Quarterly Returns Q3 2018 – Goal-scoring accuracy

Quarterly return posts supplement my monthly Financial Dashboard, covering investments in detail and looking at my yearly targets. Here I track purchases and sales, document progress against my (in progress) investment strategy, and discuss re-balancing and changes over time.

Q3 Returns:

Net worth Q3

Getting married and moving house were fantastic experiences, the peak of our year in a summer that will be remembered for sun, but they would not please Mr Scrooge. Rough sums suggest we spent around £15,000 on our wedding, half the national average of £30,355 (1). The actual figures in my spreadsheet are less, but some things like the price of MrsShrink’s wedding dress I’m just not allowed to know! About a 1/3rd of the costs were paid for or made by family. Like Mr & Mrs YFG at some point I’ll probably relate how we kept our wedding cheap (2). Moving house cost another £~5k through stamp duty and solicitors fees though this didn’t come out of our bank accounts. We safely avoided a painful potential £8k early repayment charge on our mortgage. We saw the £~5k cost through loss in our net worth as it was paid out of the equity in our previous property.

We’ve spent another £4,240 to date renovating the house, with new fixtures, fittings and soft furnishings throughout. This was mainly materials (and bloody curtains) as I can turn my hand to most DIY, and MrsShrink is a dab hand with a paintbrush. We did spend £1400 on plumbing work, but I’ll detail all when I get round to writing a property renovation post. The majority of the work is now done, with just a chimney cap rebuild (Jan 2019), new bathroom (~Q3 2019) and new kitchen to go (2020ish). My net worth has gradually increased during these months, but at a slow old rate. Current investment assets stand at:

  • Cash Savings Accounts £1000 (+£600)
  • Investments £0
  • Cars £3000

I am starting to value my books and art. I’ve accumulated a number of first-editions over the years, and a few original pieces of artwork by famous illustrators. I may keep this ‘off the books’, but interesting to know as a fallback.

Yearly Targets:

Goal 1: Build an emergency fund.

As per the r/UKpersonalfinance flow chart, I’m working towards building an emergency fund (3).

We currently have a month’s outgoings in our joint account (some of this will be eroded by our honeymoon), and I’ve another months parked in my savings account. MrsShrink and I will aim to build six months worth of our combined household expenses held across multiple high-interest current accounts. We’ll maximise the returns on this using the bank account savings website (4).

Goal 2: Pay off debts

At the start of Q3 my short term debts were £1.25k to family and £4.1k on 0% interest credit cards. We’ve talked with the family member who lent us the money, who doesn’t want it back until next year. I’ve instead focused on my credit card debt, which now stands at £3.6k. Some expensive exams and unexpected work costs haven’t helped. In future this will be budgeted for, with the emergency fund just in case. I still need to close my two redundant accounts, which currently prop up my credit score (as % of total credit used is low). As TI says over on Monevator, I’ve been borrowing from my future self (5). Following the good advice, I’ve been selling unwanted items to try and clear this further. I’m also planning to increase my monthly credit card payments from £250/month to £350/month to clear it earlier

Goal 3: Reduce superfluous outgoings.

Some serious differences been made here. The major influence has been that we’re no longer paying rent in one city where we live and mortgage on another home we never see. This has seen our monthly outgoings drop by at least £600/month. I’ve also made progress on my own personal spending, cutting down to a monthly budget. We’ve got further to go on our household grocery expenses, and on my hobbies, but all progress.

Goal 4: Commence investing!

This was the target for Q3, but I now recognise this was a little naive. As mentioned in this week’s Full English I’ve been watching the market ‘turbulence’ with interest. The argument that the earlier you invest the better is strong, and I’m well aware of the benefits of dollar-cost averaging (6, 7). Then there’s AWOCS’ tale of Bob, the world’s worst market timer (8). I’m uncomfortable commencing investing whilst my short-term debts, particularly my credit cards, exceed my liquid cash. Therefore the aim is to complete my investment strategy statement this quarter.

I’ll check in again in three months and see how things are getting on.

References

  1. https://www.independent.co.uk/life-style/love-sex/wedding-cost-uk-average-how-much-marriage-ceremony-bridebook-a8460451.html
  2. https://youngfiguy.com/our-unconventional-and-cheap-wedding/
  3. https://www.reddit.com/r/UKPersonalFinance/
  4. https://www.bankaccountsavings.co.uk/
  5. http://monevator.com/why-you-must-get-out-and-stay-out-of-debt/
  6. http://uk.businessinsider.com/compound-interest-retirement-funds-2014-3
  7. https://www.investopedia.com/terms/d/dollarcostaveraging.asp
  8. https://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/
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The Full English – Are we nearly there yet?

