 5% of their market cap in 2018 (being 1% of Emerging markets as a whole), and quadrupling to 20% in 2019, where it sits now (being 4% of the Emerging Markets).

If China becomes a free and open market and A-shares increase to full inclusion in the index, China would make up almost half the value of the Emerging Markets.

What We Do

For now, we feel the risk is too high to excessively ramp up China in our portfolio, and will stick to the MSCI Emerging Market IMI Index allocation, which incorporates the MSCI China index.

Mindful of growth potential, but also of Chinese government shadiness, we like to overweight the emerging markets slightly in our portfolios, which puts China at around 6-7% of the total equity for now.

This will be naturally increased as MSCI adds more A-shares into the index, and as China continues to grow.

How are you investing in China? Let us know in the comments below.

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

Triple Your Pension Income – Optimal Safe Withdrawal Rate

How big does your pension pot need to be? The answer comes down to how big your income needs to be.

A basic retirement income doesn’t actually need to be that big – remember you’ve likely nearly paid off your house and sent the kids off packing by the time you can legally draw your pension.

Which.co.uk says the average pensioner spends just £12,500 a year.

Using an inflation linked lifetime annuity with Aviva, shockingly you’d need a pension pot of £700,000 to achieve this.

However, the average private pension pot for 55-65 year olds only stands at £105,000, which translates into a meagre £1,900 a year income using an inflation linked annuity.

The pathetic returns on annuities means that if you’re still young, you need to either start ramping up your monthly pension contributions big-time, or know how to squeeze every last penny out of your pension pot by using the stock market.

In this article we’ll show you how you can triple your pension income by trusting in the stock market, and for all you under-55s out there, hopefully get you thinking about whether you’re putting enough aside for retirement in the first place.

The New Approach To Pensions

It used to be that on retirement day you would legally have to buy an annuity with your pension pot. No longer. You still can, but the returns are a joke.

The Annuity approach pays you an income by swapping your pension pot for an insurance product – it’s the low-risk, terrible-return approach that guarantees you a basic income.

How basic? Well, to confirm what we suspected about annuities, we ran a quote through Aviva for the average UK pension pot size of £105,000 and were quoted a £1,900 annual income, inflation linked.

That’s equivalent to a 1.8% rate of return, but with all your capital surrendered to the insurance company – don’t let them have it!

The new approach to pensions is the Drawdown method – continuing to hold investments with your pension money, and drawing an income from them – rather than seeking certainty from insurance products.

The drawdown method weighs likely market returns against your likely lifespan, and trusts in capitalism to see you through. The rest of this article assumes we follow the Drawdown approach.

Risks Of The Drawdown Approach

If you get the Accumulation stage a bit wrong for a while, you can always course correct.

But in the Withdrawal stage, being old and possibly infirm, you probably can’t just go back and get a job if your pension income is insufficient to live on. You’re stuck with the cards you’ve dealt yourself!

You’ll also need a plan for managing longevity risk – the risk that your cash will run out before you pop your clogs. And finally, there’s sequence risk.

Sequence Risk – The Risk Of A Bad First Decade

Getting a good rate of return is more important in the early years of retirement.

We know the stock markets average around 5% returns after inflation – that’s 8% nominal returns minus 3% inflation. But that’s just an average.

Here’s 2 scenarios. In both, we retire at the earliest possible pension age for our generation, age 58, and have a good innings until age 88.

Fig.1 Sequence Risk (2 Scenarios)

Scenario 1: In the first 10 years your investments perform terribly, returning around 2% after inflation. We get to enjoy some good times in the decade before we croak, at 8% over inflation.

Scenario 2: Here it’s the opposite, with the good times happening early on and our final years spent grumbling at the news and chuntering that the young-uns are messing everything up: “those damn kids!”

So what’s the difference? In Scenario 1, we run out of money at age 76. In Scenario 2 we outlive our money.

Safe Withdrawal Rates

To make sure we don’t run out of money, some clever boffin (who we’ll get to soon) came up with the concept of a safe withdrawal rate – the amount you can cream off the top without damaging your pot.

You might have heard about the 4% rule. This is the amount you can withdraw safely from an American portfolio. It’s the amount you take out in year 1, and then you adjust it for inflation thereafter.

UK researchers might quote you closer to 3%.

This is because the UK stock market has underperformed the US on average by around 1% over the last 100 years, and bonds by around half a percent.

But these academics are living in the past – there’s no barrier now stopping UK citizens owning a majority of US market funds instead of UK ones!

Fig.2 UK Safe Withdrawal Rate is 3.1% (source: Abraham Okusanya, Beyond The 4% Rule)

Here’s the UK funds version – there are 86 blocks of 30-years between 1900 and 2015. 1900-1929, 1901-1930, 1902-1931, and so on.

We can see that the worst-case real-world scenario was 3.1%.

Pensioners using this rate would have survived financially through 2 world wars, the Great Depression, several recessions and the risk of nuclear war, without denting their portfolios at all!

A similar history applies for US funds, at a safe withdrawal rate of 4%.

