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The Saving And Investing Into The Doom And Gloom Thread


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I am going to have to really learn about this investing stuff. ...

It has honestly been one of the most liberating things I have ever done. I honestly don't know what I'd be thinking now, given the state of this country financially, if I hadn't as I'd now have few to no options.

If I was just starting out now and wanted to learn the first thing I would do as a UK based investor is read Tim Hale's Smarter Investing. It's not the most easy of reads however it's a serious topic and so shouldn't be easy. What is should be is educational and it is. It is the first link here if you're interested. That link also contains some of the books that made a real difference for me.

Good luck with it all.

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It has honestly been one of the most liberating things I have ever done. I honestly don't know what I'd be thinking now, given the state of this country financially, if I hadn't as I'd now have few to no options.

If I was just starting out now and wanted to learn the first thing I would do as a UK based investor is read Tim Hale's Smarter Investing. It's not the most easy of reads however it's a serious topic and so shouldn't be easy. What is should be is educational and it is. It is the first link here if you're interested. That link also contains some of the books that made a real difference for me.

Good luck with it all.

Thanks for the tip re reading material.I will follow it up when I get back from holiday.

I have Ben Graham's book The Intelligent Investor sat in my bookcase. I did manage to read the first fifty or so pages about ten years ago but found it very dry. So no doubt I will have to revisit it at some stage.

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Thanks for the tip re reading material.I will follow it up when I get back from holiday.

I have Ben Graham's book The Intelligent Investor sat in my bookcase. I did manage to read the first fifty or so pages about ten years ago but found it very dry. So no doubt I will have to revisit it at some stage.

Do persist with Graham book, it's well worth it. I know it's dry but the topic warrants persistence. In comparison for me the Hale book was a much easier read than Graham's.

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Following on from my earlier post, the first month of fatherhood has been and gone. I thought an update was worthwhile posting.

Despite being down on my wages due to paternity pay, I've still put a decent chunk into my S&S ISA, and the biggest surprise is how well my wife has adjusted to living frugally. Despite now living on half her previous income, she still had a reasonable amount left at the end of the month, commenting earlier "I don't know what I used to spend it all on". I think we may have had a lightbulb moment...

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Following on from my earlier post, the first month of fatherhood has been and gone. I thought an update was worthwhile posting.

Despite being down on my wages due to paternity pay, I've still put a decent chunk into my S&S ISA, and the biggest surprise is how well my wife has adjusted to living frugally. Despite now living on half her previous income, she still had a reasonable amount left at the end of the month, commenting earlier "I don't know what I used to spend it all on". I think we may have had a lightbulb moment...

Congratulations and congratulations IB. My better half was never a frugalista and I've never pushed it other than agreeing that she has to pay for her own 'fun' while I'm happy to pay for 'home running costs' plus my own 'fun'. Over the years I've noticed her spending less and less as my methods are pretty transparent yet enjoying life more and more. Now that her personal wealth has reached a reasonable number I've also really started to see excitement in her eyes about the freedom that buys with personal spending falling off a cliff. She's now giving me a run for my money on methods to live below ones means.

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A quick wealth warning for any readers of this thread who use an AJBell YouInvest wrapper (trading/ISA/SIPP). They are changing their T&C's from the 01 October 2016. You might want to have a look how the changes affect you.

If I had have done nothing my SIPP wrapper expenses would have increased by 68%. I did something and instead of an increase have reduced product/wrapper expenses by 23%. As always I'm pretty transparent so if anyone wants to see how I did that it's here.

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A quick wealth warning for any readers of this thread who use an AJBell YouInvest wrapper (trading/ISA/SIPP). They are changing their T&C's from the 01 October 2016. You might want to have a look how the changes affect you.

If I had have done nothing my SIPP wrapper expenses would have increased by 68%. I did something and instead of an increase have reduced product/wrapper expenses by 23%. As always I'm pretty transparent so if anyone wants to see how I did that it's here.

As your anonymous comment says, HL has something somewhat similar. I've moved quite a lot of money from funds to listed ITs in response, but there's a long way to go. In part because some of the funds have no IT equivalent, or the latter trades at a massive premium (global infrastructure being a case in point - I hold the First State OEIC).

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Hi WICAO and others,

Thought I would dip into this thread as I've started to take more of an active interest in passive investments.

I've skimmed through a lot of your blog as well as Monevator etc but one thing that strikes me is that very few seem to have a genuinely balanced/diversified portfolio, reflecting the extreme low yield environment we are in. I think the YTD investment performance says it all - a balanced portfolio isn't meant to grow at such ferocious pace.