What’s piqued my interest this week?
Caution, monster link-fest ahead. 
Well this has been a busy old week in the markets, eh? The FTSE sunk off the back of US losses, due in part to rising Federal Reserve interest rates (fuelling a drop in bond returns, therefore loss in confidence, therefore sell-off), and losses on tech stocks, particularly the FANG lot (1).
Lots of our compatriots have seen a slide… Monevator  FirevLondon, RIT (2, 3). This is all excellent fodder for the press, who have called it everything from a correction, turbulence, to a “global market MELTDOWN, the beginning of the next CRASH” (4, 5). Hyperbole so ballistic SpaceX will be after the patents. And to be fair, lots of people have been voicing that we’re in the late stages of a bull market and we should be expecting a recession imminently. It only takes one person to yell fire to start a stampede.
Look past the press, noise and short-term numbers and see that actually, big down days aren’t that uncommon. The US blogs A Wealth of Common Sense and the Irrelevant Investor both had some excellent posts on this (6, 7, 8). Shamelessly stealing their graphs and tables, this was the 20th -3% day on the S&P 500 since the end of the 2008 bear, however 80% of 3+% down days were in a sell-off/ recession.
What does this tell us? You can’t predict the future, especially looking at just one measure, and if you’re well diversified and holding long term it shouldn’t matter. And will we even see a ‘great crash’? People are jumping on index investing in ever greater numbers, spurred on by pieces like this weekends NYT article (9).  This is supported by the Morningstar Barometer continuing to show passive beating active returns over the past 10 years (10, 11). Ten years of passive investors watching an incoming tide lifting all boats has had people warning of the end of active investing (12). Passive ETFs had grown to an estimated 35% market share by 2017 (13). I couldn’t unearth more recent figures, but it seems reasonable that this will have grown in the last year. Even the great Bogle was warning of danger. But if 35%+ of the market is in trackers which move with the market, what effect will this have on when the market moves? If all the trackers are holding, or at least slow in their re-balancing, theoretically it should create an undercurrent of stability within the market, mitigating investor psychological panic moves. Additionally, for us Brits, Brexit has introduced such a level of uncertainty into the UK economy that perhaps people have been holding off while across the pond they’ve continued to make hay. I bloody love YFG’s post this week on this very topic (14).
It’s also worth remembering many young investors (me, etc) have no experience of big down days and drops. I was doing my best to get horizontal at pound-a-pint student nights during the last recession. Woohoo, cheap beer! And as someone with a lifetime of saving ahead, I should be praying for a recession (15). I’m sitting tight at the moment. In my Q2 goals it was a target, but this was naive. Had I stuck all my money in Wolf Minerals as I planned when I was first starting out, I’d be buggered (16). Instead I’m going to continue building my emergency fund in cash, set a solid plan and keep a finger in the air to see which way the wind is blowing. To mix metaphors, I’m going to get myself fully shipshape before bracing any storm.
If there is a storm. Howdy Callum!
Have a great weekend,
The Shrink
Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Smashed through The Windup Girl in a week, fantastic atmosphere but a bit of a damp squib in the end. On to… The Book of Dust – Philip Pullman

Religio Medici by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor.

