Wednesday, 22 December 2010


I have laid aside business, and gone a-fishin'.
Izaak Walton, The Compleat Angler, 1653

As the early nights draw in, icy winds and snows descend and we plunge headlong into the deep mid-winter, On the Money finds himself curling up on the sofa, throwing back a couple of port & brandys and taking stock.  

I set up this blog in the autumn of 2009 as a way to help friends and folks with a stake in the financial markets (or just a healthy curiosity about what the hell is really going on out there) to safely navigate the aftermath of the biggest economic shock of our lifetimes.  

In the process it's become clear that, if governments and major financial institutions have their way, the aftermath is going to be dragged out for as long as it takes to ensure that they - the institutions - survive and prosper, and screw the rest of us.  

But there is a way for the little guy to win.  In this post, and in parts two and three which follow, you're going to find out how put the institutions up against a wall and screw them back.   


The ultimate result of shielding men from the effects of folly
 is to fill the world with fools.
Herbert Spencer

In his 1942 work Capitalism, Socialism and Democracy, renowned economist Joseph Schumpeter coined a phrase which would finally place the prior thirteen years of economic carnage in its historical perspective.  'This process of creative destruction', he wrote, 'is the essential fact about capitalism'.

He saw that, from corner shop to corporate behemoth, bankruptcy, failure and ruin was a cruel but essential part of the process of economic regeneration; that for growth and innovation to exist and flourish, the system must create winners and losers; and that this 'survival of the fittest' could not - and in the interests of economic renewal should not - be bucked.  

What then, I wonder, would he have made of our blitzkrieg of bailouts?  Of our governments rewarding the failure of A.I.G, General Motors, Fannie Mae, Freddie Mac, Citigroup, Bank of America and half the US banking system, of Royal Bank of Scotland and Lloyds and HBOS, of 'quantitative easing' (a bank bailout through the back door), of Greek government bailouts, Irish government bailouts, the de facto bailouts of these nations' banks and of banks across the world who owned their debt and of the forthcoming bailouts of Portugal and Spain and who knows where else before it all ends? 

Capitalism without failure is like catholicism without hell - it just doesn't work.

Allan Meltzer, 
Professor of economics, Carnegie Mellon University

I strongly doubt that our law-makers' attempts to outrun the laws of capitalism can succeed indefinitely but then, economic reality did not prevent them encouraging monstrous bubbles to form on the way up to 2008 and, with economic reality  little changed, it has not prevented a brazen and foolish repeat being attempted in 2009-11.  

The dynamics of self-delusion, denial and cowardice which have underpinned government and central bank policies for a decade and which lock us in to an intensifying cycle of bubble and bust, remain firmly in place.  

La, la, la... keep cranking up the volume, Bob

From the US government changing accounting rules in 2009 to make America's insolvent banks appear solvent at the stroke of a pen, to the Fed - by its own admission! - artificially pumping world stock markets higher to create an illusion of wealth which sane observers know perfectly well to be false (see The Wealth Effect here), these interventions make the job of a humble market commentator - never mind an investor - hazardous, fascinating and all-consuming. 

With a couple of frustrating exceptions I seem to have kept us on the right side of major market moves, but the cost of being able to anticipate these twists and turns is constant vigilance and research plus the length of time it takes to write anything worth reading.  As I don't receive a penny for my pains (and wouldn't have it any other way, gentle reader), I need not only to work for a living but, occasionally, to have a life.  

With that in mind, and with many plans as yet unfulfilled, this seems as good moment as any for me to step back a little and re-establish some balance.  


No man can lose what he never had.
Izaak Walton, The Compleat Angler

And so in what will be my last major monthly post, I'm going to finalize the long term investment strategy I began detailing in these pages back in August.  I can't think of a more appropriate parting gift than to offer my faithful reader, free and gratis, a plan which has not only delivered consistently over many decades, but which can be trusted to safely navigate even a rookie investor through the most tempestuous of economic seas

As perfect as it is for a novice, this is a true strategy for a lifetime even for an old hand.  Its combination of user-friendliness and amazingly consistent, low-risk 
out-performance is why I've chosen it to form the backbone of my own long-term investment plan.  

Now you know I'll try to make this an entertaining read, but there's only so much discussion about asset-allocation the human person can take before rigor mortis sets in. So, landing as it does amid a mass of yuletide distractions, I'm keen not to over-egg this particular festive pud.  

I've therefore split The Compleat Investor into three easily digestible parts which will be posted every few days as we head into to New Year.  

Today in Part 1 I'll set out basic principles and show the kinds of returns you can expect to achieve;  in Part 2, we'll set up a simple investment portfolio you can follow, essentially, for life.  Part 3 will show how your plan can be very simply managed and safely tended, at which point we'll attempt to bring everything together and come to a suitably uplifting, snow-sprinkled conclusion.