As background, I have a strong view that the low yield environment is here to stay, partly because of market forces (hat tip to forum member Skepticus for helping me develop my understanding in this area) and partly because of the central banker obsession to reduce the cost of debt to next to nothing. However, I also believe in "diversification of opinion" and always consider the possibility I may be wrong. This investment principle extends as far as holding assets that I personally believe will underperform. The next question then is how can I hedge my position, i.e. what would be a good passive investment strategy if yields and the cost of debt started a rapid turnaround?

Bonds and leveraged investments like Property are obviously out, which is why I don't hold them in my trackers. Most Equity indices are also likely to suffer, especially given the recent boom appears to be almost entirely due to yield curve manipulation. Despite generally being a hedge against market chaos, my guess is that even Gold would take a big hit from fiat strength (same for Silver, which is my preference at the moment).

So given that I am a passive investor at heart - and not interested in shorting strategies or "exotic" investments such as derivaties/swaps - what can I add to bring genuine balance to my tracker portfolio? Not really counting Cash, which of course I do hold, as I'm really looking for something negatively correlated that could off-set losses rather than avoid losses. Very interested in hearing any ideas!

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I think the YTD investment performance says it all - a balanced portfolio isn't meant to grow at such ferocious pace.

I would disagree with that statement in this particular case, as a considerable proportion of this year's growth (in a globally-diversified portfolio) will have come from equities that are denominated in currencies other than GBP. The growth has come from the devaluation of the pound i.e. those equities in foreign currencies have maintained their purchasing power [EDIT - when measured in £]

You mention that very few seem to have a balanced/diversified portfolio; what is your interpretation of that phrase? To me, it means having different assets that perform differently in different environments and hopefully have low correlations with each other, and also from a spread of countries, denominated in multiple currencies. You might find this interesting.

[EDIT] wrt asking what might not suffer, I see drops as a buying opportunity. They often only last a few years. I just put new money into whatever is the most underweight according to my allocation.

Edited by Inoperational Bumblebee
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I would disagree with that statement in this particular case, as a considerable proportion of this year's growth (in a globally-diversified portfolio) will have come from equities that are denominated in currencies other than GBP. The growth has come from the devaluation of the pound i.e. those equities in foreign currencies have maintained their purchasing power [EDIT - when measured in £]

You mention that very few seem to have a balanced/diversified portfolio; what is your interpretation of that phrase? To me, it means having different assets that perform differently in different environments and hopefully have low correlations with each other, and also from a spread of countries, denominated in multiple currencies. You might find this interesting.

[EDIT] wrt asking what might not suffer, I see drops as a buying opportunity. They often only last a few years. I just put new money into whatever is the most underweight according to my allocation.

I take your point that portfolios measured in other currencies have not seen quite as dramatic of a rise. Still, the basic argument I'm making is that the asset classes listed all show uncomfortably high correlation as of late.

If Janet emerged from her Jackson Hole (pun intended) and surprised markets with a rate rise, Equity/Bond/Property/Gold indices would all fall. The permanent portfolio does not look like such a good bet then.

When I say that portfolios look 'unbalanced' I mean they are highly exposed to systematic risk. Sure, trackers can remove specific risk, you don't need many share holdings to effectively achieve that. But I think people are fooling themselves if they believe that by spreading equity investments into US/GB/EU markets they are materially reducing their systematic risk.

I'm too young to say for sure that it has not always been this way. But when CBs have manipulated the world economy to such an extent that, at a macro level, bad news becomes good news, then I believe we are entering a new paradigm.

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You might find this interesting.

Thank you for the link by the way. Sadly this is exactly the kind of analysis I question the validity of in our extreme low yield environment. Rising inflation expectations would hit the yield curve and destroy linkers, so I find that a very poor recommendation. In the past bond prices would survive yields going from 4 to 5% but what happens when they go from 0.nothing to 1%? Isn't that just maths? Inflation protection won't be much consolation when new investors are buying the index at a fraction of what you did.

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... one thing that strikes me is that very few seem to have a genuinely balanced/diversified portfolio, reflecting the extreme low yield environment we are in.

...

So given that I am a passive investor at heart - and not interested in shorting strategies or "exotic" investments such as derivaties/swaps - what can I add to bring genuine balance to my tracker portfolio? Not really counting Cash, which of course I do hold, as I'm really looking for something negatively correlated that could off-set losses rather than avoid losses. Very interested in hearing any ideas!

A couple of thoughts.