Layering The Cake

The clever fellow who came up with the Safe Withdrawal Rate, Bill Bengen, suggested that it can be increased by adding layers like you would to a cake.

You can take that 4% and ramp it up quite significantly by making your retirement plan smarter.

Layer 1 – Adjust For Spending Patterns

Older people spend less. It’s a fact. New retirees in their 50s and 60s will spend about 50% more than they spend by age 80. We should recognise this in our retirement plan.

Here’s a tried and tested way to do this gradually: if you skip your inflationary income rise on every market down-year – that’s on average once every 4 years – history shows you could have added 0.6% to your initial withdrawal rate.

Layer 2 – Asset Allocation

The 4% rule is based on a 50/50 portfolio split of equities to bonds, but according to the research, you could sack off bonds, and have 100% allocation to equities instead. “Blasphemy”, we hear you say. “Pensioners need bonds to stabilise their pension!”

Except, interestingly, the history of the last 115 years tells us that a 100% stocks portfolio would have survived with a higher safe withdrawal rate than one split 50/50 stocks to bonds according to Bengen’s models – 0.5% higher.

But we do hear you. We ourselves probably wouldn’t want 100% in equities in old age, even if it does have the best history. We’d sleep better at night with some diversification.

Layer 3 – Small Caps

Further studies show that having 25% of your portfolio in small-cap stock funds over the last hundred years allowed for a higher withdrawal rate even in the worst years.

Doing this would have in fact added 0.4% to the safe withdrawal rate.

Layer 4 – Probability

This is the final layer, and up until now the cake could be baked so as to remain whole for your lifetime. But this final layer accepts that you won’t live forever – the longevity risk.

By running 10,000 simulations of different periods of stock market history, it’s been calculated that adding an extra 1% to your initial withdrawal rate gives an 83% chance that you won’t run out of money.

And that’s increased to an 87% chance of success when we factor in the high chance of dying before age 88 – i.e. 30 years after retiring at 58.

That means 13% of the time, this strategy will fail – in almost all cases, it will be due to sequence risk – the risk of having a bad first decade.

So, failure doesn’t mean you just keep ploughing ahead – you’ll get an early warning from the markets and course-correct in the early years, maybe by downsizing your home or living less lavishly to make up the difference.

Whether a much better lifestyle in retirement is worth the 13% risk of having to course-correct is of course your call to make.

So… How Big Does Your Pension Pot Need To Be?

Let’s add all that up. Starting with 4% invested largely in US funds, we add 0.6% to recognise we spend less when we’re over 80, we add 0.5% because we’ve sacked off bonds, we add 0.4% for having a quarter allocation to small-cap funds, and we add 1% in exchange for a 13% chance of course-correction.

That’s 6.5% total; or £6,800 from the average £105,000 pension pot. Still not enough! But triple what you’d get with an annuity (£1,900); or double the 3.1% UK unadjusted withdrawal rate (£3,300).

Here’s how big your pension pot needs to be under each approach to give you just £12,500 per year:

  • Annuity @1.8% = £694,000 Pot
  • UK Standard SWR @3.1% = £403,000 Pot
  • US Adjusted SWR @6.5% = £192,000 Pot

The average 55-65 year old therefore has about half as much saved up as they actually need for a basic retirement using the highest risk approach – and nowhere near the amount needed to use a low risk annuity.

Should You Use Such A High Withdrawal Rate?

History tells us that this works, and the rates are designed to protect you from the worst-case scenario.

But you also have to be able to sleep easy at night. So maybe somewhere between 4% and 6.5% then, depending on your attitude to risk.

Ideally though, and what we plan to do, is build up such a large pot that you don’t need to withdraw anywhere near 4% and still live very comfortably. This only happens by hustling now.

Building The Pot

Hopefully this study highlights the dangers of neglecting to build a sufficiently big pension portfolio.

And it’s important to have visibility over it so you can make sure your future is being managed properly.

We’ve both consolidated our old work pensions into SIPPs for just this reason. Left unchecked, they could otherwise be poorly managed by workplace pension providers as we proved in this video:

YouTube Video > > >

By using a single SIPP to consolidate your old pensions, you can tailor your growing retirement fund to your risk profile, reduce your ongoing fees, and have oversight of the total balance – so you can easily check if you’re on track.

We looked at the Nutmeg SIPP in that video, and we think it’s one of the best for a set-and-forget strategy. You set the direction, and they do the rest.

We’ve arranged for you the first 6 months without fees when you open your SIPP through the link on the Offers page. Check it out and see if it’s the right SIPP for you!

How big is your pension pot? Is it going to be enough? Let us know in the comments below!

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

3 Super Stocks On Stockopedia For 2021

What’s our number one method of finding winning stocks – stocks that are going to generate double digits returns or more?

You’ve possibly seen us use Stockopedia before to present stocks but Stockopedia is so much more than that – it has a ton of built-in tools which serve you up portfolio-ready stocks on a plate.

