Hi Investors!

Welcome back to another week of Market Movers, where I summarise the top headlines that attracted my attention this week to keep you up to speed with the markets and give you some light reading for the weekend.

As usual, lets start with a look at the general markets, followed by the digital asset space.

Don't forget to check out the Risk On Investor resources page for access to the growing selection of calculators, tools and video guides to help you become a better investor. There is also more content posted frequently on the YouTube channel to keep you informed and entertained - you can also read back on previous newsletters if you're a new joiner to the investor club

View the Investor Resources Page (Constantly Updated)

Subscribe to the RiskOnInvestor YouTube Channel

Read previous newsletters

See my investing framework (Constantly Updated)

Have a great weekend

Chaz (RiskOnInvestor.com)

---

Disclaimer - The opinions of the author in this newsletter should not be taken as financial advice. Any mention of investment products is not a recommendation to buy.

If you are looking for financial advice, please seek the services of an industry professional and do your own research.

Capital is at risk when investing

---

Major Market Indices

The End of Defined Benefit Pensions?

You may be familiar with the famous marshmallow experiment by Stanford University. Children were taken into a room and a marshmallow put on the table in front of them.

The researchers then told the kids that the researcher would leave the room for a while, if the child didn't eat the marshmallow while the researchers was away then they would get an extra marshmallow on the researchers return .

The researchers then left the room for 15 minutes.

As you can imagine, some of the children gobbled up the marshmallows at the first opportunity whereas others patiently waited.

In follow up studies as these children grew up, there was found to be a strong correlation between those who delayed gratification and waited for the second marshmallow and higher academic score, lower drug abuse rates, lower obesity, better social skills as measured by a broad range of metrics and many many more skills.

What has this got to do with pensions?

We are all sitting at the table with a marshmallow in front of us right now. That marshmallow is just in the form of a paycheque.

Every month you get the opportunity to eat some marshmallow (spend your money) or delay some gratification by saving into your pension.

But this isn't the case for everyone.

In the UK and many other countries, private pensions can be broadly divided into two categories. Defined benefit (DB) and defined contribution (DC).

Defined benefit pensions take away the marshmallow choice from you and are common in government and public sector areas such as the civil service and NHS. In a defined benefit scheme, your pension income is linked to your years of service and pay during that service.

Whereas defined benefit pots are almost entirely at your discretion, so those on lower incomes during their working career can end up with higher pension incomes than those with higher working incomes if they put away more while working (waiting for the second marshmallow).

​The IFS makes some interesting claims about this, namely:

• The median defined benefit pension is worth more than the median defined contribution pension
• Defined contribution pensions are becoming a major factor in the wealth of the wealthiest individuals.

What does this tell me?

That the wealthiest are those who are willing to delay gratification by saving into a pension vehicle they can't access until retirement are more likely to be at the highest end of the wealth spectrum but that average results are better if we don't get the choice.

Seems like an extension of the marshmallow test but with money right?

But there is a darker side.

What if you don't work in an environment with a defined benefit scheme but also don't want to delay gratification and want to maximise your cash in hand now?

The results don't look so favourable.

Whilst the wealthiest build significant savings in a DC pension, many end up with small pension pots (see the chart above looking at percentiles)

And what do those with smaller pots tend to do?

You guessed it, they eat the marshmallow as soon as possible whereas those with higher pots tend to draw down on it slowly.

For the average person this all shows that a defined benefit pension will lead to better retirement outcomes and it's therefore a valuable benefit because it takes away the marshmallow option.

United Learning, an organisation that runs around 90 academy schools in the UK is running its own marshmallow experiment, but instead of using marshmallows, it's using money and pensions.

Teaching is another profession that in the public sector enjoys the benefits of a defined benefit pension scheme, but as you may have guessed from the numbers we've seen, these schemes are expensive to run as they generally provide better outcomes for the participants.

