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Bloomberg Audio Studios Podcasts Radio News.
- [02:02]
Maren Thunberg
Welcome to Marantalks yous Money, the personal finance edition of marantalks Money. In these bonus podcasts we talk about the best strategies for making the most of your money. I'm Maren Thumbset Web and with me senior reporter and Money Distilled author John Stapek. Hi John.
- [02:14]
John Stapek
Hi Mel.
- [02:21]
Maren Thunberg
Now John, we are lucky. We get lots of comments and lots of questions coming into the show. There's all sorts of things that that people want to know more about and things that we haven't addressed they want us to address and things we have addressed that they think we've got. WR Perfectly reasonable. We're not experts on everything. So this week what we're going to do is going to delve into this mailbox a little bit and address some of the comments and the questions that we've been getting. Now the first one I am really, really interested in because we talk about this all the time. It's about flows, what makes market moves. Everyone goes valuations this valuations that geoploticals, blah, blah, it's flows. How much money is coming, how much money is going out, that's what makes the market go up or down. Supply and demand. Hello. So this one is about this. Hi there long term listener, appreciate the regular podcast, thanks very much. And his question is something he says he's been wondering about for ages. Have capital flows into the markets over the last six years or so changed and if so, how has that affected things? I mean he talks about himself as an example, saying he's in his mid-30s, didn't know anything about investing, never thought about investing pre pandemic. But during that, that sort of insane lockdown period when he had loads of time and nothing to do, suddenly he's paying attention, looking at crypto, looking at all the meme stocks and now he has an equity portfolio that he manages through sort of super low cost online broker. So it's an app. He can almost zero cost trades anytime he like 24 7, totally easy in a way that it absolutely was not even a decade ago.
- [03:42]
John Stapek
Yeah.
- [03:42]
Maren Thunberg
So does that ease, plus the sort of widespread awareness, social media, the endless memes, et cetera, that ease of doing it mean that flows into the market have massively increased and that as a result the market has just gone up and up and up. And the answer to that I would say very clearly is yes, absolutely.
- [04:01]
John Stapek
The most obvious example of this is all the stuff that happened with the meme stocks and the Gamestop. And something actually I found really interesting the other day is I was speaking to a friend, we popped over and had dinner with him. I was speaking to his wife and she was just fascinated by the Reddit thread, I think it's called Wall Street Bets. The one that originally started. Yeah. And I mean she wasn't a trader, she wasn't particularly interested in betting on stocks, she didn't a Robinhood account. But she just loved read in the chat on the thread. And I was just quite surprised because this was somebody who wasn't especially engaged in kind of trading or investment but was very aware of all of the kind of jargon around it.
- [04:44]
Maren Thunberg
We have numbers for this as well. If you look at the share of US household wealth held in equities is massive. It's up to nearly 60%. That's more than any other country. And of course the US is the biggest market. Those flows into that. That's extraordinary. And then there is a stat I saw the other day on retail share of trading every day in U.S. stocks. Right. That has doubled doubled in 15 years. So been 35 to 40% of all trading every day is retail investors, ordinary people buying and selling. And that's new. That's new. And this isn't during a time when people are stuck at home. And, you know, it's not a time even when Americans have piles of savings. Right. They've been running down their savings. So is there more flow, retail flow into the market, particularly the US Market? We're talking about the US Market here, into that market. And is that making a difference? I would say absolutely, because that retail army is going out and buying every debt, pouring money in. But of course, the important thing to say here is that that can reverse. And in the past, when we've seen huge retail excitement and relentless retail flows in the markets, when it has reversed, it's reversed really nastily.
- [05:51]
John Stapek
Yeah. And I mean, I suppose the other thing is that some of this stuff is hard to split out from the rise of passive in general and the kind of relentless increase in the amount of money that's just automatically getting stuck into markets in the form of kind of like pension accounts rather than trading accounts. But, yeah, definitely. Much as I dislike people describing retail as the dumb money, it isn't the dumb money.
- [06:21]
Maren Thunberg
I mean, there's lots of evidence that over the last 10 years or so, retail investors have outperformed institutional investors. And there is. You know, we've looked at that data before, John, but who was it? Simon Evan Cook produced all that data showing that while the average fund underperforms, the average active fund underperforms, the average retail investor is often in the fund that outperforms any. Sorry, interrupt again. I'm doing too much interrupting of you today. What were you going to say? You don't like the phrase dumb money,
- [06:48]
John Stapek
but you're quite right. I mean, I think it's more just. It's emblematic of enthusiasm and then kind of overall enthusiasm. So it's not the individual investors are daft, it's just that this is the hot area. And so people are attracted to it. And the more of that you see, the more it's kind of like, well, okay, but what happens when the enthusiasm runs out? It's felt like that for a while, though, to be fair.