We want to know whether the stocks that Stockopedia recommends are any good, because if they are, it would save you a lot of time picking stocks – you’d only have to investigate the highly rated stocks on Stockopedia to find market beating returns.

So, in this video we’re deep diving into 3 of the top-rated Super Stocks on Stockopedia as we enter 2021, using 3 of their most popular selection tools.

We’ll tell you whether we agree that they are worth investing in, and how you can find your own stocks using this ground-breaking service. Let’s check it out!

If you want to have a play around with Stockopedia for free, go to the Offers page for a link to a free 14-day trial. If you find you like the service, those who signed up with our link will also be given a 25% discount off their first year!

YouTube Video > > >

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

Weak Dollar? Buy Buy Buy! – Currency Risk & Investing

The pound has been strengthening recently against the dollar. Or, more accurately, the dollar has been weakening and losing value against most other major currencies, struggling throughout the second half of 2020 and into 2021.

A continued slide could put British investors in hot water – but also opens up opportunities.

But what’s going on? As the world recovers from the shock of Covid, investors are now putting on a brave face and seeking riskier investments away from the safety-blanket of the US dollar, according to the Telegraph.

This has weakened the dollar – a good thing for Brits buying American stocks, which now cost fewer pounds to buy.

And with a Brexit deal now looking nailed down, this should give the exchange rate of the pound against the dollar some stability.

In this article we’ll be looking at how currency risk has a big impact on your portfolio, what makes a currency get stronger or weaker, and where we see the dollar and the pound going from here.

And we’ll look at what you can do to protect your investments!

Stake are giving away a free US stock worth up to $100 to everyone who signs up the link on the Offers page. Be sure to check that out!

What Makes A Currency Strong Or Weak

#1 – Interest Rates

These used to be a big driver of exchange rates, but are probably having little effect right now, with the modern era of close-to-zero interest rates across all developed nations.

If the US were able to raise interest rates, the dollar would strengthen.

#2 – Economic Health

Institutions and banks tend to move invested money out of economies with a bleak outlook, into healthier ones.

The US is in no worse shape than the UK coming out of coronavirus, so this probably isn’t what’s happening now.

#3 – Currency Itself Is A Speculative Investment Class

Traders buy and sell currencies just like stocks. Brokers trade currency based on how they think it will move in the future, which moves the exchange rate.

#4 – Panic and Confidence

At times of panic – war, political upheaval, or plagues roaming the land – investors flock to what they perceive as safe havens. The US dollar is one of these.

When stock markets crashed in March 2020, the dollar got stronger against other currencies. When the panic passed, money flowed back out into the world.

Also damaging confidence are the current money printing programs in the West, the largest being in America.

The US central bank magics money into existence on a computer and buys bonds and other assets in the open market with it, resulting in more cash in the hands of banks, who lend it out.

Thus, more cash dollars end up floating around the economy. This is in addition to the US’s very generous stimulus cheques that have been conjured up for the majority of workers in America. This seemingly infinite supply of US dollars makes them less valuable, and weaker vs other currencies.

Why Currency Risk Matters

Currency risk is the chance of your investments losing money from moves in exchange rates. The share price of a stock you hold can even go up but you can still end up losing money if the currency swings against you.

Currency risk has a big impact on your portfolio, but many investors will not even recognise it as the cause of their poor performance.

You need to be thinking about currency risk when you plan out your portfolio. Even UK stocks are exposed to currency, with around 75% of revenues generated by FTSE 100 companies coming from outside the UK. That’s almost all revenues being in a currency other than the pound.

When exchange rates move, your stocks will either benefit or take a hit. The effect could be small or enormous, depending on events outside of your control.

A Good Century For UK Investors In US Stocks

This chart shows the declining exchange rate between the pound and the dollar since the 1950s – the pound getting weaker and the dollar stronger:

Fig.1 Exchange Rate History GBP to USD

This puts into some perspective the bounce we’re seeing since June 2020.

That strengthening dollar would have had the following impact on a UK investor investing in America’s S&P500 stock index over that time frame:

Fig.2 S&P 500 USD vs GBP chart

We’ve laid this graph out with the S&P500 priced in GBP on the right, being the orange line, and on the left, we’ve taken the exchange rate of 2.8 at the earliest data point – December 1954 – and made sure the axis is 2.8 times higher than the GBP side.

The result is a visualisation to scale of the difference between what US investors would have to pay, vs the ever-increasing price that UK investors had to pay to buy into the S&P500.

Had exchange rates stayed the same as they were in 1954, the GBP line would be equal to the USD line, costing £1,330 instead of more than twice this at £2,750 today.

This means 2 things.

#1 – Expensive To Buy

First, for UK investors buying US stocks at any point in the last 70 years, it was a relatively expensive time to do so.

More recently when the S&P500 crashed in March 2020, at the same time the dollar strengthened against the pound.

This meant UK investors were not buying the bargains they might have thought they were.

The US index fell by 34% between 20th Feb and 23rd Mar 2020 – but, Brits would have been disadvantaged by an 11% fall on the exchange rate buying at this time.