So United learning is offering a trade off, staff can pick between the following options:

1. Remain in the defined benefit scheme on normal pay. (United pays ~28% contributions into the scheme in return for the fixed outcomes for teachers)
2. Get a 5% salary boost and swap to a defined contribution scheme. United pays in 20% contributions
3. Get a 10% salary boost and united pays in 10% into a defined contribution scheme.

In the United scheme here we can see that the worse staff are at delayed gratification, the lower the overall cost the United. For example option 3 gets staff the most money in a teacher's pocket now, but at 20% total cost to United, is less than the 25% for option 2 or 28% for option 1.

Is this the first steps on the erosion and eventual removal of high cost defined benefit schemes?

It could be.

Lets weigh this up from pure numbers from the perspective of a teacher. We've seen already that it will be cost effective for the employer, but what about staff, let's compare?

To keep this simple, I will make the following assumptions; that a teacher gets an average salary of £35k through their career and works for 40 years.

If we stay in the defined benefit scheme, what might our outcomes have been?

Fortunately the teachers pension website has a way of estimating this, plugging our numbers in tell us that we would see about £17,500 per annum and get a £50k lump sum when retiring. Add in state pension and you would retire on ~£29,000 per annum.

Very respectable pension income and coming close to matching your pre-retirement income.

This is based on retiring at 60. If you are a 60 year old female today your life expectancy is 87 and you have a 10% chance of making it to 98.

So across your expected 27 retirement years, you will receive ~£472,500 (£17.5 x 27)

Now let's compare against option 2.

But lets say we are savvy about it, the 5% salary boost will be saved into our pension as well as the 20% contribution from our employer resulting in no difference to us (If you just wanted the cash bonus now you would likely opt for option 3).

The details of the scheme aren't clear yet, but let's say that the 20% contribution is based on your salary above the pensionable earnings of £6,240.

This means that we have the following contributions per year:

• 5% bonus on £35k salary is worth £1,750 per annum
• 20% salary contribution on earnings between £6,240 and £36,750 is worth £6,102 per annum

In other words we have £7,852 per annum being contributed to our pension or £654.33 per month.

Credit Suisse, before being brought out by UBS used to publish long term returns of different assets classes and pegged equities at 5% above inflation.

So for simplicity we will assume that pay rises annually with inflation only and 5% is returned on this money.

As an aside, the teachers pension scheme grows contributions at inflation +2.5% so we are getting a higher return that money from the teachers pensions scheme but putting less in.

Compounding this for 40 years we find that we end up with an expected pension pot of almost exactly £1m at £998,520.

At this point we would have multiple options, we could buy an annuity to give us a fixed income for the rest of our life, or we could drawdown on the pot manually as we wish.

For an annuity current rates for an RPI (inflation linked) at 60 years old would result in an average income of £38,582

Once we add state pension on top you would be earning £50,000 in retirement, or significantly more than during your working career!

But let's say that we wanted to draw on the pot ourselves?

​Common wisdom suggests that for a 30 year retirement, based on historical performance withdrawing 4% of our portfolio would see us not run out of money in 30 years 95% of the time. This would squeeze us a little extra out of our pot but has another advantage.

When you die, under most circumstances and annuity or defined benefit pension expires and it not part of your estate.

In a defined contribution scheme you can pass on any left wealth to children or grandchildren.

This all sounds great, but there is a downside. By taking control of your pension you are also bearing the risk.

If you retired right before the global financial crisis you would have seen your pension cut in half in the following years.

The 4% withdrawal rule is meant to account for black swan events like this, but I certainly wouldn't be comfortable in that situation.

So in conclusion, if you are the type who can defer a marshmallow, maybe a defined contribution pension is better for you. But if those tasty sugar sweets are just too good to resist, you probably want to stick with your defined benefit pension

---

(Affiliate link) - If you sign up to Trading 212 and deposit at least £1 to qualify for a free share we will both receive a free share of the same value, up to £100 (free share value is random), this helps support this newsletter at no cost to you - if you don't like Trading212 you can sell your free share and withdraw the money. Win-win for all parties, your support is appreciated - Sign up here​

---

Digital Assets

Note: MSTR underwent a 10:1 split. Historical prices not adjusted to represent this

BitGet Wallet is the most downloaded crypto wallet in July. What does this tell us?