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://www.theguardian.com/business/2018/oct/11/why-are-stock-markets-falling-and-how-far-will-they-go
  2. http://monevator.com/weekend-reading-looking-down-when-the-tide-goes-out/
  3. http://www.retirementinvestingtoday.com/2018/10/2018-quarter-3-review-readying-for-fire.html
  4. https://www.theguardian.com/business/2018/oct/12/ftse-100-falls-to-six-month-low-amid-fears-over-us-interest-rates
  5. https://www.express.co.uk/finance/city/1030145/global-markets-meltdown-equity-financial-crash-why-global-markets-are-down-today
  6. https://awealthofcommonsense.com/2018/10/big-down-days/
  7. https://theirrelevantinvestor.com/2018/10/10/u-g-l-y/
  8. https://theirrelevantinvestor.com/2018/10/09/a-bullish-washout/
  9. https://www.nytimes.com/2018/10/12/business/index-fund-investors-simpler-approach-may-enrich-returns.html
  10. https://www.fnlondon.com/articles/passive-beat-active-over-the-past-decade-finds-morningstar-20181001
  11. https://www.moneyobserver.com/news/active-funds-have-underperformed-passive-all-two-sectors
  12. https://bit.ly/2CJjgNY
  13. https://www.forbes.com/sites/greatspeculations/2018/09/19/are-we-headed-for-a-passive-index-meltdown/#137fbde4413e
  14. https://youngfiguy.com/brexit-and-finance/
  15. https://awealthofcommonsense.com/2018/10/who-benefits-from-a-market-correction/
  16. https://www.bbc.co.uk/news/uk-england-devon-45812974
  17. https://www.bbc.co.uk/news/business-45854817
  18. https://www.bbc.co.uk/news/uk-england-bristol-45770028
  19. https://www.theguardian.com/environment/2018/oct/10/huge-reduction-in-meat-eating-essential-to-avoid-climate-breakdown
  20. https://on.ft.com/2PrHbnT
  21. https://metro.co.uk/2018/10/11/wh-smith-to-start-closing-stores-as-it-struggles-on-the-high-street-8027099/
  22. https://www.bbc.co.uk/news/business-45822650
  23. https://www.independent.co.uk/news/business/news/rbs-savings-account-best-interest-rate-goldman-sachs-a8578996.html
  24. https://www.theguardian.com/business/2018/oct/11/brexit-uncertainty-taking-toll-property-market-rics-research
  25. https://www.theguardian.com/business/2018/oct/11/profits-slide-at-big-six-energy-firms-as-14m-customers-switch
  26. https://www.moneywise.co.uk/news/2018-10-08/chancellor-philip-hammond-planning-to-cut-pension-tax-relief-the-autumn-budget
  27. https://www.theguardian.com/money/2018/oct/13/uk-millennials-costs-eu-pay-rent-transport-grocery-revolut
  28. https://www.bbc.co.uk/news/health-45750384
  29. https://www.bbc.co.uk/news/business-45786690
  30. http://thefirestarter.co.uk/september-income-expenses-report-up-and-running/
  31. https://deliberatelivinguk.wordpress.com/2018/10/05/september-2018-review/
  32. http://www.mrmoneymustache.com/2018/10/05/the-fire-movement/
  33. http://monevator.com/preparing-to-take-a-retirement-income/
  34. http://monevator.com/ratesetter-high-interest-offer/
  35. https://youngfiguy.com/financial-independence-and-dieting/
  36. https://thesavingninja.com/what-would-you-do-if-you-got-given-1-million/
  37. http://www.msziyou.com/if-i-won-1m-tomorrow/
  38. http://thefirestarter.co.uk/the-million-pound-question/
  39. https://indeedably.com/million-pound-question/
  40. https://theirrelevantinvestor.com/2018/10/08/built-to-break/
  41. https://awealthofcommonsense.com/2018/10/the-case-for-bonds/
  42. http://diyinvestoruk.blogspot.com/2018/10/climate-changebe-change.html
  43. https://www.morningstar.com/blog/2018/10/01/low-carbon-economy.html
  44. https://indeedably.com/accountability-cant-be-outsourced/
  45. https://theescapeartist.me/2018/10/09/get-rich-with-hobbies/
  46. http://ukfipod.space/004/
  47. https://www.theguardian.com/money/2018/oct/13/because-of-my-upbringing-ive-always-been-careful-with-money
  48. https://www.ukvalueinvestor.com/2018/10/hargreaves-lansdown-dividend-yield.html/
  49. https://www.jackwallington.com/allotment-month-34-happy-herbal-apple-disaster-persistent-prairie/
  50. https://sharpenyourspades.com/2018/10/11/love-garlic-then-you-have-to-grow-your-own/
  51. https://lifeatno27.com/2018/10/01/spuds-gluts-and-deliciousness/

The Full English Accompaniment – On Brexit, social psychology and market timing

What’s piqued my interest this week?
I’ve been reading Tim Hales Smarter Investing over the last couple of weeks, which appears considered essential reading by most FI/ passive investment sources (1). It has prompted me to write down a philosophy and a draft set of goals for my investment plans. One of the cautions is against market timing, because it’s very statistically difficult to be good at it, incorporating not a small amount of luck. Much better to go Bogle, and buy then hold a low cost tracker (2). So far, so sold.
There’s another section of the book which documents how one of the most important, most overlooked parts to a portfolio decision is target country allocation. This is where I’m currently stuck, as Brexit presents a big hit of unknown outcomes, and is turning my market timing milk sour. Oh look, another r/UKPersonalFinance post triggered me (I’ll cut out all the Reddit relevant-only bits)…

Everyone, put on your tin-foil hats and join me on a journey considering a Brexit scenario…

I’ve personally suspected that Brexit is being pushed along despite it outwardly, appearing to be in no-one’s interests perhaps as a textbook example of Naomi Klein’s ‘Disaster Capitalism’ but maybe just as a way for massive money to be made from the lurches in exchange rate and FTSE etc.