This shows that a stock can be cheap for buyers on one side of the Altantic, but not the other.

When an American YouTuber tells you that a stock is cheap, they mean it’s cheap for Americans!

A foreign currency like the Great British Pound will not be on their radar! Ignore them, and just watch Money Unshackled instead!

#2 – Currency Gains

Secondly, UK investors holding US stocks over the last 70 years would have ridden a wave of currency gains.

In fact, UK investors into the US would have received a double dose of growth over this timeframe.

The US’s S&P500 has outperformed all other major world stock markets since 1990 – beating some, like the UK, by a country mile.

So, owning US stocks would have given you better investments, and growth from the currency movements.

But the exchange rate could have moved the other way, like it looks to be doing now, at least in the short-term.

Impact On Investments If The Dollar Continues To Get Weaker

UK investors could take this opportunity to top up their American holdings before and if the dollar recovers.

For us globalists who already own a wide range of stocks from all countries, not just the US, our non-US stocks may be blown upwards on favourable headwinds as other investors pull money out of the US and store it elsewhere.

Fig.3 MU Ultimate Portfolio geographic split

This by the way, is our actual portfolio equity split, more info on which can be found here.

If you’ve ignored us and built a portfolio solely of UK stocks, your small cap stocks may now perform better from a solely currency perspective, as they have less US exposure.

But as we’ve shown, large caps who make a lot of their earnings overseas in dollars are less likely to benefit.

Impact On Investments If The Dollar Returns To Strength

The most obvious way to restore confidence in the dollar and send it back to strength would be if the US central bank stopped their folly of printing money without limit.

But that is like asking a scorpion not to sting you – as much as it might try not to, at the end of the day, it’s all it knows how to do.

Obviously, central bankers think money printing is necessary, but other experts like Ray Dalio say they’re just kicking a problem down the road. It might be better to take the pain and get it over with.

If the dollar does return to strength, which it probably will eventually because America is such a powerful economy, then you may have wanted to use this time to buy US stocks while they were on sale – relatively speaking.

Should You Fear Currency Risk?

Your time horizon matters. Short-term exchange rate fluctuations can be violent – as we saw around Brexit.

But long-term investors may have much less to worry about – many economists believe that currencies reach equilibrium over time and therefore exchange rate fluctuations tend to balance out.

And we’ve shown how UK investors would have missed out on American growth if they’d worried too much about the increasing buy price.

However, we know from looking at the last 70 years in Fig.1 that a directional trend can become engrained, so let’s now look at your options for reducing or eliminating currency risk.

#1 – Avoid

Just buy UK investments. Hopefully you see the pitfalls in limiting yourself to one market though, and this would not be our preferred way to run a portfolio.

And we’ve shown that avoiding currency risk in the UK market is almost impossible, dependant as it is on the Financial and Energy sectors, both hugely impacted by the US dollar.

#2 – Diversify

Instead of investing in one foreign country, invest in all of them. By owning assets in all currencies, global equities will naturally hedge each other as rising currencies are offset by falling ones.

This method gets our vote.

#3 – Currency-Hedged ETFs

This can be a very cheap and straightforward way to remove currency risk.

Currency-hedged ETFs offset the effects of exchange rates on returns, cancelling out any losses from falling overseas currencies.

Sadly, it also cancels out any win you might have taken from rising overseas currencies too.

As indeed would have happened if you’d chosen to hedge the S&P500 over the last 10 years, instead of accepting the risk and taking the much higher unhedged gains.

Currency Hedged ETFs will usually have the word “Hedged” in their title.

Future Outlook

So which way is the dollar going? The US has said it will keep injecting at least $120bn of credit per month until “substantial further progress has been made” in the recovery – by which it means both full employment, and inflation over 2%.

When this will be is anyone’s guess, and until then the dollar will presumably continue to weaken.

Economist Jim Rickards, bestselling author of The Death of Money, estimates this is 5 years away, which could mean $7trn more money printing still to come.

Wealth manager Iboss said: “We expect the dollar will continue to weaken … because the American government and central bank will continue pumping money into the market to help the economy.”

Another wealth manager Seven Investment Management said the dollar could weaken against the pound in the longer term, regardless of Brexit, and with the rollout of Covid vaccines, money might continue to flow out of safe haven currencies like the dollar.

So it looks like a weak dollar, and bargain prices in the US market, may be around for a while yet.

How do you manage currency risk in your portfolio? Let us know in the comments below.

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

How Big Should Your ISA Be?| ISA Statistics

ISAs are the main investment and savings vehicle in the UK, and every year gov.uk publish a report that gives us some fascinating insight into the investing and saving habits of the UK as a whole.

Throughout the year, ISA managers send HMRC a wide range of data regarding ISAs and today we’re looking at what was last published by gov.uk in June 2020.

Reading the 33-page report is probably not the most exciting of reads, so we’ll forgive you if haven’t gotten round to reading it yet. But now you don’t need to as we’ve handpicked all of the most noteworthy points and put it into a digestible 10 minute video.  And of course, as we go through we will share our thoughts on each point.