One of the metrics I personally track in crypto is wallet downloads.

Wallet downloads can help us determine where users are being acquired and where they are spending their time. Self custody is a hallmark of crypto users who are more likely to stick around, this helps exclude the users who simply buy some crypto on an exchange and let it sit, since to interact on chain you need a wallet.

A useful metric for crypto hype is often cited as the number of wallets being downloaded in a given month compared to historical averages, the more downloads the more users are coming to various ecosystems but that's not what I'm interested in here.

So what happened in July?

So we know that there were a few million wallets downloaded in July, but what else? The more interesting information for me is looking at what networks these wallets work with and why people may download them.

I have summarised the wallets and their primary networks below:

1. BitGet - General purpose
2. MetaMask - EVM compatible chains, Ethereum, Layer 2's, Avalanche etc
3. Phantom - Primarily Solana but also Ethereum, Polygon and Bitcoin
4. Coinbase wallet - EVM compatible chains, Solana, Bitcoin, Dogecoin, Litecoin, Stellar and XRP
5. SafePal - General Purpose
6. Solflare - Solana
7. Exodus Wallet - General purpose
8. Uniswap wallet - EVM compatible chains
9. Keplr Wallet - General purpose
10. Rainbow - Ethereum, L2's and BNB

To me this shows the two dominant ecosystems at the moment, Ethereum and Solana

1. Ethereum (EVM) ecosystem compatible downloads - 4.671million
2. Solana compatible ecosystem downloads - 3.2million

Excluding general purpose wallets on the assumption that the divide will match dedicated wallets:

1. Ethereum (EVM) ecosystem - 2.769m
2. Solana ecosystem - 1.298m

If we therefore used wallet momentum as a proxy for network value (very simplified) them we would expect Ethereum to be worth approximately 2.13x the value of Solana.

At the time of writing valuations are approximately:

Ethereum - $315b

Solana - $85b (FDV)

Multiple: 3.7x

In other words, based on wallet downloads Solana can be considered slightly undervalued against Ethereum. Assuming Ethereum is priced fairly it would imply a valuation of $254 per SOL.

Now this is just a single data snapshot and you would want to track this over time to try and notice some momentum. For example, it is usually Metamask at the top of the rankings, which is an EVM ecosystem centred wallet but BitGet, which primarily focusses on DeFi and meme coins has recently taken the top spot and works across many chains.

We can apply the same social tracking concepts using Google Trends.

We can see that interest in Solana has been gaining traction against Ethereum over the last 12 months (chart shows last 5 years) and that Ethereum has really failed to capture a narrative of interest after the spike in interest in 2020 and 2021.

and that primary interest for Ethereum comes from 'western' countries, notable North America, Europe and Oceania

while interest for Solana appears to come from similar areas but with a significant level of additional interest in China and some of the steps.

As someone not in the loop with Chinese technology it's difficult to say what's driving this but there appears clear appetite.

A Solana hackathon event recently held has entries from 68 countries, the most frequent nationality of developers entering came from China and Vietnam suggesting this is legitimate interest.

I don't necessarily have any hard conclusions to draw from this. It largely reinforces what I already knew.

Solana and Ethereum are the dominant smart contract ecosystems and Ethereum is still king, but Solana has seen strong growth over the last couple of years.

Can Solana topple Ethereum? I struggle to see it given the structural advantages that the Ethereum ecosystem has at the moment, but anything can happen in crypto!

[DISCLOSURE - Chaz holds $MSTR, $RIOT, in an ISA and $wStETH and $GALA in unsheltered positions]

---

Latest from the YouTube Channel

I'm not a fan of credit scores - in my opinion they are misleading at best and at worst, a scammy marketing tool. You can see my thoughts here​

---

Have a great weekend!

Chaz

P.S - Want to work with me? Reach out by replying to this email and lets chat