The Full English – Tech bubble or Tech revolution?

What am I buggering on about this week?

This week we’ve seen Slack join ranks of tech startups on the stock market (1). It’s price surged immediately after listing and remained up, a distinct difference to the Uber IPO in May and the Lyft IPO in March (2). Perhaps due to the state of Uber and Lyft’s respective balance sheets (3, 4). Perhaps due to the methodology of the listing, with Slack following in Spotify’s footsteps in utilising a direct stock listing rather than an IPO. This model means that current investors are allowed to list their stock for sale, but no new stock is offered, and the positive uptake of Slack and Spotify is spurring other companies to consider this model (5, 6).

It’s been a big year for new tech listings, with Pinterest, Zoom, Beyond Meat and Fiverr also coming to the market, and AirBnb, WeWork, Palantir Tech and Peloton all touted to be in the pipeline (7, 8). This is inevitably raising the spectre of the last time we had lots of tech companies listing… the late 90s (9). So what’s to set the current market apart from the dot-com bubble, and what comparisons can we draw (10).

The Similarities

These are fairly obvious:

  • Loss-making tech companies making well over valuation at initial IPO. Promising dot-com companies that make millions going public but never turn a penny profit was a hallmark of the dot-com bubble, and we’ve yet to see Uber or Lyft make money…
  • Linked to the above, 84% of companies going public last year were not turning profits, the highest % since 2000 (11)
  • A market that is (depending on your measure) over-valued (12)
  • Economists are predicting a recession, as they did in fear of the millenium bug
  • Investors are chasing returns through new startups as the traditional markets slow

The Differences

A defining trait of humanity is it’s ability to learn, so you would hope we’ve learnt from the dot-com bubble and won’t repeat the mistakes. Let’s not do a Nathan Barley (a Charlie Brooker masterpiece) (13).

Looking at the recent tech listings there are some differences:

  • The internet is more mature

The internet in the nineties was still a thing of wonder. It’s potential seemed limitless, so valuations naturally followed. It wasn’t yet clear how this could be translated into a money-making machine, and that was a partial cause of the downfall. The internet has matured in the intervening 20 years, and the FAANG stocks in particular have demonstrated how to capitalise on it. They now dominate the market with eye-watering profits. Their growth may be slowing but they’re unlikely to collapse given their hoarded cash reserves (14).

  • Companies funding streams are more complex, but also more transparent and under greater scrutiny

Many of the companies being listed are not the fully VC-backed start-ups of old, selling a fairly unspecific dream. Companies are staying private for longer, with pressure for their finances to be under public scrutiny. Others are utilising P2P/ crowdfunding streams like CrowdCube and Seedrs. You can’t just pitch any old crap with a domain name!

  • Companies are disrupting traditional models (IMO)

Arguable this one, but I think many of the companies that went bust in the dotcom years were basically trying to take a traditional economic model and translate it to an online format with minimal idea on how to gain market presence or be profitable; see Pets.com and eToys.com. Compare this to the current round of stock offerings.

The global tech revolution

Here’s where I see the real difference. Amazon, Netflix, Google etc are massive global players, making profits around the world. They developed their own markets. AirBnB, Spotify, Slack, Uber etc are all doing or have done the same. Their founders have identified a niche or a gap, and placed a product which is a natural fit. Why else would they become so ubiquitous if they were not so obvious. Improvements in the infrastructure of technology has made this possible, and will continue. Starling and Monzo, which I talked about last week, are also disruptive, but banking still has further to go.

We’ve seen wholesale changes in almost all aspects of our lives. There are apps for pretty much everything you do; shopping, leisure activities, work, investments and loans, sleep, music, etc. What hasn’t changed? Banking and central economics. Governments and central banks still set interest rates, still co-ordinate and oversee financial structures and currencies. Which is where Libra, the new cryptocurrency backed by Visa, Mastercard, PayPal, Uber and Facebook comes in (15).

There’s plenty of arguments against Libra (I’m looking at you Ermine), not least security and the prospect of having Facebook digging through your earnings (16). But it’s backed by lots of major players, and could be truly disruptive. Like all blockchain cryptocurrencies it’s decentralised, beholden to no central bank (17). This has got the regulators in a right tizz; if it’s globally decentralised who can/ would regulate it (18). How will government lobbyists get their greasy mitts on it?!?

The clever move that puts Libra over and above Bitcoin and other blockchain cryptocurrencies (beyond it’s big industry support) is asset-backing (19). Backing with physical assets (probably cash/ bonds, but interestingly also could be equities) removes the wild price swings seen with Bitcoin. If it’s globally backed then you suddenly have a currency which tracks global inflation automatically, can be accepted in any country, and allows you to purchase across borders without incurring currency conversion costs. No wonder Mark Carney reckons it could be ‘systematically important’.

We live in the age of a global economy. Corporations are multinational, straddle borders and look to leverage international differences to increase earnings (moving jobs offshore for lower wages for instance). I don’t think central governments/ banks are about to relinquish their stranglehold on economic policy, but Libra offers a window into a future where this might be the case. Where your earnings are paid in a global currency by a global company, wherever you are. Where geoarbitrage becomes the norm, forcing international parity. Where interest rates on your loan are not set based on a baseline from central government, but by global market inflation, or a combination of your credit score and what a credit union of your Facebook contacts are willing to lend. Governments and global banks (Rothschilds etc) have long held a hegemony on money. Now there’s a chink in their armour.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (affiliate links):

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

References:

  1. https://www.bbc.co.uk/news/business-48707622
  2. https://www.bbc.co.uk/news/business-47741990
  3. https://www.bbc.co.uk/news/business-48451339
  4. https://marketrealist.com/2019/05/why-lyft-stock-has-declined-21-since-its-ipo/
  5. https://www.bloomberg.com/news/articles/2019-06-21/with-slack-sitting-pretty-its-bankers-eye-more-direct-listings
  6. https://markets.businessinsider.com/news/stocks/slacks-direct-listing-bill-gurley-says-startups-call-morgan-stanley-2019-6-1028298641
  7. https://www.marketwatch.com/story/slack-listing-comes-during-banner-year-for-tech-ipos-despite-uber-and-lyfts-troubled-debuts-2019-06-20
  8. https://www.vox.com/recode/2019/6/20/18650993/tech-ipo-tracker-uber-lyft-slack-zoom
  9. https://www.barrons.com/articles/chewy-fiverr-and-crowdstrike-ipos-recall-the-dot-com-bubble-51560553067
  10. https://en.wikipedia.org/wiki/Dot-com_bubble
  11. https://www.vox.com/recode/2019/6/20/18650993/tech-ipo-tracker-uber-lyft-slack-zoom
  12. https://eu.usatoday.com/story/tech/2019/06/17/goldman-sachs-says-technology-stocks-overvalued/1483689001/
  13. https://www.digitalspy.com/tv/tube-talk-gold/a399600/nathan-barley-is-10-looking-back-at-charlie-brookers-debut-tv-series/
  14. https://marketrealist.com/2019/01/the-tech-sector-is-finally-slowing-down/
  15. https://www.forbes.com/sites/panosmourdoukoutas/2019/06/22/libra-could-make-or-break-bitcoin/
  16. https://simplelivingsomerset.wordpress.com/2019/06/18/all-you-cash-belong-to-zuck/
  17. https://www.wired.co.uk/article/facebook-libra-startup-privacy-analysis
  18. https://www.bbc.co.uk/news/technology-48688359
  19. https://www.theguardian.com/business/2019/mar/20/lorraine-kelly-theatrical-artist-tax-tribunal-judge-rules
  20. https://www.theguardian.com/business/2019/jun/19/consumers-being-badly-advised-on-pensions-says-regulator-fca
  21. https://www.cam.ac.uk/employmentdosage
  22. https://www.independent.co.uk/money/spend-save/help-to-buy-house-prices-loans-first-time-buyers-savings-a8958056.html
  23. https://indeedably.com/marriage-of-ultimate-doom/
  24. https://indeedably.com/ownership/
  25. https://simplelivingsomerset.wordpress.com/2019/06/20/playing-with-fire/
  26. https://monevator.com/visualizing-investors-emotions/
  27. https://www.ukvalueinvestor.com/2019/06/royal-mail-dividend-yield-is-13pc-but-i-still-wouldnt-invest.html/
  28. https://cashflowcop.com/best-guide-to-selling-on-ebay/
  29. https://cashflowcop.com/maternity-leave-for-men-tips-for-dads/
  30. http://diyinvestoruk.blogspot.com/2019/06/sipp-drawdown-year-7-update.html
  31. https://firevlondon.com/2019/06/17/ive-paid-for-my-dream-home-in-less-than-4-years/
  32. http://quietlysaving.co.uk/2019/06/20/crowdfunding-road-trip/
  33. https://ditchthecave.com/may-2019-update/
  34. https://thesavingninja.com/what-is-fire/
  35. https://www.msziyou.com/net-worth-updates-april-2019/
  36. https://www.msziyou.com/bros-scared-me/
  37. https://awaytoless.com/a-way-to-less-what/
  38. http://www.thefrugalcottage.com/my-updated-porfolio-june-2019/
  39. https://gentlemansfamilyfinances.wordpress.com/2019/06/19/green-money-greencoat-uk-wind-share-offer-success/
  40. https://gentlemansfamilyfinances.wordpress.com/2019/06/18/hard-lucks-and-let-down/
  41. https://gentlemansfamilyfinances.wordpress.com/2019/06/21/booze-and-babies/
  42. https://www.earlyretirementguy.com/summer-2019-networth-update/
  43. https://www.iretiredyoung.net/single-post/2019/06/21/My-early-retirement-or-midlife-crisis
  44. https://twothirstygardeners.co.uk/2019/06/interview-urban-foraging-whiskey-cocktail-making-john-rensten-bushmills/
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The Financial Dashboard – May 2019

The goals for May were:

  • Sell £100 worth of stuff
  • Finish my portfolio spreadsheet
  • Get two extra blog posts out
  • Re-mortgage
  • Set up new bank accounts

Checking the assets and liabilities:

May AssetsMay Liabilities

These are taken, as always, from my Beast Budget spreadsheet. This month my net worth fell by 1.41%. A number of reasons for this: we re-mortgaged which included a fee, I moved the date I pay into our joint account resulting in less actually in my accounts, the markets dipped a bit, and I had a number of work courses which all required payment at once.  We finally paid off our loan to our family member for the wedding, and I’ve started setting up new accounts to squirrel emergency savings into.

Goals:

Goal achieved: Sell £100 worth of stuff

Finally got rid of a big ticket item that’s been taking up garage space, along with some smaller stuff. Actually smashed this goal, making £250 into the joint account. For now this goal will be on hold while I send more stuff to charity shops.

Goal failed: Finish my portfolio spreadsheet

So I tried the Rebo app developed by Andy at Liberate Life, but found it too simplistic for what I wanted (1, 2). I’m working on another hybrid google sheet which I’ll probably start debuting for next months end of Quarter review.

Goal achieved: Get two extra blog posts out

This was to get me back into the swing of posting regularly. There’s some fairly long posts which have been taking me a while to draft, hopefully these will be out soon.