We’ll look at some intriguing data on the number of ISA account subscriptions, the total amounts saved and invested, average amounts subscribed, market values, and how much people save based on their salaries.

We’ve also got savings data by age and gender and more. Let’s check it out…

If you’re looking for the best Stocks and Shares ISA, then head over to the Best Investment Platforms page. There you’ll find a full breakdown of all the major investing platforms in the UK to help you choose the one that’s right for you. Some like Freetrade are even giving away free stocks when you use our link!

YouTube Video > > >

Check out the MoneyUnshackled YouTube channel, with new videos released every Monday, Thursday and Saturday:

The Ultimate ETF Portfolio – Low Fees, Low Taxes, High Returns

We’re always looking to build the perfect ETF portfolio and we think we’ve now come pretty close.

While the overall theme is similar to what we have talked about before, the portfolio has gone through a total makeover – and the end result may surprise you. Spoiler – there’s no room for Vanguard.

In this article, we’re going to share with you the exact portfolio that we’re building going forward.

It’s designed to be simple, low maintenance, low cost, low tax, and extremely transparent, so we know exactly what we’re investing in. Plus, it should be very profitable!

We’ll first look at why there’s no room for Vanguard, and then go through each ETF in turn, why they’re in the portfolio, and their historic returns. Let’s check it out…

All these ETFs are available on Interactive Investor. Anyone signing up through this link helps the website, so thanks in advance.

No Vanguard

Probably the most surprising part of this ETF portfolio is the absence of any Vanguard ETF. In our mission to simplify the portfolio, drive down taxes and to ensure wide coverage across market cap size we have decided to omit Vanguard completely.

This is despite Vanguard having some of the lowest cost ETFs available. The main reasons we dropped Vanguard are as follows:

Reason #1 – No Synthetic ETFs

Many greedy countries around the world deduct a despicable tax from your dividends called Dividend Withholding Tax. For some countries – but not all – synthetic ETFs allow you to circumvent this tax, giving your returns an immediate boost.

Most importantly, synthetic ETFs manage to avoid US withholding tax, and it wouldn’t be an ultimate portfolio without a large allocation to the US, so it’s crucial to eliminate this unnecessary drag on performance. This cannot be achieved with Vanguard!

Although these exact ETFs are not in the portfolio, the comparison clearly demonstrates the effect of withholding tax on US stocks:

S&P 500 ETF comparison table

With US stocks typically yielding around 2% and a 15% withholding tax applied on this, using synthetic ETF’s should benefit the US holding of a portfolio by 0.3% every year.

Reason #2 – FTSE Indexes

Vanguard track FTSE indexes – in this context, FTSE isn’t referring to just the UK market, but is the name of an index provider for many global indexes.

Tracking FTSE indexes isn’t a problem per se but almost all the other ETF providers track those from MSCI. Therefore, you have far more choice if you were to pick just MSCI-tracking ETFs, which our ultimate portfolio does.

It’s not ideal to build a portfolio mixing index providers because MSCI and FTSE categorise countries differently and also include different market cap sizes.

So, by mixing index providers, you can accidentally double up on certain stocks and countries or miss out on others completely.

For example, if you chose an MSCI Pacific ETF and a FTSE Emerging Market ETF you would have no exposure to South Korea. If you did it the other way round you would double up your exposure to South Korea.

Reason #3 – No Small-Caps

Small-caps have outperformed larger and mid-size stocks over the long-term. If this trend continues you will wish you had allocated more of your portfolio to small-caps, but Vanguard do not have a small-cap ETF.

Also, MSCI and FTSE have different definitions of what is a small cap and what isn’t, so you would duplicate some positions.

Inside The Ultimate Portfolio

#1 – Invesco MSCI World UCITS ETF (MXWS)

The largest position in the portfolio, making up 64% of the equity, is the Invesco World ETF, which tracks the performance of 23 developed markets including the UK, Switzerland, France, Canada, and so on. It has a dominant position in the US at around 66% weighting with the next biggest, Japan, only making up 7.7%.

This might sound like an excessive allocation to the US, particularly if you’ve seen slightly lower allocations from other world ETFs, perhaps the Vanguard FTSE All-World ETF.

This is because this Invesco ETF is just tracking the MSCI developed markets. We will be adding in a dedicated emerging market ETF for that exposure which will bring these developed allocations down for the portfolio as a whole.

Even then though, you might think that’s still excessive to invest so much in the US, but it just reflects the size of the US stock market relative to the rest of the world.

It’s the US where you’ll find the lion’s share of the biggest and best companies in the world – Apple, Microsoft, Google, Coca-Cola, McDonalds, Johnson and Johnson. The list goes on.

So why the Invesco MSCI World ETF? First, it’s a synthetic ETF and so gives us the tax advantages that we already looked at.

It does cost quite a chunky 0.19% but at that price point it’s more important to look at the returns you get, rather than what you pay. Having said this, it’s still amongst the cheapest MSCI world ETFs and has the best returns over the last 3 years.