So one outcome I suspect is that the pound will stay relatively weak to the EUR/USD etc, keeping the FTSE reasonably high, until we suddenly hit a point where it gets revealed we’ll basically stay in the EU (or EEA), perhaps after a 2nd referendum, so…

If the timeline of this is the next 6 months, how will the politicians and their chums be looking to maximise the person financial benefit to themselves? Assuming a, say, 15% increase in the value of the pound, and 10% drop in the FTSE 100, would they be looking to sell most investments, have cash and then be ready to re-invest after the correction?

What would you do in this scenario if you had this inside information? (3)

This is a little tinfoil hat brigade, although the murmuring the Nigel Farage shorted the value of the £ when he found out the result of Brexit before it was officially released could provide some evidence (4). An ex-investment banker wouldn’t call up his mates still in the industry with privy information would he? The main issue I have with the above is that it appears to go against the political wind and public opinion polls. The Conservatives and Labour are both loath to go back on the stated plan to exit (would be seen as weak?), and YouGov’s last poll in July found that a fraction greater percentage thought Brexit was the wrong decision than didn’t (5). Opinion polls may be a pretty poor judge, but they’re not so bad as to miss half the nation suddenly decided they do want to stay in the EU, after all (6).
Brexit therefore represents a challenge to the efficient market hypothesis (7). Pre-Brexit vote, a commentator in Forbes discussed how the referendum would represent an excellent testbed for efficient markets (8). It truly did, as the unexpected (to the city) voter decision was integrated into share prices in a number of hours. The fact that the referendum result was unexpected and therefore prompted such a dramatic shift in the markets challenges the efficient market hypothesis, and specifically what makes it efficient. The efficiency relies upon the sum of all the traders individual access to information. To bring it round to psychological terms, it is a form of social Gestalt theory, where the individual chaotic pieces of information/ action contributes to a total pattern (9, 10). Market traders were unaware of the depth of feeling in favour of Brexit prior to the vote (those pesky polls again), and were suddenly exposed to it and integrated it into the markets on referendum day.
But why were market traders so unaware? I wonder that the possibility of a Leave vote did not comply with the collective conscience of market traders and ‘the city’ and therefore was not appropriately considered by the markets (11). To go back to Durkheim’s original use of collective consciousness (very separate from Jungian collective unconsciousness), it is the ‘general feeling’ towards a position, experienced and perceived by the individuals in the collective (11). A shared unconscious understanding of social norms. In the city, it was a social norm to be pro-EU. In the general populace, not so much. Therefore the true risk of a Leave vote to the markets was a Rumsfeldian ‘unknown unknown’. To be pro-Leave in London pre-Brexit went against social norms, it didn’t fit with the social reality constructed in that environment, even if it did fit with the social norms and social reality of the wider UK (12).
Which brings me to my market timing and allocation conundrum. The market is efficient when it is integrating information which makes sense within it’s system; IPOs, sales data, quarterly returns etc. It appears less efficient at integrating popular opinion and behaviour. The market is vulnerable to collective psychological effects (herd behaviour etc), and changes in the market are made by people. The people who change the market (traders etc) operate in a different social world (‘social reality’) to the general populace, by nature of their social interactions. Yours is visible in day-to-day life in your twitter or social media sphere, which may differ from general public opinion. The markets will therefore be generally running on the market traders social reality, whilst the rest of us live in a slightly different social reality. Politicians span the divide, but take their lauded mandate from the general populace’s social reality. The difference comes to the fore when the market has to integrate decisions which are made by the wider populace that didn’t fit with it’s reality, e.g. Brexit. The reddit comment quoted above appears to sit well within the market reality bubble; we’ll stay in the EU in the end, it’s all a sideshow. My concern is that the general populace appears fairly relaxed about a ‘No-deal’ Brexit. Knowing that we’re a few short months out of formal Brexit, do I choose allocations based on that worry which insulate against this outcome. Does even thinking about this represent market-timing, and I should just bung my cash ‘somewhere’ and sit it out. Your opinion welcome here…
Have a great week,

 

The Shrink

 

Side Orders

Other News

Opinion/ blogs:

What I’m reading:

Smarter Investing by Tim Hale – essential reading

Religio Medici by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor. This is turning out to be real heavy-going.