Goal achieved: Re-mortgage

We’re in a slightly difficult situation, in that we have a split pot mortgage as a result of our various house moves. The larger of the two mortgages came to the end of it’s 5-year 4.29% fix last month; a reminder of days when we only had a 10% deposit and where the economy and house prices were looking strong with all the talk of rising interest rates. Hindsight is 20-20. We umm-ed and ahh-ed about what to do. Given our intention is to sync up the two pots within the next five years here’s our thinking:

  1. A tracker rate appealed for similar reasons as set out by 3652days last year (3). Namely:
    • If we assume a no deal brexit there will likely be a recession. BoE unlikely to raise rates. Tracker wins.
    • If we continue to have delays to Article 50 then the knock on economic uncertainty is likely to keep a dampener on inflation/ economy. BoE unlikely to raise rates. Tracker wins.
    • If parliament passes Mrs Mays deal (unlikely) then whilst the pound and economy may rise from their current torpor, it’s unlikely this will be within the two year tracker period. It will take time for things to gear up again. Tracker – not much difference.
    • Depending on the new leader of the conservatives and de facto PM, we can theorise potential outcomes – either they’re a hardline no-deal leader, in which case they’d probably try to push a no-deal brexit by waiting the damn timer out (and therefore see bullet point one)… Or they try to unify the party with the promise of a new deal in compromise with labour. Such a deal will likely struggle to get through parliament, because it’s unlikely to resolve the Irish border or pacify the wings of either party. Both strategies will push towards a general election, which the bookies now reckon is more likely in 2019 than not (4).
    • If we assume no brexit, either through a further referendum or a complete “betrayal” by the conservatives or a new government, then the economy may bounce back.  Routes to this would be either a general election and coalition Lib/Lab/Green Gov, or (due to our first past the post system) a Conservative majority led by a moderate trying to appease the centre. This will again take time. The economy’s not going to be able to come straight out of the blocks flat out whilst still wading through the political fallout of such a decision. Tracker – not much difference to fix.
  2. The tracker rates available to us were ~4-5% within the same bank we currently use. Rates available at other banks were ~1.55%.
  3. Fixed rates available to us were ~1.6% for 2 years, up to around 2% for a five year. Fixed rate pros and cons:
    • If we go for a longer rate fix we might as well change bank for the lowest rate possible. A long fix nullifies the tracker arguments to an extent due to timescale. Pros – financial stability and predictability. Cons – lack of flexibility and difficulty consolidating mortgage pots resulting in logistical and cost  implications.
    • If we fix for a shorter rate we can stay with the current bank. Pros – consolidating mortgage pots next year, cheaper rate vs long fix, flexibility. Cons – risk of interest rate rises in the next two years.
  4. Inflation is currently 2.1%, close to the BoE target of 2.0%. Whilst this remains that way they’re unlikely to change the base rate. The current outlook is mixed and largely Brexit dependent, but the BoE is predicting a base rate of 1.25% by 2022, with the next move late this year or early in 2020 (5, 6).

Our decision was somewhat reactionary and behavioural. We were burnt by our lack of flexibility in the past. Our current home is not our dream home, and we intend to move in the next five years. We favoured the flexibility of a short fix or tracker. The tracker rates at our current bank were not competitive. If we moved banks we could split the pot across banks, but this would likely make consolidating the mortgage next year (when the smaller pot’s fixed rate ends) more challenging. The short fixed rate at our current bank was close enough to tracker rates as to make no odds. We’ve therefore fixed for two years, gambling that rates will only rise by ~1% in the interim, dependent on Brexit outcomes. Both pots average ~1.65%, meaning our mortgage rate is less than RPI inflation.

The kicker here is that the drop in our interest rate actually meant that we could reduce our term whilst keeping repayments the same. It now sits at a nice 20 years, with the continued option of a 10% overpayment. We calculated either of us can pay the mortgage on our own independently, and we could tolerate up to a 15% interest rate (which would be seriously dire days) (7). It’ll be interesting looking back on this in the future, did we make the right gamble?

Goal achieved: Set up new bank accounts

Our 5% Santander regular saver matured this month, and Santander have reduced the interest rate to 3%. Santander have also changed the terms on their 1-2-3 account, which we’ve been using for our joint account. I’m therefore in the process of moving us over to First Direct for their £100 switching bonus and linked 5% regular saver (8). I’ve also opened a Nationwide Flex account to benefit from their 5% interest rate on balances up to £2500 for the first year (9). In the next few months I’ll add a Marcus account to this mix for my emergency fund over £2.5k.

Budgets

  • Groceries – Budget £300, spent £264.72, last month £184.25. We hosted a lot this month, so spent more than usual but well within budget. I’ll likely decrease my self-imposed budget limit soon.
  • Entertainment – Budget £150, spent £139.47, last month £99.38
  • Transport – Budget £460, spent £119.25, last month £851.53. Back on track.
  • Holiday – £150, spent £0, last month £0
  • Personal – £100/ £15/ £41.88
  • Loans/ Credit – £350/ £407.40/ £88.97
  • Misc – £50/ £59/ £121.92. Misc payments this month:
    • £25 on a sewing machine
    • £25 on a carpet cleaner
    • £9 on gardening gear

In the garden:

Things are getting wild, overgrown and many an evening is spent weeding. Our salad crops are providing plenty of dinners, and the first of the spring onions and early potatoes are nearly ready.

Goals for next month:

  • Finish my portfolio spreadsheet
  • Compare current insurance rates
  • Look into further financial planning: wills and income protection
  • Plan healthy weekly dinners
  • Exercise at least 3x a week

What’s in the pipeline: (Life continues to get in the way of blogging)

  • Stoicism and the finance world
  • Should I buy an electric car?
  • Q2 2019 – Green Credentials
  • Property Renovation Lessons Part III
  • Plus the usual Full English Accompaniments and other drivel…

Happy June everyone,

The Shrink

References:

  1. https://reboapp.co.uk/
  2. http://liberate.life/index.php/2019/05/01/track-portfolio-rebo/
  3. https://3652daysblog.wordpress.com/2019/01/11/its-a-tracker/
  4. https://www.theweek.co.uk/93763/will-there-be-a-general-election-in-2019
  5. https://www.which.co.uk/news/2019/05/what-will-brexit-mean-for-interest-rates/
  6. https://moneytothemasses.com/owning-a-home/interest-rate-forecasts/latest-interest-rate-predictions-when-will-rates-rise
  7. https://www.moneysavingexpert.com/mortgages/mortgage-rate-calculator/
  8. https://www.bankaccountsavings.co.uk/
  9. https://www.moneysavingexpert.com/banking/compare-best-bank-accounts/#bonus

The Full English Accompaniment – Playing fair when maximising your ISA allowance

What’s piqued my interest this week?