Give a man a fish and he'll eat for a day. 
Teach a man to fish and he'll eat for a lifetime.
Lao Tzu



It confounds the public's preconceptions, and pokes a stick in the eye of the financial advisors who feed off their ignorance. What is it?  

It's an investment plan anyone can follow, that really works.

If you want to build a substantial nest-egg for your retirement or a solid foundation for your children's future - and want to invest confident in the knowledge that the plan you're following has survived and prospered through a century of market boom, bust and turmoil - read on.

I'm about to present a systematic strategy which is not only disarmingly easy to follow, but has made consistently strong returns, necessitating far fewer sleepless nights, for far longer than even the most optimistic investor has any right to expect.  

Most people imagine successful investing to be an intrinsically complicated and stressful process.  As you'll see, that's not the case.  In fact, I'd go so far as to say this long-term plan is not just clever - it's child's play.

Adrenaline junkies be warned, however: this is a way not to get-rich-quick, but to build wealth slow. Itching for instant returns?  Need a fast-money thrill? Move along, nothing to see here.  

If however you're the kind of reader I think you are - an open, inquiring mind with the curiosity and patience to follow an argument through to its conclusion - you might be interested in a statistically sound investment solution that's been severely tested in real time conditions and come up trumps.*  

It is a strategy which requires minimal judgement, minimal time and leaves little room for human error; one which by design minimizes your risks while maximizing your returns; a way, indeed, to fish for life. 

*The impossible-to-impress boffins at CXO Advisory Group who spend their days running independent statistical tests on trading systems - and who 99% of the time find absolutely nothing of worth in any of them - wrote an almost glowing review of this strategy which you can read here (I say 'almost glowing': in their case that's not a caveat, but the highest form of praise). 


What is most remarkable to me about the strategy presented here is that, quite apart from its excellent returns over four decades (which outstrip all but the very best money managers and beat a simple buy-and-hold strategy hands down), the results are achieved with astonishingly little risk.

It's a basic tenet of investment life - and real life too, you might agree - that great rewards generally come only on the back of great risks.  

George Soros,
The man who broke the Bank of England
The bars around Wall St echo with tales of steel-cojoned investors - Livermore, Soros, Paulson - legends of the game who, possessed of great conviction, stepped in to buy this or that instrument at a time when every other sucker in the Street was in a panic-fuelled stampede for the exit.  These rare characters make immense fortunes, but the understanding, skill and sheer nerve required to execute such trades consistently is, and always will be, beyond the vast majority of investors.

So what about those of us who don't want to take such huge risks?  What if you and I are not prepared to put everything on the line for a trade, are not 100% convinced about the prospects for this or that particular market or stock - or what if we are and don't have enough practical nous or deep enough pockets to take advantage of our conviction?  

Does it mean we have to abandon our hopes of ever making a serious investment return?


The most powerful force in the universe is the 
power of compound interest.  
Albert Einstein

It turns out that investing may be the only sphere of life in which time is actually on your side.  What more delicious irony or sweeter revenge could there be than in transforming our most feared and implacable enemy into our most powerful ally?  

Think back to when you were a teenager.  Imagine that when you were just 19 a rich uncle had told you to put     £€$2000 per year (pick your local currency) into a tax-free investment account until you were 26 - then instructed you to stop and not invest a penny more for the rest of your life.  

Let's say that money, put to work in markets, earned 10% per year for those seven years before you were 26 and now your investment 'career' is done.  You're simply going to leave that money where it is, growing in a tax-free investment account until you retire at 65.

Now imagine you have a friend who is the same age and received the same advice - but decided to ignore it. He partied hard until finally he began to put money away age 26 - the age at which you stopped.  He puts £€$2000 per year into his tax-free investment account, just as you did, and continues doing so every single year until he retires at 65.

Let's imagine that both of your investments continue to earn 10% per year until you retire.  Who will be richer when you cash in your chips - you, who haven't invested a dime since you were 26, or your friend, who has diligently squirrelled his money away for the past 40 years?

Source: Market Logic / Richard Russell, 'Dow Theory Letters'

Please click to enlarge!

No that's not an error - it really is YOU.  Your measly seven years of contributions, merely by dint of having been made earlier, led to more gains than your friend's forty years' of contributions and gains combined.  A grand total of 14,000 went in, almost a million came out.  That, dear reader, is the power of compound interest.


If you are a parent of young children looking to invest for their education, or to start a long-term wealth-building account into which they can eventually contribute, the above chart shows you just how inexpensive and successful doing that can be.  The key is starting early.

But not if you've got a million
waiting for you when you
If, like the lucky investor in the above example, you are 19 - rejoice!  That chart is your key to the kingdom.  Cut it, paste it, print it, frame it - and never ever forget it.  All you need do now is follow the remaining advice in this post and with time on your side you can be sure of a bountiful second childhood regardless of whether you become a millionaire in the meantime.  