- [07:15]
Maren Thunberg
Yeah. Okay. Anyway, so thank you very much, Daniel, for that question. And at the end of his question, he says, is this nonsense? Just a thought, Daniel. It's not nonsense. You're absolutely right. We think you're absolutely right. Anyway, okay, next one.
- [07:27]
John Stapek
Well, see, he's the smart one.
- [07:28]
Maren Thunberg
He. Exactly. There is no dumb money listening to this podcast. Okay, next one. Hi John and Marion. Keep the good work coming. Newsletters and podcasts are all great. Thanks very much. Everyone is beginning to learn how to get their question answered right. You know, full flattery up front and then it gets somehow floats at the top of the pile. Anyway, this is from Keith, Keith Harrison. Thank you for this. And he is writing in about nest. We did a whole little pod talking about nest, this big pension provider for auto enrollment recently and I'm actually just going to read his out because I don't really have anything to add to it. Here's the expert here. As a financial advisor, I come across NEST quite frequently and an interesting aspect of NEST is that you can't partially transfer your money out or transfer out if you're an active member of the scheme. So if the allocation to private assets, which is what John, you and I were talking about the other day, the fact that NEST is allocating this huge chunk of money, and I think we rather think maybe too much money to private assets at quite a strange time to do that. Anyway, if it's not your taste, it is very difficult to to get out. Your options are fairly limited. So he has given three options for people who listened perhaps to the POD we did the other day and thought, well, God, it's not quite what I want. The first one is speak to your employer, see if they will pay into an alternative scheme. It's unlikely, not very many people will. It's loads of payroll admin if everyone has their own scheme and it's difficult if you are demonstrating employer governance, etc. So ask but unlikely. Number two, opt out, transfer out completely, opt back in. Do this on repeat every so often, lots of hassle and you may miss some employer contributions along the way. You have time out of the market, etc. So that is one possible way of doing it, but it's not very practical and it's not really that advisable. Number three, keep your contributions to the absolute max the employer will match and anything extra you have, do not do it through your employer, do it into a SIP or use an alternative provider. So you know, those are, I think those are really useful points, although actually in the end the answer is there's not much you can do about this. In lots of ways he says Nest is a soft target for the government due to the terms imposed on it and lots of people will have literally no practical choice to accept it. So that was a really interesting email, but once we get to the end, actually there's not much you can do,
- [09:46]
John Stapek
I suppose. I suppose it's useful to at least be aware and I guess that's all you can say because the problem is that obviously we auto enrollment, you know, if you give it up then you're losing out on the employer contribution and there's almost nothing that's going to be worth that, you know, because in most cases you're already doubling the amount of money you put in. So. But you know, it's good to at least be aware and maybe also have a look at what are the other options because it's not there's not a single nest fund at the end of the day they do have a couple of options and some of them are more equity heavy than the others. Although yes, it was quite tricky to find out exactly what was in them. But anyway, that's another Anyway, we're not
- [10:27]
Maren Thunberg
going into a nest rabbit hole again today. Done with that. This point I think is really interesting actually. A few years ago I moved around half our assets to a discretionary fund manager and a rising market has led to some nice gains. However, the constant erosion of the capital gains tax allow fiddling with the rates, et cetera, now means that each year I am presented with a tally of crystallized gains upon which I must play CGT in the part of my portfolio I imagine myself. I can of course decide when or whether to crystallize gains and can choose to defer CGT indefinitely if I wish. Whilst having gains to tax is a nice problem to have, I wonder if you might address the pros and cons of discretionary wealth management, whether any advantages to paying as you go CGT um, now this is really interesting because obviously if you are managing your own money, you can decide for yourself what you sell, when you sell it, how much capital gains you pay and then when he's talking about discretionary fund managers, he is talking the one he uses is a passive strategy. It's the same for everybody. You choose between a risk level and then everyone's money is managed in exactly the same way. So the CGT comes when it comes. You know, you make the capital gains when you make the capital gains and that's different to using a much more individually based discretionary fund manager which you might have you had maybe a lot more money or maybe you've had a different approach or you're prepared to pay the higher fees. Whatever it is where you have one guy or woman looking after your money in particular and your portfolio may be different to everybody else's and you can specify whether it is that you want to make capital gains or not in any particular year. Obviously that you can't avoid making capital gains all in. But you have more discretion over it if you use an old fashioned fund wealth manager than you might if you use one of the more modern ones where your costs are lower because your portfolio is more generic. So the question there is quite interesting, that's about, well, what if I'm going to use a wealth manager, what kind of wealth manager should I use? Which is something that we talk about a lot on the podcast and the kind that he's talking about, that will be much cheaper, the fees will probably be much lower because your portfolio is not being managed individually. But you do have this problem. Now I use this type, I use both types actually. And if you use the ones, as I say, that have these generic portfolios, that seems to be the place to use for your SIP and your ISO wrappers because then the problem doesn't arise.