It’s that time of the year, and for the first time in a long time I’m looking at dipping my toe in the ISA waters, that generous government tax-sweetener (1). Sensible investors of course maximise their ISA allowance at the start of the tax year (for time in the market), but I’m only just reaching a point where I can start thinking about it.

So I have my £20,000 allowance ahead of me. How do I use it? Well according to some denizens of the internet I should max out all of my lines of credit and fill up my ISA pots. This would potentially maximise my allowance, and ensure I don’t regret losing it in the future. I could do this by stoozing, taking out a new 0% interest credit card and bunging it all in an ISA (2). I’m loath to do this for three reasons. The best cash ISAs are currently providing 1.77% interest (or 1.95% if two year fixed), which on £10k borrowed is a measly £177 (3). I lack the kahunas to leverage £10k on credit cards into a S&S ISA in the current market. We’re also due to remortgage soon and I’m trying to minimise my credit utilisation.

If not stoozing then perhaps using a flexible ISA to at least fill my allowance before paying it all back next month (4). This would be a pretty weird use of the flexibility, and I’m not sure how well it sits with me. The main premise of a flexible ISA is that you can take money out and as long as you replace it within the tax year it doesn’t effect your allowance; i.e. Put in £5k, leaving £15k allowance, withdraw £2.5k and you go down to £17.5k allowance (5, 6). So far so simple, but it gets a bit more complicated when you start adding in previous tax year allowances. Money withdrawn comes first from the current years allowance, and then previous years. Money replaced first replenishes previous years and then the current year’s allowance (7). Also worth noting Innovative Finance ISAs and cash within a S&S ISA can be flexible, but not any element in a S&S ISA that is not cash. MSE’s guidance on this is pretty excellent (7).

In my situation I could therefore use £20k of credit to fill up this years allowance on the 5th of April, before paying back my creditors on the 6th of April and leaving myself with £40k to fill for the next tax year. I’m not going to do it because I don’t think I’ll fill my £20k allowance next year, never mind £40k. It also feels a bit morally like bed and breakfasting, the act of selling and repurchasing shares on the same-day to play CGT, which is a naughty tax no-no (8). My suspicion is that the actual number of people in this position is so low that nobody at HMRC really cares. Bed & ISA-ing is a separate proper thing which is recommended, because the repurchase into the ISA counts as being in a different capacity and therefore it’s not B&Bing (9, 10, 11).

Other sources point to portfolio cash ISAs, with a bit in S&S and a bit in cash in separate pots under once umbrella, just to make the waters more muddy (12). There’s also recommendations to use a flexible ISA as a sort of tax store, where you take it out of your 1% instant access ISA account at the start of the tax year, bung it somewhere it can earn more interest, and then put it back in at the end of the tax year to keep the allowance (13). This makes it ‘work harder’, but seems absolutely bonkers to me as surely any interest is taxable and therefore negates the point of having a bloody ISA. It’s all a bit of a minefield of suggestions, and you’ll have to wait until the end of the month to find out what I actually did. Hint: it’s very boring.

Have a great week,

The Shrink

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (affiliate links):

Tombland – C.J. Sansom – I love the Shardlake series, detective novels set in the Tudor period with a crippled lead character. Beautifully written.

Food Of The Gods: The Search for the Original Tree of Knowledge: A Radical History of Plants, Drugs and Human Evolution – Terence McKenna – An ethnobotanist explores humanitys’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

References

  1. https://www.gov.uk/individual-savings-accounts/
  2. https://www.moneysavingexpert.com/credit-cards/stooze-cash-credit-cards/
  3. https://www.moneysavingexpert.com/savings/best-cash-isa/
  4. https://www.gov.uk/individual-savings-accounts/withdrawing-your-money
  5. https://www.thisismoney.co.uk/money/saving/article-5572897/What-flexible-Isa-advantage-it.html
  6. https://www.gov.uk/individual-savings-accounts/withdrawing-your-money
  7. https://www.moneysavingexpert.com/savings/flexible-ISAs/
  8. https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg13370
  9. https://forums.moneysavingexpert.com/showthread.php?t=5850109
  10. https://www.moneyobserver.com/how-to-invest/isa-rules-everything-you-need-to-k
  11. https://www.which.co.uk/news/2019/03/revealed-how-to-play-the-tax-free-isa-rules-to-your-advantage/
  12. https://www.which.co.uk/news/2019/03/revealed-how-to-play-the-tax-free-isa-rules-to-your-advantage/
  13. https://www.thisismoney.co.uk/money/saving/article-5572897/What-flexible-Isa-advantage-it.html
  14. https://www.bbc.co.uk/news/business-47636056
  15. https://www.theguardian.com/business/2019/mar/21/bank-of-england-holds-interest-rates-amid-brexit-chaos
  16. https://www.bbc.co.uk/news/business-47554026
  17. https://www.bbc.co.uk/news/business-47617206
  18. https://www.bbc.co.uk/news/business-47666249
  19. https://www.telegraph.co.uk/news/2019/03/21/three-drunk-russian-sailors-rescued-island-welsh-coast-getting/
  20. https://www.bbc.co.uk/news/uk-47652870
  21. http://eaglesfeartoperch.blogspot.com/2019/03/cost-of-car-ownership-over-9-years.html
  22. https://theescapeartist.me/2019/03/19/get-rich-with-recycling/
  23. https://ofdollarsanddata.com/we-all-make-mistakes/
  24. http://quietlysaving.co.uk/2019/03/22/5-years/
  25. https://monevator.com/weekend-reading-oops-bonds-did-it-again/
  26. https://monevator.com/why-the-4-rule-doesnt-work/
  27. http://diyinvestoruk.blogspot.com/2019/03/ishares-global-clean-energy-new-addition.html
  28. https://simplelivingsomerset.wordpress.com/2019/03/20/red-and-white-dragons-fight-under-the-edifice-of-brexit-as-the-end-of-the-isa-year-approaches/
  29. https://gentlemansfamilyfinances.wordpress.com/2019/03/21/fire-proofing-the-portfolio/
  30. https://theenglishinvestor.com/a-life-update-from-the-english-investor-q1-2019-edition/
  31. https://ditchthecave.com/child-millionaire-saving-kids/
  32. https://thesavingninja.com/how-to-be-successful/
  33. https://indeedably.com/uncharitable/
  34. https://indeedably.com/a-professional-not-an-expert/
  35. https://firevlondon.com/2019/03/17/february-2019-skinny-update/
  36. https://lifeatno27.com/2019/03/23/sweet-cherry-tomatoes-plot-to-plate/