Firstly, a key question is the future a new paradigm or will it rhyme with history. I honestly don't know but I personally position myself for it to rhyme. Every time we are supposedly in a new paradigm Mr Market has a habit of reverting things to 'normality' (whatever that means). No more boom and bust, dot com crash etc etc

The other piece for me is what choice do we have. The market may over the next X years give performance less than the 'average' but what can I do but to simply participate. Opt out and I likely lose, opt in and I get below average. To try and pick a winner is then active investing not passive.

As for diversification. I personally hold:

- US, Europe, Japan, Aus and EM equity trackers covering thousands of companies. I must have 90% of the world covered across most sectors.

- UK and then some global corporate bonds

- UK index linkers

- UK and European commercial and industrial property

- gold

- cash inc P2P

Of course I am missing some diversification but is it significant in the grand scheme of things?

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A couple of thoughts.

Firstly, a key question is the future a new paradigm or will it rhyme with history. I honestly don't know but I personally position myself for it to rhyme. Every time we are supposedly in a new paradigm Mr Market has a habit of reverting things to 'normality' (whatever that means). No more boom and bust, dot com crash etc etc

The other piece for me is what choice do we have. The market may over the next X years give performance less than the 'average' but what can I do but to simply participate. Opt out and I likely lose, opt in and I get below average. To try and pick a winner is then active investing not passive.

As for diversification. I personally hold:

- US, Europe, Japan, Aus and EM equity trackers covering thousands of companies. I must have 90% of the world covered across most sectors.

- UK and then some global corporate bonds

- UK index linkers

- UK and European commercial and industrial property

- gold

- cash inc P2P

Of course I am missing some diversification but is it significant in the grand scheme of things?

Your portfolio seems balanced by conventional standards and has clearly done you very well (congrats on FI by the way, hoping to get there soon too). Personally I question the rationale for any form of fixed income investment, when 'risk free' cash essentially yields the same, but perhaps I'm missing a trick.

More interestingly, how do you think your portfolio will perform if we see gradually increasing yields over the next few years, across all major economies? Some of your equities may hold up (perhaps financials such as insurers) but generally my guess is that it would be red across the board.

Would you look to exit the market or still attempt to stay in and rebalance by selling the best performing class and buying more of the worst performing? That would take some balls.

I'm not trying to criticise your portfolio, after all mine isn't very different, but just trying to highlight why I believe we aren't as diversified as some say. That's why I'm on the hunt for a reliable asset class that gives me that negative correlation (probably not a very popular one as it would have been on some losing streak over the last few years!).

I mentioned insurers above and, for the longer term, I guess banks would also benefit (I've been avoiding them like the plague so far). Other than that my only insurance policy at present is my job and a good old fashioned pile of cash.

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Your portfolio seems balanced by conventional standards and has clearly done you very well (congrats on FI by the way, hoping to get there soon too). Personally I question the rationale for any form of fixed income investment, when 'risk free' cash essentially yields the same, but perhaps I'm missing a trick.

More interestingly, how do you think your portfolio will perform if we see gradually increasing yields over the next few years, across all major economies? Some of your equities may hold up (perhaps financials such as insurers) but generally my guess is that it would be red across the board.

Would you look to exit the market or still attempt to stay in and rebalance by selling the best performing class and buying more of the worst performing? That would take some balls.

I'm not trying to criticise your portfolio, after all mine isn't very different, but just trying to highlight why I believe we aren't as diversified as some say. That's why I'm on the hunt for a reliable asset class that gives me that negative correlation (probably not a very popular one as it would have been on some losing streak over the last few years!).

I mentioned insurers above and, for the longer term, I guess banks would also benefit (I've been avoiding them like the plague so far). Other than that my only insurance policy at present is my job and a good old fashioned pile of cash.

If I was crystal ball gazing, given all the market manipulation and current valuations, I'd predict my portfolio will under perform against the long run average (but perform close to the market, whatever that is, during the future period as I'm passive, have low expenses and have positioned myself for low taxes in FIRE) over the coming years. Of course I might be right or wrong and only time will tell.

Importantly though I've also positioned myself for that type of return by only requiring a bit less than the market returns, including sequence of returns, that are the worst in history for my strategy to be successful. For me that means I'm only looking to pull a starting 2.5% per annum from my portfolio. Maybe it's too conservative but the last thing I want is to run out of wealth before I run out of life.

If you do find a reliable asset class that gives a negative correlation with the usual suspects I'd love to hear about it. I fear you may be looking for a unicorn.

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Thank you for the link by the way. Sadly this is exactly the kind of analysis I question the validity of in our extreme low yield environment. Rising inflation expectations would hit the yield curve and destroy linkers, so I find that a very poor recommendation. In the past bond prices would survive yields going from 4 to 5% but what happens when they go from 0.nothing to 1%? Isn't that just maths? Inflation protection won't be much consolation when new investors are buying the index at a fraction of what you did.