If you are currently borrowing from the bank of mum and dad or struggling to make a living, the above figures will seem wildly improbable.  But the theory is not up for debate - all it requires is to be put into practice, for the process of compounding is pure mathematical fact.  Check out this online calculator to see how tall your investments could grow.

If by chance you're not 19...don't despair! (to let you into a secret, OntheMoney isn't 19 either).  There's still time to let time work for us.  All we need is 

  1. a tested, practical plan designed to take full advantage of compound returns
  2. the discipline to follow it through  

Well, you've already stumbled upon number one and number two happens to be dead easy.  Let's recap.


Just before the downturn began in 2007, Mebane Faber, a money manager at US firm Cambria Investment Management, published a paper in the Journal of Wealth Management entitled 'A Quantitative Approach to Tactical Asset Allocation'.

In this and his subsequent book 'The Ivy Portfolio'*, he exploits the methods used by major endowment funds such as Harvard and Yale, which have been the most consistently successful US money management vehicles (aside from the top echelon of hedge funds) for many decades.  He then combines these with an extremely simple market timing technique designed to steer investors clear of major market disasters.  

The results are remarkable.

By combining just five different asset classes using low-cost investment funds or ETFs**, then following a simple timing system which takes negligible time, effort or judgement to implement, an investor would have been able to make average returns of more than 11% annually over a 36 year period.  

Not only did this handsomely beat a 'buy-and-hold' strategy over the same stretch, but it did so with far less volatility and only modest drawdowns (those sickening market plunges which are liable to make most investors sell in panic, usually at exactly the wrong time).  

In fact, the year following the paper's publication was a dramatic demonstration of its effectiveness.  

While hedge funds imploded in 2008 and Harvard and Yale endowments plunged 25% - 30%, while the US stock market itself plummeted 35%, the 'Ivy Portfolio' dipped almost imperceptibly - by just 0.59%.  In fact 2008 was the only negative year out of thirty-six studied.

Taking into account the effect of compounding, the return over the entire period of the study would have transformed a single £5000 investment made in 1972 into more than £500,000 today.

*For the record, I have absolutely no connection with Mr Faber nor any financial interest in his book.  The recommendation is made purely on merit.

**ETFs (Exchange-traded Funds) simply replicate the performance and returns of a particular index, like the FTSE100 or the Dow.  There are hundreds to choose from, covering most countries and asset-types, and you can buy and sell them cheaply, just like an individual stock.


On the face of it, there's nothing new or remotely sexy in the 'Ivy Portfolio'.  It uses those time-tested principles of diversification and trend-following which have, in various forms, been proven over and over again to work and which are the cornerstone of most successful money management strategies.  If, as they say, it ain't broke, why fix it?  In the trap-strewn world of finance, sexy and new are usually the most dangerous words.

Yet strangely, many have come to see these two principles as mutually exclusive; what Faber has demonstrated is how, by building a smart strategy upon both these ancient pillars of investment wisdom, an ordinary investor can make the magic of compounding work even more effectively over time.


Any number of studies have shown that the effect of compound interest is significantly eroded by negative annual returns.  If you needed reminding, check your stock market statements for the past 12 years.

S&P500 Index 1998 - 2010 - twelve years of hurt.

The problem is volatility.  Look at 2008 and 2009 for instance.  For every year the market falls 35%, a return of 70% is needed the following year just to get back to even.  

So if, in a sequence of ten years, the last nine are excellent but the first is a total dog, your portfolio will have to work doubly hard over years two-to-ten just to claw back what you've lost in year one.  Never mind the boom years between 2003 and 2007, or 2009-2010, it's the shockers before and in-between that have murdered any number of investors' endowments and pension funds, even after the mega bull market gains of the 1980s and 1990s.

So yes, compounding is a truly wondrous thing - but it relies on a positive return each year to deliver fully on its promise.  Unfortunately, there are only three ways to have a chance of getting a consistent positive return.  

  1. Keep all your money in cash, earning miserly interest
  2. Diversify your investments intelligently to smooth out gains and limit losses
  3. Find a way to avoid major market downdrafts

Since we want to avoid leaving too much money in cash (unless the dangers elsewhere are overwhelming), what we could really use is a combination of options 2 & 3.  And that, dear reader, is exactly what this strategy is going to give us.  

In Part 2, coming up after Christmas, we'll get down to the nitty-gritty of constructing a long term portfolio and finally, we'll look in Part 3 at what you need to do to make sure it's protected from the worst any economic winter can throw at it.  

You'll discover it's really not that different from tending a garden - except that here among the Ivy there's barely any work to be done.  A little pruning and replanting is occasionally required but most of the time you'll just be sitting idly by, getting on with the rest of your life, watching your garden grow.

Still can't believe making a fortune can be that simple? Subscribe via email using the button at the top of the page and get Part 2 sent direct to your inbox.

'Til then, dear reader, have a great Christmas!