 

 

Investment Strategy Statement – Part 4 – Accounts, Funds, Taxes & Rebalancing

Wrapping up my ISS with the mechanical stuff.
Taxes

Exploit tax-free allowances where possible

MrsShrink and I are both UK resident fully compliant UK taxpayers. 2018/19 I have been on the cusp of higher rate tax, and will need to review once I get my year end P60 for the three (actually sort of four) jobs I’ve been on PAYE (1). From 2019/20 onward it looks like I’ll be in the higher rate 40% bracket.

I plan to exploit four tax-sheltering methods:

1. Interest from cash savings and emergency funds will stay within my Personal Savings Allowance

This latest weapon in the public’s tax armory allows for £1,000 tax-free savings for basic rate tax payers and £500 for higher rate (2, 3). Interest from our high interest current accounts holding our cash emergency fund will aim to be held within this limit.

2. Filling up ISA allowances

Once our emergency fund is topped off we will contribute to ISAs (4, 5). In the short term all my stock market purchases will fit within the £20k/year wrapper (6). MrsShrink is likely to use Cash ISAs (7). We will utilise the Marriage Allowance if such circumstances arise (8).

We are considering using LISAs as well, but their benefit appears limited to the government bonus (9). We’re not first time buyers, so such an account would be for the long-haul and intended to supplement our income post-60. They’re a complex product and I’m not sure I’m happy with the lack of flexibility, so this will be another area to think about in the future (10).

tax efficiency

3. Pensions Contributions

I will maximise my tax relief on my pension contributions. I’m in the enviable position of having pensions held in two of the most generous funds left in the country; the NHS Pension Scheme and the Universities Superannuation Scheme. Both are sort of defined benefit schemes. The NHS Pension Scheme functions as a career average revalued earnings (CARE) scheme (11). The USS is a hybrid defined benefit and contribution scheme, where DB is paid on salaries up to £57,216.50 and DC over that figure (12, 13). I will detail both schemes in separate future posts. I shouldn’t really have both (this has happened due to some HR oddness) and so I need to sit down and unpick. The complexities of my professional life mean that I am likely to be bouncing between services for the foreseeable future, so this will remain a headache.

The secondary headache in this is that both pensions may be hard up against the lifetime allowance cap (14, 15). As a defined benefit scheme my NHS pension is multiplied by 20 and added to any lump sum to give a capital value (16). Many of my senior colleagues have been hit with substantial (five-figure) unexpected tax bills since the reduction in the lifetime allowance. It’s therefore not clear to me yet if making further contributions will be tax effective, or which pension scheme will be the most advantageous for a potential early retirement (17, 18, 19, 20). A matter for future reading.

4. Other investment structures

Longer term areas of interest:

  • Venture Capital Trusts
  • Enterprise Investment Schemes
  • Seed Enterprise Investment Schemes (21, 22)
  • Premium Bonds (I dared to speak thy name!) (23, 24)
  • Property (25, 26, 27, 28)

Accounts and Funds

Split holdings across multiple providers and platforms to reduce risk

We will use the bank account savings website (or similar if superseded) to maximise returns on liquid cash holdings (29). This will be split across multiple accounts to remain within the FCSC £85,000 limit (30). Tax-free accounts will be the preferred method for holding passive equities, bonds and stock.

Assets will be allocated across investment accounts to reduce costs, provide further security and reduce platform risk (31, 32). Initially I will aim to keep investments within the £50,000 FCSC protection limit (33). As stated in my ISS part 3, I intend to allocate ETFs across fund holders to meet allocation targets. No provider will hold more than 25% of my holdings after year five (to give me time to actually build the damn thing up!).
Rebalancing

Rebalance quarterly using Swedroe’s 5/25 through purchases

A basic tenant of my investment plan is to sell rarely, if ever. My stock purchases are for the long haul. Therefore I aim to check and buy back to allocation each quarter through purchases (34, 35). Boundaries for this are set using Larry Swedroe’s 5/25 rule; 5% absolute or 25% relative percentage variance (36). If this implicates selling I will wait until year end to optimise Capital Gains Tax. Allocations will be balanced annually against global markets plus my own weighting. On the active naughty step portfolio investments are free to do their own thing but will be re-evaluated against the overall portfolio yearly at the 10% stocks, 10% active target.

I’ll revisit this and update periodically, but for now that about wraps it up.