Enchiridion by Epictetus – Bedside reading for a bad day

 

References:

  1. https://www.amazon.co.uk/Smarter-Investing-Simpler-Decisions-Financial/dp/0273785370/
  2. https://www.bogleheads.org/wiki/Getting_started
  3. http://www.reddit.com/r/UKPersonalFinance/comments/9cnsqj/the_potential_effect_of_a_massive_shift_in
  4. https://www.theguardian.com/politics/2018/jun/25/nigel-farage-denies-shorting-value-of-sterling-on-night-of-brexit-vote
  5. https://yougov.co.uk/news/2018/06/23/eu-referendum-two-years/
  6. https://www.nature.com/articles/s41562-018-0330-7
  7. https://www.investopedia.com/terms/e/efficientmarkethypothesis.asp
  8. https://www.forbes.com/sites/timworstall/2016/02/22/brexit-uk-financial-markets-and-the-efficient-markets-hypothesis/#31ab82161667
  9. https://www.britannica.com/science/Gestalt-psychology
  10. https://en.wikipedia.org/wiki/Gestalt_psychology
  11. https://en.wikipedia.org/wiki/Collective_consciousness
  12. https://en.wikipedia.org/wiki/Social_reality
  13. https://www.thisismoney.co.uk/money/pensions/article-6130445/Will-council-force-sell-house-cover-dads-care-bills.html
  14. https://www.thisismoney.co.uk/money/cars/article-6138267/A-1979-Lada-Niva-estimated-sell-75-000-goes-just-4K.html
  15. https://www.theguardian.com/money/2018/sep/07/house-prices-rose-at-fastest-rate-in-almost-year-says-halifax-august-north-south
  16. https://www.theguardian.com/uk-news/2018/sep/05/thinktank-calls-for-major-overhaul-of-britains-economy
  17. https://www.thisismoney.co.uk/property/article-6106049/A-downstairs-family-bathroom-lowers-property-value-6.html
  18. https://www.thisismoney.co.uk/money/news/article-6080099/Are-Monzo-Revolut-Starling-Transferwise-safe-bank-with.html
  19. http://monevator.com/10-things-you-can-do-today-to-reset-your-life/
  20. http://monevator.com/weekend-reading-what-is-your-reason-for-being/
  21. http://thefirestarter.co.uk/my-5-years-are-up-how-did-i-do/
  22. http://thefirestarter.co.uk/august-income-expenses-report-a-bit-of-an-odd-one/
  23. https://thefireeng.com/net-worth-update-august-2018/
  24. http://www.msziyou.com/yes-i-am-rich-now/
  25. http://www.msziyou.com/net-worth-updates-august-2018/
  26. http://www.mrmoneymustache.com/2018/09/05/what-really-goes-on-at-mmm-headquarters/
  27. http://theirrelevantinvestor.com/2018/09/04/gold-what-is-it-good-for/
  28. https://www.ukvalueinvestor.com/2018/09/sold-senior-plc-after-recent-share-price-gains.html/

The Financial Dashboard – August 2018 – returning to normality

The goals for August were:

  • Rein in spending on the automotive hobby by setting a budget – success
  • Sell five items from my hoard – fail
  • Reduce daily living (groceries and lunch out) and entertainment expenses to budget – fail
  • Use my Starling account to track monthly outgoings – success
  • Repair or purchase a new bike – fail
  • Special goal – rework my net worth and savings graphs to cover results simply

Checking the assets and liabilities:

August 2018 Assets

August 2018 Liabilities

These are taken from my Beast Budget spreadsheet. I’m working on pretty graphs to spice things up. My net worth grew by a paltry £180 (0.9%). My savings rate including my mortgage was 15.09% (not including my DB pension). This is close to my best recorded, and probably my best once all the house purchase/ sale shenanigans are taken into account. I saved £200 in my 5% interest Santander saver and paid off £500 of a credit card. My net worth didn’t grow due to spending around £1.5k from our joint account on building work for our house.

Goals:

Goal achieved: Rein in spending on the automotive hobby by setting a budget

I set myself a pretty stern budget of £300 for my automotive hobby earlier in the year, which I’ve repeatedly failed to meet. I spend £50/month on tax direct debits, and another £120/month on a storage unit which is currently full of engines, tools and furniture from our house move. I managed to only spend £280 this month, £50 on tracking for my daily driver and £60 on fuel. I’ve started to walk to work, and have only filled up the car once because of this. I need to start putting money aside for predictable expenses such as maintenance, rather than taking it on the chin each time.

This goal is a marker of the change in my own mindset, as previously I viewed my £120 storage as a justified expense. It now feels like a waste of £1440 a year which could be better saved. I’ve also been paying others to do work I could do myself, as I lacked the time. My hobby car has been sat for months barely used, waiting on some fettling. I’ve now changed jobs, have some more freedom, and so one of my goals for next month is to get my home garage set up and do a piece of automotive DIY. Reducing my monthly fixed liabilities, and doing more work myself will hopefully make this a more frugal (dare I say profitable one day?) hobby.