- [12:55]
John Stapek
Yeah, makes sense.
- [12:58]
Maren Thunberg
Anyway, as he says, it's a good problem to have, but it's an increasingly difficult problem because the CGT allowance is now so very low.
- [13:05]
John Stapek
I suppose people didn't think about CGT a lot because the actual allowance itself used to basically be the same as the ISA allowance. But now the kind of tax free amount you can profit is just three grand. And the honest truth is that for most people with any decent amount of investment outside of the wrapper, that is going to become an issue. And it's very galling to have to be, you know, kind of like, you know, a huge chunk of your hard earned investment gains over and above the three.
- [13:37]
Maren Thunberg
And it's also worth saying that those gains, given that the allowance is so low, it will be the case that a lot of what you are being taxed on is purely inflation. So you know, make a 10% gain and inflation has been 5%, you've only made 5% but you're taxed on the entire gain. So that is a genuine wealth tax. You are being taxed on the real, on the, the nominal value, not the real value of your investment. So that, that capital gains is a big wealth tax. I can see why it's so distressing for people to see it come through like that. But then of course there is the argument that is it better to pay your capital gains as they come because you then run into this, this really naughty problem later in life. If you do not pay capital gains on a pay as you go basis where you get, you know, Maybe into your 70s, you have a massive potential capital gains liability and you find yourself unable to sell anything because you cannot bring yourself to sell a large chunk of assets and pay capital gains tax on it when you know that you will shortly or your heirs will shortly be paying inheritance tax on those same assets. So you have find a lot of people running into problems. And you may say again, these are nice problems to have, but they are problems nonetheless where you find it too difficult to sell. And of course, on death, the capital gains tax liability disappears and effectively replaced with the IHT liability if you sell before you end up paying twice. So I totally see why people get very stressed about that. So maybe it's better not to run up these huge paper gains. Anyway,
- [15:13]
John Stapek
don't bother. I mean, this sort of takes us back to the problem that we often talk about, which is the behavioral distortions that the existence of the tax in the first place, which is one thing, but the fact that it does constantly change because not only do you have to sit there and think, well, am I going to take this gain now because I might not want it in the future when I've got even more profit to bank, hopefully. But there's also the question of, well, they reduced the capital gains tax allowance. It's been quartered in a very short space of time. So what happens if they just get ready altogether? You have to take into account the direction of taxation policy as well.
- [15:52]
Maren Thunberg
There's always a chance, I mean, hear me out, right? There's always a chance that at some point we have a, an administration that vaguely comes to its senses and understands that wealth creation is not in some way evil and stops taxing you on inflation and stops taxing you only on genuine gains that, you know, wealth, wealth taxes across the board disappear. I mean, it's so important, isn't it, to remember that the UK is basically the home of wealth taxes we have more than anybody else. We don't call them wealth taxes, but boy oh boy, do we have wealth taxes. Texas for fun. Should we name them? Should we name them just for fun while we're here? IHT Capital gains. Stamp duty on your house, stamp duty on your equity trading constantly endless damn duty. Luxury car tax you have to pay, you know, buy an expensive car, not even an expensive car these days. Extra passenger tax when you fly business class, premium economy, whatever with.
- [16:44]
John Stapek
Well, I mean, I think that's a pretty, a pretty good chunk of them. And I think again, the fact that they're not called wealth taxes doesn't mean they aren't wealth taxes. I mean, There is certain conditions, you know, they can have additional. You could argue that the additional council tax is also going to be a wealth tax as well.
- [17:04]
Maren Thunberg
Definitely the mansion tax that's coming.
- [17:06]
John Stapek
Yes, the mansion tax. Yeah. There's lots of stuff already.
- [17:09]
Maren Thunberg
Anyway. I'm sorry, Douglas, we haven't really helped there. All we can say is naughty problem, naughty problem, pay somebody else more.
- [17:19]
John Stapek
It's that crystal ball element combined with the various assumptions you would have to make about the maths and the spreadsheets and working out. Right, well, if I make this return, then I better crystallize in this here. But what if someone gets in in 2029 and ditches all of these rules? Or what if something gets in 2029 and means that you've got a zero capital gains tax exemption? So it's too. Yeah, there's too many variables and I think it would be ideal if governments thought about that sort of thing whenever they were passing these rules. There's some. There's a premium to keeping things in place for the long term, even if they're bad.