Take care,

The Shrink

References:

  1. https://www.gov.uk/income-tax-rates
  2. https://www.gov.uk/apply-tax-free-interest-on-savings
  3. https://www.moneysavingexpert.com/savings/personal-savings-allowance/
  4. https://www.gov.uk/individual-savings-accounts
  5. https://www.moneyadviceservice.org.uk/en/articles/isas-and-other-tax-efficient-ways-to-save-or-invest
  6. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/stocks-and-shares-isas/
  7. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/isa-basics/
  8. https://www.gov.uk/marriage-allowance
  9. https://www.fool.co.uk/investing-basics/isas-and-investment-funds/lifetime-isas/
  10. https://youngfiguy.com/why-the-lifetime-isa-is-not-a-simple-to-understand-product/
  11. https://www.moneywise.co.uk/managing-your-pension/pensions/the-lowdown-nhs-pensions
  12. https://www.imperial.ac.uk/human-resources/working-at-imperial/pension-schemes/uss—universities-superannuation-scheme/changes/pension-schemes-explained/
  13. https://www.uss.co.uk/members/members-home/the-uss-scheme
  14. https://www.gov.uk/tax-on-your-private-pension/lifetime-allowance
  15. https://www.pensionsadvisoryservice.org.uk/about-pensions/saving-into-a-pension/pensions-and-tax/the-lifetime-allowance
  16. https://www.bma.org.uk/advice/employment/pensions/lifetime-allowance
  17. http://www.legalandmedical.co.uk/3-reasons-to-have-a-pension-pot-that-is-over-the-allowed-limit/
  18. https://chasedeveremedical.co.uk/2018/02/22/beware-the-lifetime-allowance-charge/
  19. https://www.telegraph.co.uk/money/special-reports/should-i-retire-at-55-because-of-my-125m-nhs-pension/
  20. https://www.uss.co.uk/members/members-home/retirement-articles/2018/the-easy-way-to-keep-track-of-your-annual-and-lifetime-allowances
  21. https://www.moneyobserver.com/how-to-invest/how-to-invest-tax-efficiently-beginners-guide
  22. https://www.fool.co.uk/investing-basics/how-shares-are-taxed-2/tax-efficient-investing/
  23. https://www.moneysavingexpert.com/savings/premium-bonds/
  24. https://www.nsandi.com/premium-bonds
  25. https://www.moneyadviceservice.org.uk/en/articles/tax-and-property-investment
  26. https://www.out-law.com/topics/tax/property-tax-/tax-treatment-of-reits/
  27. https://www.investorschronicle.co.uk/tax/2017/08/31/how-farmland-is-taxed/
  28. https://www.whatinvestment.co.uk/how-to-invest-in-forestry-2134293/
  29. https://www.bankaccountsavings.co.uk/calculator
  30. https://www.fscs.org.uk/what-we-cover/
  31. https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
  32. https://www.thisismoney.co.uk/money/experts/article-2553851/How-I-know-DIY-investing-platform-safe.html
  33. https://www.fscs.org.uk/what-we-cover/investments/
  34. https://www.investopedia.com/articles/stocks/11/rebalancing-strategies.asp
  35. https://www.bogleheads.org/wiki/Rebalancing
  36. https://awealthofcommonsense.com/2014/03/larry-swedroe-525-rebalancing-rule/

The Full English Accompaniment – Wealth whispers

What’s piqued my interest this week?

This picture, from meta-aggregation site Reddit, triggered me.

The Shrink comes from an old family. We have an extensive family tree taking up many interconnected A1 sheets, and several books have been written about both maternal and paternal ancestors. These families are not rich. They fell from grace long before my parents came around, and many of the extended family survive at the mercy of universal credit. This is one of the reasons for my peculiar attitude to wealth. I have learnt from my family that all that is won can be lost by your children. Attitude is more important than cash. The Shrink’s great x 5 grandfather may have been a Victorian Buffett, but he didn’t teach his grandson not to splash it all on fine wine and pheasants.

This created an underlying distrust of overt displays of wealth. Encounters with people classically defined as aristocrats reinforced this. No lord gives a damn about your 68-plate Landrover. Wealth whispers.

I feel this attitude sits well with financial independence. You don’t maintain great wealth by spending it frivolously. To an extent, I think the financial independence movement needs to credit the millionaire next door concept as part of it’s roots. The original 1996 Millionaire Next Door book found that millionaires were disproportionately clustered in blue-collar neighbourhoods due to white-collar professions spending on luxury goods and status items (1). The follow-up focused on how financial attitudes (and advertising/ cultural shifts) pushed people to live a pseudo-affluent lifestyle of “freedom to consume” (2). Credit and loans means you can consume whatever you want, when you want, and deal with the consequences later. Consumerism and debt props up a stagnating economy by borrowing from future prosperity. Lifestyle magazines and the media focus on self-made stars (footballers, rockstars etc) encourages people to believe that anyone can rise to the top and have everything. And even if you don’t get that million-pound AC Milan contract you can emulate your favourite footballer by buying a Merc C-class. You just have to get finance at 18.9% APR to do it, paid for by your job managing a Vodafone call centre. Other brands are available.

Across the ages debts don’t make a person rich. Greeks and Romans knew the value of saving. Samuel Pepys turned £25 to £10,000 by working hard and saving (3). The core concepts of saving, spending only what you can afford, keeping debts and credit lines small cross-cut history and movements. Modern articles on how to be the millionaire next door could be copy-pasted to FI (4). The lesson is that you can’t get rich by ‘flashing the cash’.

Have a great week,

The Shrink

Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Fools and Mortals – Bernard Cornwell