Goal failed: Sell five items from my hoard

Items were listed on a specialist forum, then on eBay, with some interest but no sales. I’ll be re-listing and also putting some furniture on Gumtree. Fingers crossed some buyers next month.

Goal failed: Repair or purchase a new bike

The shop I’ve found still hasn’t got the right one for me. Next month.

Goal failed: Reduce daily living and entertainment expenses to budget. 

A further failure. We spent £607 on ‘daily living’ and £160 on entertainment. Almost all of our groceries and going out expenses are now going through our joint account, and not my account. I spent £14 on food out and £20 on sport. What did it all go on? We spent £81 on tickets for a concert in December, £27 at restaurants and £35 on trips out with friends. We had no takeaways! We made some minor house purchases, but most of our costs were on groceries, as we had lots of friends over and bought nice food rather than going out. I’m therefore going to change this goal a bit to: Establish weekly and monthly joint account grocery expenses. I’ve trimmed expenses from my accounts as much as I can, and need to work out where all the rest is going.

Goal achieved: Use my Starling account to track monthly outgoings

Not to sound like a fanboi, but I’m really enjoying using my Starling account. I’ve used it for everyday expenses and outgoing over the last month, and plan to move all payments which aren’t automated onto it. Each month I’ll transfer enough to cover my budgeted expenses, and the rest can automatically transfer to savings.

Budgets:

  • Daily living and entertainment – Under review as above.
  • Transport – budget £300, spent £279, last month £803.
  • Holiday – £100/ /£35.22/ £0 We’re paying lots out at the moment for our honeymoon which will show up next month and make a big dent in our joint account balance. Need to build holiday funds in future.
  • Personal – £50/ £93.32/ £21.53. Upgrading/ updating work clothes and supporting a Youtuber I follow by buying their merch.
  • Loans/ Credit – £200/ £500/ £575. Overpaying a bit.
  • Misc – £50/ £0/ £97.50. No unexpected expenses, big woop!

Goals for next month:

  • Do a piece of automotive DIY
  • Establish weekly and monthly joint account grocery expenses
  • Sell five items from my hoard
  • Repair or purchase a new bike
  • Finish reading Tim Hale’s Smarter Investing

What’s coming this month:

  • Musing on… Motivating factors for financial investments
  • Frugal Motoring – Should I buy a petrol car?
  • A draft investment policy
  • Some sort of post about property renovation
  • Plus the usual Full English Accompaniments and other drivel…

Happy September everyone,

The Shrink

The Full English Accompaniment – Are regular savings accounts dead in the water?

What’s piqued my interest this week?

After last weeks relative quiet from FIRE bloggers (if not the BoE), this week the Side Orders section has a bountiful glut. Many of the topics I considered covering this week have been covered by others including Monevator’s weekend reading post around the bull market (1), linked to the irrelevant investor’s post on the same topic (2), and Monevator’s post covering Fidelity’s US market 0% fee tracking fund (3).

Monevator mentioned the focus of this post in his weekend reading only in passing; that outgoing Monetary Policy Committee member Ian McCafferty predicted interest rates will stay below 5% for the next 20 years, and wages will increase by 4% (4). I take all opinions with a pinch of salt, especially when they concern future predictions. We’ll assume that this is a man with a finger on the nation’s economic pulse, and leave aside how he’s actually made this prediction, which could just be a big fat whopping guess. What this ‘prediction’ does is stick a massive pin in the savings account whoopee cushion.

This week has also seen the fallout of the BoE base rate rise. Whilst 28% of mortgage rates have risen, only one in ten banks have increased the interest rates on their savings accounts (5). The biggest boost came from smaller building societies, particularly Beverley and Monmouthshire Building Society (5). Moneysavingexpert’s page of best easy access savings accounts is currently also topped by building societies, Coventry Building Society and Birmingham Midshires, offering 1.4% variable and 1.35% variable respectively (6). Fixing for one-year with Atom or Investec with get you 2.05%, steadily increasing out to 2.68% for five years fixed with Charter Savings Bank (6). These barely beat inflation. If interest rates are unlikely to rise to historic norms in the next 10 years, the pressure comes on to invest either in equities or other vehicles, from P2P or fine wine.