I've been pondering this since you asked; is a way round this to buy actual inflation-linked bonds (rather than a fund), and hold them to maturity? I've been reading around and, to be frank, I find it too complicated to try and control for.

I'm also wary of overthinking this. A few years back my father said he wasn't buying bonds as rates were so low, but look how they've performed over recent history. I certainly wouldn't have wanted to miss out on that.

Similarly to WICAO, I'm just going to carry on following my original plan. I do not have the capability to control for every eventuality; I will just do the best I am capable of.

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On 23/09/2016 at 1:39 PM, Inoperational Bumblebee said:

I've been pondering this since you asked; is a way round this to buy actual inflation-linked bonds (rather than a fund), and hold them to maturity? I've been reading around and, to be frank, I find it too complicated to try and control for.

I'm also wary of overthinking this. A few years back my father said he wasn't buying bonds as rates were so low, but look how they've performed over recent history. I certainly wouldn't have wanted to miss out on that.

Similarly to WICAO, I'm just going to carry on following my original plan. I do not have the capability to control for every eventuality; I will just do the best I am capable of.

Let me then try to explain why I see linkers as a bad idea in the context of an actual index-linked bond.

In today's City AM there was a note (don't think I can post links yet) explaining that the latest linker issue by the Treasury was at a record negative rate, yielding -1.77%. Sold for 870m, it will return investors an inflation-protected 855m in 2052 (these linkers tend to have extreme durations, not sure how short you can find them for a realistic 'holding to maturity' strategy).

Let's assume we made this investment and look at the possible scenarios of how the world will turn out, to see whether the linker indeed offers something useful.

Low Yield, Low Inflation (say 0% real yield): Current situation remains. Clearly better off with Cash. 

High Yield, Low Inflation: Don't think anyone believes this will happen. But if it does, you would face realising a huge loss trying to sell the linker. Maintaining it to maturity (all 36 years) means foregoing a large potential return in other classes, so presumably there is a price where you would still sell and take the loss. Opportunity cost. Clearly would have been better off with Cash.

High Yield, High Inflation: Plausible scenario but not one where linkers will shine. The extremely high valuation we have today and the extreme sensitivity to yield movements for such long dated investments means the inflation protection benefit would not compensate. You would be better off with sensibly invested Cash or even very short dated Bonds. Or Equities in sectors such as banks and insurance companies (the potential 'unicorns' I've mentioned upthread).

Low Yield, High Inflation: You win! Right? Not so fast. This is to a reasonable extent already priced in (hence why the issue is at negative yield). Also for how long can this actually persist in the real world before markets demand compensation and push up the yield curve (resulting in the previous scenario). Don't rely on the central bank to be able to control that, despite their shiny toolbox of monetary fraud. And don't forget that Equities and even Property (schhh say it quietly) have proven quite effective inflation protectors. And then there's that shiniest of shiny artefacts, which would be worth its weight in gold.

All of which you hold (assuming your portfolio resembles the one WICAO has so kindly shared with us). So what was the point of the allocation to UK linkers again? Surely not diversification. A gamble on helicopter money? Not a very passive investment strategy... and any gains from rampant inflation would be illusory as the sterling debasement means you could/should have just bought some foreign currency or metal. 

All intended to stimulate thought and shared with the best intentions (DYOR). I do like to 'over-think', although personally I don't find that a bad thing!

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  • 2 weeks later...

I've shared my diversified portfolio previously but maybe worth sharing what recent exchange rate movements and Brexit talk mean for me.

It's no secret that a Med move was Plan B (with Plan A being a modest UK home) for us so the EUR:GBP exchange rate is an important one.  Since the Brexit vote our wealth in Euro's has gone from EUR1,192k to EUR1,220k, so essentially  nowhere.  Additionally, all my planning was based on a forever exchange rate of 1.123 and we're now below that but for how long...  Additionally, we have May talking about hard Brexit which could affect healthcare costs post State Pension Age and State Pension triple locks for those moving to the continent.

In contrast in £'s since the vote wealth has gone from £939k to £1,091K in just 4 short months.  This is making us start to re look at Plan A again.

I really am so glad I went down the rabbit hole I did.

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Similar here with exchange rate effects on my small portfolio. Pretty much two years to the day I started and the gains I've seen have been very encouraging this early in my 'investing career'. In this short time, the increase is already beyond what I would have been able to add myself through trimming my spending from income.

I'm expecting to see inflation soon because of the devaluation, which will obviously take the shine off the performance. That said, I'm pleased that I'll have been able to protect some of the fruits of my efforts from its effects.