#2 – iShares MSCI World Small Cap UCITS ETF (WLDS)

This beauty is going to provide the supercharged small-cap growth for the portfolio. We have opted for this ETF to make up 18% of the equity – a lower allocation than the large cap ETF due to the risk but large enough to have a significant positive affect on overall returns.

Where the MSCI world index covered 85% of the market cap of developed countries, this world small cap index covers the next 14%, so combined make up 99% of the market cap in each developed country.

This index is also dominated by US stocks making up 56% of the ETF. Japan and the UK come in second and third with weightings of 11.2% and 6.7% respectively.

This iShares ETF is unfortunately physically replicated, rather than synthetic, so we will be suffering from US withholding tax but at the small-cap end of the market there is less choice.

In fact, there’s only one other ETF tracking the MSCI World Small-Cap Index and that costs a fair bit more. The iShares ETF we’re investing in costs 0.35%.

Nevertheless, despite the hefty fee of the iShares version and likely withholding taxes dragging on performance we would expect this to kick ass over the long term.

#3 – iShares Core MSCI Emerging Markets IMI UCITS ETF (EMIM)

Another area we want to get extra exposure to is the emerging markets, particularly China, as we expect these countries to outperform.

We have decided for our portfolios to allocate 18% of the equity to this ETF – more EM exposure than what you would get from a bog-standard world tracker.

This index is heavily weighted to four countries, which make up around 73% of the ETF between them.

The largest – China – by itself has a weighting of 37%, and we would expect this to continue increasing proportionally as China’s market develops and becomes more accessible.

With the developed markets we chose to use two separate ETFs – one for large caps and one for small caps. We wanted to do the same with the emerging markets for the flexibility but unfortunately, the cost of a small cap emerging market ETF is too expensive with the cheapest costing 0.55%.

Instead, we’re investing in a single emerging market ETF which covers both large and small caps. The iShares Emerging Markets IMI ETF is awesome, and covers 99% of the market cap, which is what the IMI in the name signifies.

This ETF costs just 0.18%, which we think is very reasonable considering the stock markets that it gives you access to.

Precious Metals

#4 – iShares Physical Gold ETC (SGLN) and #5 – iShares Physical Silver ETC (SSLN)

Gold and Silver are real money and have a history of protecting a portfolio against economic turmoil – the kind of turmoil that we seem to be experiencing far too often these days.

When world governments print trillions of dollars’ worth of currency, they are forgetting that fiat currencies like the US dollar, the Euro, and the British Pound are only based on belief.

Investors are choosing to protect their wealth from destruction by investing in precious metals like gold and silver. Stocks tend fall in bad economic times and precious metals tend to rise, therefore contribute to a well-diversified portfolio.

Both these ETCs are low cost with the gold one costing just 0.15% and the silver one costing 0.20%. They provide a cheap way to hold physical gold and silver without having the risk, cost, and upheaval of storing it yourself.

For this portfolio we want 10% of the entire portfolio to be allocated to precious metals, and with gold the default choice and with the most demand we have gone with 7.5% gold and 2.5% silver. We may tweak this percentage over time in line with wider economic factors and trends.

Portfolio Overview

This portfolio has been built by us, for us, and if you plan to copy it you might prefer to modify it slightly, so it meets your needs. Some of you might like to add in Bonds for example.

Or use these ETFs as a baseline that you build upon, maybe adding areas you see value in such as the UK market, Oil, Renewable Energy, or whatever else you’re bullish about.

Here is what the portfolio looks like:

Portfolio table

In our portfolios we also like to hold some P2P Lending and Cash.

If you’ve been paying attention and adding up the allocation figures as you went, you might have discovered that they didn’t add up to 100%.

That was because the equity allocations we gave earlier was just for the equity alone. We have opted to allocate 75% of the overall portfolio to equity causing the equity allocation to be reduced overall. Hopefully, that is clear from this table.

The overall OCF comes in at a tidy 0.21% and the portfolio is as tax efficient as we could reasonably make it. Between the 3 equity ETFs, we’re covering 99% of the developed and emerging markets across large, medium, and small-cap stocks.

We also have some flexibility in how much we allocate to each of these key positions, and crucially it is an easily maintained portfolio.

Portfolio Overview – Geographies

Here is the portfolio by region based on the exact allocation we used:

Geographies pie

As we’ve already touched upon it is overwhelmingly weighted towards North America, which is mostly the US with a little bit of Canada.

You’ll notice that the UK is relatively small but as we discussed recently in a dedicated home bias video, linked below, we see no substantial reason to overweight the UK.

If we look at the big countries it looks as we would expect for coverage of the major economies, perhaps with a little too much Taiwan and Korea. But to avoid overcomplicating the portfolio it’s good enough.

Portfolio Overview – Sectors

We’re not too fussed about the sector breakdown as long as it is widely diversified – and as we have built a world portfolio, we would expect this.

Here is the portfolio by sector based on the exact allocation we used:

Sectors table

We’re big fans of technology, so it’s good to see this take up such a prominent position at 20% of the equity allocation. With US tech stocks like Google, Apple and Microsoft so dominant these days this comes as no surprise.

