Unlock Editor’s Digest for free
FT editor Roula Khalaf selects her favorite stories in this weekly newsletter.
Anyone who has seen the movie. Crocodile Dundee You know we don’t have mental health problems in Australia. As Mick explains: “No. Back there, if you have any problems, tell Wally. And he tells it to everyone in town, brings it out into the light. “No more problems.”
I mention it because in this final Skin in the Game of 2024 my plan is to answer the five most common questions I’ve received via email this year. Interestingly, for an investment column, most of them have to do with your emotional well-being.
That is to say, many readers hate managing their life savings. And even I understand the reasons. We are very busy, and yet we are expected to find room to generate returns high enough to retire. Meanwhile, the fear of loss constantly gnaws at us.
Well, my recommendation is to copy my father. Get someone else to do it and disappear on your motorcycle across the country for a few decades (or until someone leaves you out). Just look at your wallet.
This works for the reasons I have described many times. Less churn means lower costs. Staying invested guarantees being in the market on those massive rebound days that follow the sell-offs, when everyone else has bailed out.
But Dad doesn’t pay fees because he was one of the first clients and he continues to introduce his colleagues to his advisor. For the rest of us, the next best option is a simple, diversified portfolio of exchange-traded funds. Set it up. Ignore.
Many readers send me a list of their holdings (often hundreds of companies). Even if these outperform an index (doubtful, most professionally selected ones don’t), the effort alone guarantees misery.
Pay trading commissions or capital gains taxes. Loss compensation. The administrator of dividends and buybacks. Corporate activity, such as mergers or acquisitions, governance, and voting. Writing the words stresses me out. And I used to do it for a living.
Many emails also suggest concern that even the potential earnings from your portfolio will not be enough to provide you with a decent retirement, much less a debauched retirement. How can you maximize returns without taking incredible risks?
Again, I have written often about the long-term performance of various asset classes. Realistically, you can’t expect more than a 6 percent real return on stocks, let alone government bonds. Two digits? You are dreaming.
So how do the rich do it? Mainly through complex structures, leverage or tax minimization. The latter is key. Why bother trying to gain another odd percentage point here and a dozen basis points there? It’s a pittance versus reducing your tax bill.
In my opinion, this is the only reason to spend money on a financial advisor. Forget your macroeconomic forecasts or your opinions on stocks. They have no idea like the rest of us. However, find someone who mutters the tax law in their sleep and you too can rest easy.
Sure, but is there a more conscious approach to growing your retirement fund quickly? Dozens of you have asked me this year. There is. Spend less! After minimizing taxes, this is the second fastest path to retirement.
It’s also not talked about much, which is crazy. Consider £8 for your two flat whites each day. This is paid for with your net income. So, in effect, you have to earn between £10 and £14 to fund them, depending on your tax bracket.
This equates to about $5,000 of gross income a year, which could have been invested in a tax-free vehicle, such as a pension with a nominal 5 percent return. Over two decades, two morning coffees have set you back £173,000.
Extend that logic to other things you buy but don’t really need. I should know. Over a 30-year career, my compensation has gone from a little to a lot to a little to a lot to a little to a lot to a little again. My expenses went up and down at the same time. I almost didn’t notice.
Consuming less is also the best way to help the environment. Infinitely more than anything sustainable finance claims. Readers also asked me a lot about this in 2024. Does green investing still make sense?
Absolutely. But it is crucial to modify your approach depending on the asset class. For secondary market securities such as stocks (which are simply traded), the biggest impact comes from owning them, interacting with management, and voting.
For money itself to have influence, it must be deployed or withdrawn in primary markets, that is, to and from the companies themselves. This is where the real investment happens. Where you can write a check if companies are a force for good or refuse to do so if they are not.
In other words, the best asset classes for investing sustainably are private equity, venture capital, direct lending, and private credit. Even corporate bonds are good, as they need to be renewed frequently, which allows pressure to be applied.
In my opinion, the last two topics on which I have been questioned the most are the same, although many disagree. First, will the dominance of corporate America last? Secondly, UK readers want to know what this year’s 88 IPOs mean for their local stock market.
My answer is simple. Forget liquidity and regulation and similar. The reason British companies are flocking to US stock exchanges is because they are trading at higher earnings multiples and therefore their top executives (and their bankers) will be richer.
When this is reversed (most likely after Tech bubble burst) the Wall Street Journal will soon be filled with stories about American companies lining up to list on the “exceptional” Footsie 100.
Happy new year and thanks for all your messages. Keep them coming.
The author is a former portfolio manager. Email: stuart.kirk@ft.com; UNKNOWN: @stuartkirk__