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2 minutes ago, Inoperational Bumblebee said:

Similar here with exchange rate effects on my small portfolio. Pretty much two years to the day I started and the gains I've seen have been very encouraging this early in my 'investing career'. In this short time, the increase is already beyond what I would have been able to add myself through trimming my spending from income.

I'm expecting to see inflation soon because of the devaluation, which will obviously take the shine off the performance. That said, I'm pleased that I'll have been able to protect some of the fruits of my efforts from its effects.

Your inflation point is an important one.  If the £ devaluation holds then it must start feeding through but for anyone on the journey I'm on its impact will be far less than the average consumer.  This is because inflation only hits spending and I don't spend very much.  This is a chart I showed here:

160730-3.png

I'm spending less than 11% of what I earn gross so even if we had inflation of 10% it would be but a blip.  If I was spending 60% of what I earn and that same inflation came flooding through it would be painful.  As I sit here with what I believe will be my peak earnings a change in taxation will leave me far more exposed than some inflation.

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On 08/10/2016 at 11:33 AM, wish I could afford one said:

This is because inflation only hits spending and I don't spend very much

I'm not sure that's quite right - surely the point of FI is to be able to cover your expenses? You're going to have to spend something (regardless of what proportion of your current income it is), and if you earn and invest in GBP then the inflation will affect you. If a Mars Bar cost £30, a £100k portfolio doesn't look quite so impressive!

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7 hours ago, Inoperational Bumblebee said:

I'm not sure that's quite right - surely the point of FI is to be able to cover your expenses? You're going to have to spend something (regardless of what proportion of your current income it is), and if you earn and invest in GBP then the inflation will affect you. If a Mars Bar cost £30, a £100k portfolio doesn't look quite so impressive!

Sorry IB, poor wording on my behalf.  Let me demonstrate my point with an example.

Punter 1.  Earns £100k, pays tax of £40k and spends £10k leaving savings of £50k.  Inflation of 10% occurs in a single year.  Costs go up by £1k, savings drop to £49k, a few swear words are muttered and life goes on

Punter 2.  Earns £100k, pays tax of £40k and spends £60k.  Same 10% inflation.  All of a sudden without a pay rise they're either entering the world of debt or have to start cutting back.

You are of course correct that at the back end of the accumulation phase inflation is a problem if your assets don't keep up with it.

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Well - I have to say thanks to you WICAO. You made me realise that being that bit too passive about upping my income was a bit silly. Managed to get a new job offer - keeping my current working arrangement of three days per week of > 25% more than now. And it'll be interesting work too in a good place I hope.

This is a very meaningful jump when put into the context of future security. Where *currently* (we'll see what inflation does to the plan) I'm putting away 2/3rd of my income into the SIPP (which represents 2 years in today's money of living expenses which I hope to grow to at least match that in retirement) and living on the rest, I now have numerous choices. 

I can

* Up my deferred saving to nearly three years per year. 

* put away the same as now nominally, and either give myself more spending money in the here and now (dangerous), or use to save outside the SIPP in a standard S&S ISA, whilst paying a bit more tax.

* put away the same in the SIPP as now, and use a lifetime ISA as well, which gives me the possibility of saving for a house in that plus the gov bonus, which more or less works out as the same effective tax relief as the SIPP (I'll still be a lower rate tax payer at the new job - but not by much - which I feel astonishingly lucky/happy to have got to in a part time job I think).

Whatever the case, by switching jobs, it hopefully means that I double the speed I can get to a true fire number, all other things being equal, because I'm putting away another years worth every year. 

Life is certainly more interesting when you get into this stuff. I'm also really happy that there's companies out there who are now amenable to part time work when making offers - proving that alone has been worth the effort. For those that are considering the semi-retirement throughout working life way vs full on fire....Hopefully it's one step further towards making that a possibility for anyone who chooses it. 

 

 

 

Edited by Frugal Git
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On 11/10/2016 at 0:41 PM, Inoperational Bumblebee said:

I understand now. Anyone living below their means is affected less by inflation, due to a lower proportion of their income going on things affected by inflation i.e. they have more leeway to cope with it.

Yeah I was chatting about this with my folks.

Dad was talking about inflation being a possible worry, and I pointed out exactly this. They currently spend about 35% of their income. I take Mum to tesco every Sunday and we take some of whats left of the reduced items after those who really need it have grabbed what they need. 

Inflation will need to triple prices for this to become a problem for them. And of course, the lad has a pension in which he gets a 5% rise per year on 60% of it, and an RPI rise on the rest anyway. Which he's one of the few pensioners who readily admits the insane luckiness of him and others like him having. 

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  • 434 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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