Smarter Investing 3rd edn – Tim Hale – hu-bloody-rah

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://en.wikipedia.org/wiki/The_Millionaire_Next_Door
  2. https://thinksaveretire.com/the-next-millionaire-next-door/
  3. https://www.independent.co.uk/arts-entertainment/books/features/samuel-pepys-diary-a-decade-worth-recording-5515913.html
  4. https://www.marketwatch.com/story/heres-how-you-can-be-the-millionaire-next-door-2015-07-14
  5. https://www.bbc.co.uk/news/business-46505692
  6. https://www.bbc.co.uk/news/business-46502650
  7. https://www.bbc.co.uk/news/business-46505688
  8. https://www.independent.co.uk/life-style/gadgets-and-tech/news/bitcoin-price-collapse-cryptocurrency-latest-value-prediction-analysis-a8675766.html
  9. https://www.independent.co.uk/travel/news-and-advice/crossrail-delay-opening-latest-update-london-underground-elizabeth-line-tfl-sadiq-khan-a8676076.html
  10. https://www.reuters.com/article/us-usa-stocks-bears/almost-half-of-sp-500-stocks-in-a-bear-market-idUSKBN1O928G
  11. https://www.bbc.co.uk/news/business-46530860
  12. https://www.reuters.com/article/us-imf-economy-lipton/imf-warns-storm-clouds-gathering-for-global-economy-idUSKBN1OA0SG
  13. https://www.telegraph.co.uk/news/2018/12/11/commuter-victory-rail-firm-ditches-ironing-board-seats-new-trains/
  14. https://www.theguardian.com/us-news/2018/dec/12/as-climate-change-bites-in-americas-midwest-farmers-are-desperate-to-ring-the-alarm
  15. https://www.dailymail.co.uk/money/investing/article-6484131/The-best-worst-performing-funds-investment-trusts-2018-far-revealed.html
  16. https://www.telegraph.co.uk/business/2018/12/09/ratesetter-falls-deeper-red-acquiring-carcass-motor-finance/
  17. https://www.cnbc.com/2018/12/13/richard-branson-the-9-to-5-workday-and-5-day-work-week-will-die-off.html
  18. https://simplelivingsomerset.wordpress.com/2018/12/12/odd-christmas-sales-and-consumerism/
  19. https://monevator.com/weekend-reading-can-we-take-back-control-from-brexit/
  20. https://monevator.com/money-is-power/
  21. https://youngfiguy.com/mrs-yfg-how-my-poor-self-worth-costs-me-10000-a-year/
  22. http://www.msziyou.com/overlooked-slovenia-bulgaria/
  23. https://www.pragcap.com/3-reasons-hold-long-bonds-short-rates-rise/
  24. https://humbledollar.com/2018/12/first-impressions/
  25. https://www.financialsamurai.com/patient-capital-is-the-key-to-long-term-wealth/
  26. http://www.retirementinvestingtoday.com/2018/12/is-visible-fire-movement-changing-for.html
  27. http://quietlysaving.co.uk/2018/12/09/restarting/
  28. https://littlemissfireblog.wordpress.com/2018/12/11/november-side-hustle-report/
  29. https://littlemissfireblog.wordpress.com/2018/12/13/monthly-catch-november-to-december-18/
  30. https://littlemissfireblog.wordpress.com/2018/12/08/diversification-isnt-only-for-your-portfolio/
  31. https://gentlemansfamilyfinances.wordpress.com/2018/12/04/how-i-learned-to-stop-worrying-and-love-the-calm/
  32. https://gentlemansfamilyfinances.wordpress.com/2018/12/07/stocks-and-shares-more-like-shocks-and-scares/
  33. https://gentlemansfamilyfinances.wordpress.com/2018/12/11/graphs-i-like-income-vs-outgoings/
  34. http://www.thefinancezombie.com/2018/11/still-ere.html
  35. https://inspiringlifedesign.com/posts/2018-goals-review.html
  36. https://indeedably.com/financial-planning/
  37. https://indeedably.com/opportunity-cost/
  38. https://sharpenyourspades.com/2018/12/06/10-highlights-from-the-grow-your-own-blogs-november-2018/

The Financial Dashboard – November 2018

With the long holiday I’ve missed out October, so here’s a chance the catch up.

The goals for October and November:

  • Clear out and sell/ dump items from the storage unit – Success
  • Sell five more items – Success
  • Service the red car – Failure
  • Establish weekly and monthly joint grocery account expenses – Success
  • Finish reading Tim Hale’s Smarter Investing – Failure

Checking the assets and liabilities:

Nov AssetsNov Liab

These are taken from my Beast Budget spreadsheet. Over the two months my net worth has grown by £4427 (19%). This is down to my quarterly revaluing of our property, which sees my portion go up by £5k, hiding two months of heavy spending. My actual savings rates have bounced either side of 0, despite putting money into my mortgage, savings accounts, credit cards and pensions. We spent several thousand on our honeymoon. We’re not looking at the figures properly, as it’s a once in a lifetime thing, but it was probably £4-5k all in, travelling around the far east for three weeks.

During that time I saved £400 in my 5% interest Santander saver and for the first time since February this year my credit card debt is under £3000.

Goals:

Goal achieved:  Clear out and sell/ dump items from the storage unit

Goal achieved: Sell five more items

I’ve cleared my storage lock-up garage. In the process we sold several pieces of spare furniture, with a couple more to sell along with a whole host of stored car parts. I’m trying to get better with this, as I have a tendency to snaffle rare or good quality parts when I see them, ‘just in case’. I took a full estate-car load to the dump too. By giving up the storage unit I’ve reduced £120 of monthly motoring outgoings. So we continue – Sell five more childhood toys. Sell five more car parts.

Goal achieved:  Establish weekly and monthly joint grocery account expenses

I’m going to cover this in the next quarterly update, as more data is better. I think I’ll take an average across the whole year and look at how I can restructure our diet and shopping to get a better budget.

Goal failed:  Service the red car

I harpooned myself here. I bought the parts to do the work (£50-odd quid), and then promptly filled my garage up with crap decanted from my storage. Bah.

Problem is this continues a theme. I love working on my cars, but rarely get the time any more, especially with continued house renovations and now the garden. My garage is full of sofas, lawnmowers and boxes of books, so it looks unlikely I’ll be able to wheel either car in there for tinkering any time soon. I’ve not actually been able to work on a car for at least a year, and this not only makes me sad but it also isn’t good for the cars. Nothing knackers a motor like a long period of inactivity.