The Energy allocation seems quite low, but this is likely to be due to the time of filming. Covid has caused oil stocks to tank and we would expect these to grow in relative terms as the economy picks back up.

Some people like to hold a substantial property allocation in their portfolios, so with Real Estate making up just 4% of the equity, if you’re one of them, you may want to add in a REIT ETF to increase this.

The Portfolio Historic Performance

History is a decent indicator of what we can expect in the future, but most of these ETFs only have a few years of history.

What we can do instead is look at how the indexes that they’re tracking have performed for as long as we can get hold of data, which varies for each index.

The World index has returned 9.7% annually over the last 51 years. Let’s hope we can see more of this!

The small-cap index has returned 9.5% annually over 20 years. This might look lower than the large caps but if we relook at the World index over the same 20 years, then that has returned 6.4% annually, so small caps have smashed their larger counterparts over the same time period.

The EM index over the same 20 years has returned 9.6%. If these 20-year trends continue then it supports having larger allocations to small-caps and emerging markets as we have done.

And finally, Gold has returned 5% annually over 42 years and Silver has returned 4.7% annually over 53 years, but at times have had decades-long bull markets, which we may be in the middle of right now.

What We’re Doing Now

We both plan to eventually move our ETF positions to this portfolio in its entirety, but this will be done gradually to keep trading fees to a minimum.

What do you think of this portfolio? Let us know in the comments below.

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

What Investors Should And Shouldn’t Focus on

Investing is a minefield at the best of times, and there are tonnes of potential traps that investors need to watch out for.

How do you pick the best stocks or best funds? How do you build a portfolio that is suitable for you and in line with your attitude to risk? Who can you trust? How can you minimise tax? What are acceptable fees? This list of questions could go on forever.

Rather than come to a grinding halt due to analysis paralysis and end up doing nothing, we’re going to share with you the key areas that we think investors should focus on, and likewise the main noises that you should ignore.

Whether you’re a seasoned pro or an investing noob, there’s a world full of distraction out there and we’re going to cut through the noise.

FYI: The Stake platform are giving away a free US stock worth up to $100 to everyone who signs up via our link on the Offers Page!

Part 1 – Market Noises You Should Ignore

First up, a rundown of the major factors investors should not be focusing on, but which sadly tend to be the only things that many focus on.

Performance League Tables

You’re bound to have seen these before. You’ll find them in financial publications and newspapers.

What you usually see is a big list of funds and their performance over a few different time periods – usually ranked by 3-year performance or something similar.

Performance tables are our #1 biggest annoyance about the investment media, and one of the biggest nonsenses.

First of all, that performance is in the past and may just reflect a confined good or bad period, or fad, or short-term luck. Stock markets often move in cycles and assets, industries and fund managers fall in and out of fashion.

For example, renewable energy and electric vehicles are the craze right now and as a result funds that include them are doing very well.

So, if you were looking at a league table, funds focussing on UK equity, which wouldn’t have exposure to this would reflect badly in the table, but ESG funds would likely be sitting pretty near the top.

Whatever has led those funds to the top of the league table might not necessarily repeat. Track record is useful, but should only ever be used to start research, not conclude it. And a short-term league table is just a vanity project.

Only Looking At The Name

When buying individual stocks, a lot of private investors tend to buy stocks just because it’s a company they’ve heard of or their friends are buying.

If you’re reading about stocks, do you tend to ignore articles on stocks you don’t know and go straight to the big names? Of course! We all do, and we know we’re certainly guilty of this.

The financial magazines and publishers know their audience, which is why in magazines like the Investors Chronicle you have a big page on companies like Vodafone, but some unheard of stock that might be about to set the world alight only gets an inch of column space.

Don’t solely invest in companies just because you’ve heard of them, as a big name doesn’t necessarily mean it’s a good buy.

When we’re picking stocks we tend to use a stock screener like the one found on Stockopedia just to bring back a list of stocks. We may not have heard of these, but this is where the research begins.

Perhaps one way to unearth a hidden gem is to identify a consumer brand that you’re familiar with, and that you think is about to take-off – say Apple.

We picked them randomly, so don’t take that as a stock tip. Then check who supplies them.

Do this with either Apple or Android phones and you’d discover a company called Qualcomm. Now, Qualcomm is no small fry with a market cap of $168bn, but may have better growth potential than the big name brands, and could we well placed to take advantage of the growing list of devices that need processors.

Hot Stock Tips

Never buy a stock just because some guy or some publication said it was a buy. On the odd occasion that we talk about specific stocks, we always caveat it saying don’t buy this unless you do your own research.

One of the main reasons not to invest solely on stock tips is because knowing when to buy is the easiest part. It’s knowing when to sell that is the hard part, and when the profits are made.

For example, a few months back we were very confident with the short-term prospects of Jet2 – a UK airline.

Since we tipped it, for want of a better word, that stock went on return over 100%. Awesome. But how do you know when to sell unless the tipster continues to keep you updated?