- [18:06]
Maren Thunberg
No, John. Change for the change of stakes. The sake of change. That one. Something must be done. Something must be done.
- [18:12]
John Stapek
Yeah.
- [18:13]
Maren Thunberg
All right, moving on.
- [18:13]
John Stapek
Let me be perfectly clear. Moving on.
- [18:17]
Maren Thunberg
Right. This one is a very long conversation, but it's also a conversation we have had before. So I can direct you to listen to previous podcasts and we'll put a link in the show notes to a podcast in which we have discussed this. But nonetheless, dear Marin, very much enjoy your excellent podcast. Thank you very much. Robert and I have a question that may be of interest to discuss much discussion over which fund and which market to invest in? What is the actual data, say from the last 40 years of picking a mixed bag of funds in ETFs, investment trusts versus just putting it all into a low cost Vanguard World tracker or combination of passive trackers. What is best? Now we've talked about this a lot on the basis that a combination of passive trackers, you are making active decisions, so many active decisions. We can't compare that with a random group of funds and investment trust because you've made this basically the same amount of active decisions. So don't know. Depends what you chose. Now, on the matter of would it be better to choose one low cost Vanguard World tracker and have held it over the last 10, 15, 20, 30 years and nothing else at all, given the outperformance of the US market and its weighting in that tracker over the last. Where are we now, 20 years or so? Probably, yes. But then again, what basket of funds and ETFs are you going to track it against? It's an impossible question. Has passive beaten average active over the last decade? Two decades, yeah, probably. Region.
- [19:41]
John Stapek
Yeah. I mean we did the figures on this the last time it came up in over 40 years. It was close on. It was more than 9% annual return a year for the 100% equities. But a global world tracker, which is a pretty damn good return, I think we worked at the Berkshire Hathaway had done about twice that and Scottish Mortgage had done something similar. But the question was you would have had no qualms about putting 100% of your equity portfolio into a global tracker because that's just a passive thing. You would have probably committed it to Warren Buffett in the late 80s because by then he had a great reputation even then. But there is no way that you would have put 100% of your fund into an unproven product like Scottish Mortgage at that point. And you certainly wouldn't have held onto it for probably the first 15 years that it took to get going. So again, there's an element of psychology to it. But yeah, 10% for near enough, 10% a year for the purely passive fund. It's very good. You'd be very happy with that.
- [20:45]
Maren Thunberg
It's on John.
- [20:47]
John Stapek
But past performance is no guide to the future.
- [20:50]
Maren Thunberg
So I mean I think we, I'm going to speak for John here, but I think we both slightly feel that the overrepresentation of the US in hands of tech inside those global indices now is a worry. But yeah, you're right and that that would probably have been better over the last couple of decades. But then of course, who knows what funds and ETFs you might have picked? Maybe you'd have picked. Maybe you would have instead of the low cost Vanguard world, you would have chosen only US equity passive funds, in which case you've done even better. Right?
- [21:20]
John Stapek
Well, exactly.
- [21:21]
Maren Thunberg
There we go. There's another non answer for you. For you. Another non answer for you. I think you make your choices with these ones.
- [21:28]
John Stapek
I think that's an interesting question. Basically I would default to investing at all in a kind of passive way is better than not investing. I think low. And it's my view that if you have the capacity and you have the interest, then putting in at least some sort of overlay of your own on top of that is actually a good thing to do.
- [21:55]
Maren Thunberg
Passive active barbell strategy.
- [21:57]
John Stapek
Yeah, basically just something to. And also obviously if you're engaging with investing, then you'll probably find it quite an interesting thing to anyway. But I guess I wouldn't want to put anyone off if all they want to do is look, how can I get this done? And if you just want to get it done, then there are much worse things to do than just stick it in a passive tracker.
- [22:20]
Maren Thunberg
Okay, excellent. Right, I think that's enough questions and answers for today. Thank you all very much for sending them in. We really appreciate it because you make us think as well. And that's extremely good for us, isn't it? John?
- [22:31]
John Stapek
It's very good. We hate it, but it's very good.
- [22:39]
Maren Thunberg
Thanks for listening to this week's Marion Talks yous Money. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter erinsw and johnstepak. This episode was produced by some Asadi and Moses Andam Sound design by Aaron Casper. Questions and comments on this show and all our shows are always welcome. Our show email is merrinmoneylumberg.net
- [23:02]
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