Last month I spent a long weekend away with old friends for a stag do. Two of them are doing quite well for themselves and run brand new high-end German sports cars. They both spend a lot on these cars, but as they use them daily it’s an expense they’re happy to pay for the ‘smiles per miles’. Another bloody phrase I hate. It made me question my habits. I’m not about to abandon my bangernomics tendencies, but my current cars aren’t exactly costing pennies. I think I’ve spent £1150 on work on the red car this year alone, to only turn 250 miles in that time. I’m tempted to cut my losses and buy something either a bit worse to hack over the winter, or save up and buy an appreciating classic. Watch this space. In the interim I’m going to spend this month looking over my previous motoring spending and setting a realistic monthly budget/ savings target for my cars, to gradually build up their own replacement/ repair/ improve/ invest fund.

Goal failed: Finish reading Tim Hale’s Smarter Investing

Read fiction whilst away. Will finish it this month.

Budgets:

  • Daily living and entertainment – £0 from my account, but technically a lot more from the joint.
  • Transport – budget £300, spent £233.69, last month £217.23. Keep reducing this.
  • Holiday – a lot.
  • Personal – £50/ £20.64/ £90
  • Loans/ Credit – £200/ £571.77/ £425. Paying any new additions plus £250 off my credit card every month now.
  • Misc – £50/ £16.40/ £47.97. Took some cash out for the pub.

In the garden:

The early frost while we were away last month killed off much of our late crop. We managed to save some late potatoes which are now in the greenhouse, along with a host of salad crops. I’ve dug over the ground and I’m making plans for new beds.

Goals for next month:

  • Sell five more childhood toys. Sell five more car parts.
  • Set a realistic monthly savings target for motoring
  • Establish weekly and monthly joint grocery account expenses
  • Finish reading Tim Hale’s Smarter Investing

What’s in the pipeline:

  • Property Renovation Lessons Part II
  • Investment Strategy Statement – Part 3 – Asset Allocation
  • Investment Strategy Statement – Part 4 – Funds, Accounts & Rebalancing
  • FIRE for your Mental Health
  • Plus the usual Full English Accompaniments and other drivel…

Happy December everyone,

The Shrink

 

The Full English Accompaniment – Are banks safe?

 

What’s piqued my interest this week?

One of my threads of thought this week has followed the TSB issues and a Radio4 Moneybox episode a few weeks ago. It transpires that fraudsters used the opportunity to see others bank account information during TSB’s blunders as a a good ticket to cash-out town. This week we had the admission from TSB that at least 1300 customers lost money due to fraud as a result of their IT changeover (1). Nils Pratley at the Guardian sums it up nicely; for all TSB apologises, it doesn’t change the incompetence (2). Between this, and a discussion with YFG on an old Full English about the TSB debacle, I decided to have a chat with some friends who work IT security. One is a white-hat hacker, the other works as an IT security consultant and provides subcontracted coding services (as well as currently writing some code for a little spin-off). Both confirmed what I had read before; that the monolithic goliaths that are the main high street banks have pitiful IT infrastructure.

It makes sense. These are banks founded on the premise of an on-site vault, a list of ledgers and a network of staffed branches. Their IT was adopted ad-hoc, as a necessity, developed or brought in to fit the old model. The old model was anachronistic, it included human foibles and errors, and a degree of leniency to allow for it. Trying to bring in coders, explain and then cram all that into Windows 3.1, then 95, then 2000, etc was never a long term solution. IT departments are not the moneymaking focus of a high street bank, they don’t win all the praise, so the funds will only stretch to essential patching. This is not safe. Threadneedle street is trying to combat this by setting cyber security challenges to recruit IT experts to bolster their security (3)

Sadly, there lies my concern. A bank, by definition, should be a safe place. Your money no longer resides in a huge locked vault. It sits on an online ledger, protected by minimally patched although mostly secure firewalls and security systems. Security systems prone to outages and instability, as Tesco Bank customers found this week (4).

Which is why I find ‘challenger banks’ so tempting. The Starling Bank CIO, John Mountain (strong name), was interviewed last September about working at a bank that is challenging traditional IT thinking (5). Starling have released their API and ran a hackathon of their systems at London Campus in April this year (6). Anne Boden, the Starling CEO, is reported to have said that a bank should not have an IT department, as it’s whole business is now IT. In John Mountain’s words:

“We don’t run a technology function here because the whole business is a tech function”

Will I move all my money into ‘challenger banks’? Probably not. The Rothschilds’ don’t throw their banking system out with the bathwater every time there’s a systemic crisis. Traditional banks will have to learn the hard way, as TSB are doing. For the time being I’ll split my pots as, after all, a bit of diversification can’t help can it?

Have a great weekend,

The Fire Shrink

Side Orders

News:

Blogs/ Opinion pieces:

What I’m reading:

When Breath Becomes Air – Paul Kalanathi – Useful for a sense of perspective

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://www.theguardian.com/business/2018/jun/06/tsb-admits-1300-customers-lost-money-from-accounts
  2. https://www.theguardian.com/business/nils-pratley-on-finance/2018/jun/06/tsb-apologises-a-lot-but-its-real-problem-is-about-competence
  3. https://www.cio.co.uk/cio-interviews/bank-of-england-cio-robert-elsey-sets-cyber-security-challenge-3678401/
  4. https://www.theguardian.com/business/2018/jun/05/tesco-bank-customers-shut-out-from-online-and-mobile-services
  5. https://www.computerweekly.com/news/450426542/CIO-interview-John-Mountain-Starling-Bank
  6. https://www.starlingbank.com/hackathon/
  7. http://www.bbc.co.uk/news/business-44366731
  8. https://www.telegraph.co.uk/finance/newsbysector/transport/8613090/Crossrail-financed-by-600m-bond.html
  9. https://www.theguardian.com/society/2018/jun/08/nhs-workers-agree-pay-rise-three-years
  10. https://youngfiguy.com/why-having-your-hopes-and-dreams-crushed-can-be-a-good-thing
  11. http://diyinvestoruk.blogspot.com/2018/06/equities-outperform-bonds.html
  12. http://blog.letsventure.com/investor-insights/top-9-tips-to-be-a-successful-angel-investor/
  13. http://www.collaborativefund.com/blog/the-psychology-of-money/