On that note, Ben (MU co-founder) sold his position a few weeks back at a handsome profit. That doesn’t mean it’s a sell for you, but it no longer passes his investment appraisal.

Also, have you noticed how most stocks always seems to be a buy and only a handful are a sell?

Nobody except maybe the few people watching or reading who own the stock wants to hear about some company that is in a sell position. Therefore, the journalist or tipster has no reason to write about them.

There are so many buys because tipsters need to tip. Its what gets eyeballs on their content and gets them paid.

We won’t mention them by name but can you think of a particular website that says you’ll make a million pounds if you buy this stock?

They then seem to repeat the same article every day but with a different stock each time.

We’ve had great feedback by people saying how well they’ve done with the stocks we’ve mentioned and asking us to do more of this, but we won’t until there’s a stock worth talking about.

News

Listening to the news is such a tricky one. If you’re going with a passive index investing strategy, then you can ignore the news completely and your returns will probably be better because of it.

This is because the news is overly negative and fearmongering, again because that’s what sells. Presenting the world as a terrifying place grabs their audience’s attention, and keeping eyeballs on their content gets them paid.

Nobody would tune into the news if all they said was everything is ticking over nicely. But people do tune in when it’s some scandal, or catastrophic collapse in the economy, or some terrorist attack.

Ignoring the news might work fine for a passive strategy, but when picking stocks, you obviously need to know as much as you can about the company and the risks it faces.

Here you will have to just fine-tune your own news filter, and work out for yourself what matters and what is just noise.

Part 2 – What You Should Really Focus On

League tables, big names, pundit tips, the news cycle… all are recipes for disaster for long-term passive investors. If you focus on the following instead, you can cut through the noise and find real, sustainable returns.

Fees

In our opinion fees are one of the most important factors to consider. And you need to minimise them! Which is why if you watch our channel you will have seen how committed we are to slashing costs.

Between platforms, funds and market factors, fees can decimate returns.

For instance, a £30k investment over 30 years earning 8% will result in £272k profit.

The same investment but only returning 6% due to all manner of fees will only result in £142k profit. That’s almost 50% less! Fees. Matter.

In the past we have said that we think robo-investing is good for those who don’t want to manage their own portfolio.

The odd person has commented saying the fees are higher with robo-investors than do-it-yourself platforms, but our response to this is that you need to balance the fees with the amount of effort you need to exert and the knowledge you have.

We could save money by installing our own bathrooms, but it’s not the best use of our time as we don’t know how to do it and the builder can do it better. However, we do pick our own investments as we do know what we’re doing there and know how to slash fees.

So, fees should be kept as low as reasonably possible. Investment returns are variable and not guaranteed – but fees are certain, so it’s a definitely a focus area.

Taxes

We are obsessed with taxes or rather, paying as little as legally possible.

You should never let taxes stop you from investing, but rather should arrange your investments in a way that maximises after-tax returns.

This is often by reducing tax, but not always. Sometimes the tax matters less than the investment’s overall potential.

For example, when someone from the UK invests in US stocks, dividends will be subject to a 15% withholding tax. This on average works out to be an effective drag of about 0.3% per year, as the S&P 500 yield is around 2%.

While this is less than ideal, it would have been a terrible mistake during the last few decades to avoid US stocks and instead choose stocks from more tax friendly jurisdictions. Historically, US stocks have smashed other stocks markets. Therefore, focus on overall after-tax returns!

Risk

It’s okay to miss out on the mega returns if those stocks or investments are not suitable for your risk tolerance.

You will of course have seen most of the internet bang on about stocks like Tesla or Nio but these stocks are also just as likely to experience big drops as they are surges in share price. If you can’t stand the heat, get out of the kitchen!

When you make an investment, it’s important to understand how volatile the price is. Beta is a measure of a company’s stock price volatility relative to the market. By definition, the market itself has a beta of 1.

Tesla, a volatile stock, has a beta of 1.8. What this means is when the market moves by 3%, Tesla might move 5.4% – that’s both up, and down! Conversely, a stock like Proctor and Gamble has a beta of less than 0.4, so when the market moves by 3% P&G might move just 1.2% – less growth, but better in a crash.

Bear in mind betas are based on historical price movements so aren’t perfect, but they be can be a good indicator of how volatile a particular stock is.

Where You See The World Going Long-Term

It’s ok to look at the world around you and point your portfolio slightly towards the direction you think the world is headed in.

For instance, we believe the following to be true about the world today:

  1. It’s getting richer and people are living longer
  2. People are demanding ever greater convenience and smarter solutions
  3. Governments will continue to mess up their economies by printing money and increasing debt

We would always keep the majority of our portfolios as balanced and global, but might take advantage of our long-term outlook by creating small allocations, say 5% to cover each trend like this:

  1. Buy stocks in healthcare companies
  2. Buy stocks in tech companies
  3. Buy gold to protect against economic collapse

What do you think are the most important things to focus on when investing? Let us know in the comments below.

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