The rise of high interest current accounts also threatens mainstream savings accounts. Nationwide and TSB are both offering 5% interest on their current accounts (up to £2.5k and £1.5k respectively), while Tesco Bank offers 3% (up to £3k) (7). The Bank Account Savings website allows you to calculate your best rate of return for minimum moving about, and combined with switching cash offers and perks, can kick savings accounts into touch (8). There will always remain an argument for larger cash sums to be held for liquidity (using the £85k FSCS guarantee). But for now high street savings aren’t competitive for returns and don’t beat inflation.

Have a great week,

The Shrink

 

Side Orders

Other News:

Opinion/ blogs:

What I’m reading:

An exam textbook

Religio Medici by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor

Enchiridion by Epictetus – Bedside reading for a bad day

 

References:

  1. http://monevator.com/weekend-reading-are-we-there-yet/
  2. http://theirrelevantinvestor.com/2018/08/05/the-longest-bull-market-of-all-time/
  3. http://monevator.com/average-active-funds-have-no-answer-to-their-weightless-index-tracking-rivals/
  4. https://www.theguardian.com/business/2018/aug/09/interest-rates-will-stay-low-for-20-years-bank-of-england-expert
  5. http://www.thisismoney.co.uk/money/saving/article-6046445/Disappointing-news-savers-warned-not-benefit-rate-rise.html
  6. https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/
  7. https://www.moneysavingexpert.com/banking/compare-best-bank-accounts/
  8. https://www.bankaccountsavings.co.uk/calculator
  9. https://www.moneyobserver.com/news/charles-stanley-hikes-fees-investors
  10. https://www.cnbc.com/2018/08/01/fidelity-one-ups-vanguard-first-company-to-offer-no-fee-index-fund.html
  11. https://www.bbc.co.uk/news/technology-45113283
  12. http://www.thisismoney.co.uk/money/news/article-6039729/Royal-Mint-says-millions-old-1-coins-languishing-homes-British-households.html
  13. https://www.parliament.uk/business/committees/committees-a-z/commons-select/work-and-pensions-committee/news-parliament-2017/pension-costs-17-19/
  14. https://www.theguardian.com/business/2018/aug/10/british-manufacturing-in-recession-despite-faster-uk-gdp-growth
  15. https://www.theguardian.com/business/2018/aug/10/house-of-fraser-calls-in-administrators-as-rescue-talks-fail
  16. https://transform.iema.net/article/thousands-uk-churches-switch-renewables
  17. https://transform.iema.net/article/insurance-firms-failing-report-climate-change-risks
  18. https://www.bbc.co.uk/news/business-45113867
  19. https://www.bbc.co.uk/news/business-45119606
  20. https://www.bbc.co.uk/news/business-45113862
  21. https://www.bbc.co.uk/news/business-45118393
  22. https://www.bbc.co.uk/news/science-environment-45084144
  23. https://www.bbc.co.uk/news/technology-45097046
  24. https://www.businessinsider.com/lego-go-eco-friendly-with-blocks-made-from-sugarcane-2018-8/?r=AU&IR=T
  25. https://www.ukvalueinvestor.com/2018/08/how-to-manage-a-portfolio-of-shares.html/
  26. https://youngfiguy.com/pension-costs-and-transparency-inquiry
  27. https://youngfiguy.com/mrs-yfg-our-ideal-life
  28. https://youngfiguy.com/deciding-drawdown-and-annuities
  29. https://www.mrmoneymustache.com/2018/07/25/the-twenty-dollar-swim/
  30. http://fiukmoney.co.uk/july-18-net-worth-and-monthly-update/
  31. https://deliberatelivinguk.wordpress.com/2018/08/06/july-2018-review/
  32. https://3652daysblog.wordpress.com/2018/08/03/first-rule-of-fi-club/
  33. https://theescapeartist.me/2018/08/06/your-part-in-the-revolution-is-to-pay-it-forward/
  34. https://theescapeartist.me/2018/07/31/the-inestimable-advantages-of-child-labour/
  35. http://awealthofcommonsense.com/2018/08/the-layers-of-the-brain/
  36. https://www.bbc.co.uk/news/business-45112072
  37. http://thecannycontractor.com/crowdinvesting-become-an-angel-investor-with-minimum-outlay/
  38. http://thecannycontractor.com/passive-income-quarter-2-2018/
  39. http://thecannycontractor.com/dating-and-fire-your-love-or-your-life/
  40. https://thefemalemoneydoctor.com/warren-buffett/
  41. https://tuppennysfireplace.com/cut-your-budget-expert-tips/
  42. https://tuppennysfireplace.com/benefits-of-having-an-allotment/

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Musing on… Long-term care costs and financial savings

This post has been mulled over for a long time, trying to discern and distil a direction. It began (as these trains of thought often do) with an idle r/financialindependence post. If you’re not familiar with that, it’s a subreddit for FI-types, predominantly populated by Yanks (Reddit being a sort of forum-cum-meta-aggregator of internet waffle). In this post a group of our ex-colonial cousins were discussing long-term costs (1):

So far, so not our problem. The UK may have significantly higher tax rates (ignoring ISAs etc), but it pays for (in theory) the NHS and social care, the cradle-to-grave support system for when times are bad. The NHS and social care system are what makes FIRE and any sort of fuck-you to working possible in the UK. Check out the video and post TEA and Rhik Samadder did on the matter (2).

National, personal cover

As we celebrate the NHS’ 70th birthday, it’s worth reflecting on where this all came from. Before the birth of the NHS all doctors services were private in the UK. If you needed something, you went to your local doctor, hoped they had been trained adequately, paid your money, got your treatment, hoped it worked. There were no guidelines. There was no standardisation. This worked fine for the wealthy, who could afford the best, but for the poor would die from an inability to pay the doctor. You can find plenty of stories from that time, but if you read one, I recommend the recollections of the wonderful Harry Leslie Smith (3). He remembers a doctors visit costing half-a-weeks wages, which they sadly did not have (3). This private price has scaled with inflation. A 15 minute private GP consultation will set you back £70 (4). As a profession we remain a rare commodity, and on an open market our hourly rate is such. The NHS affords the government a position of power and collective contractual employment which, despite press vilification, means we still come relatively cheap.

In the days before the NHS, workers would club together to pay for ‘self-help’ organisations, to provide medical care for one another. Beginning in the late 1800s, the Tredegar Workmen’s Medical Aid Society was one such successful organisation (5):

By the 1920s, the society employed the services of five doctors, one surgeon, two pharmacists, a physiotherapist, a dentist, and a district nurse. For an extra sum each week, members could also benefit from hospital treatment.

During the inter-war depression, the society continued to provide services to unemployed people, even though they could no longer afford to pay a subscription. By the mid-1940s, the society was providing medical care for 22,800 of the town’s 24,000 inhabitants.

Aneurin Bevan, who was born in Tredegar, took the Workmen’s Medical Aid Society as his inspiration for the NHS, saying: “All I am doing is extending to the entire population of Britain the benefits we had in Tredegar for a generation or more. We are going to ‘Tredegarise’ you.” (5)

The fragmentation of the NHS, gradual privatisation and reduction in care available deserves a separate post. For now, with a sense of perspective, we can look across the pond and be smug about our NHS (6). Cradle to grave cover, in our most frail years, maternity and care home. Isn’t it marvellous. Except… have you ever been in an NHS care home? And how much do you think that care home costs?

Who wants to live forever?

Time and again bloggers discuss their financial plans, how they’re 50 now, and they see themselves having 30 more good years. They fall into a common trap, recent research shows 8/10 of those over 50 underestimate their life expectancy (7). Most people guess they’ll live to 82-ish, whereas the data says more like 88 for men, and 90 for women*. We have got much better at keeping people alive for longer. Those aren’t necessarily going to be good years though, and so people trot out those bleak jokes; “oh just roll me off a cliff at 80”; “I’ll just head off to Switzerland”; “I’ll just pop my clogs then”. Except those are all to varying degrees illegal/ unethical. We doctors can’t just settle you off in a dignified way when you decide you’re not much use or aren’t enjoying things anymore. How do you decide when that is? Death is so very final. As a culture we have developed a fear of discussing or even considering our own mortality.

(*N.B. You can’t actually use ONS life expectancy at birth figures for this. Infancy through to teenage years (and early adulthood for young men) still have higher mortality. Once you pass your mid-20s your life expectancy actually statistically increases to accommodate for this.)

So for our friends the FIRE-savers, that’s an extra half decade of savings to account for. Suddenly retiring at 55 with a 4% SWR estimating a 30 year retirement isn’t quite enough (8). Life expectancy has increased in the 20 years since the Trinity study was published (9). A 45 year-old sitting down now and estimating for a 4% withdrawal starting at age 55 may well have a good 40 years ahead of them. It’s not just the %withdrawal that’s a variable in this calculation, it’s the duration too. For some really interesting drawdown calculations, check out RIT’s recent post (10).

The final splurge

How much do you think your living costs will be too? The common practice appears to be to take roughly your current living expenses, and times that out for the number of years you need. Some people estimate less, as they figure their homes will be paid off. An interesting piece of research by investment firm Schroders casts doubt on that. It found that savers underestimated their living costs in retirement by 15% (11). Only half of people surveyed had enough to live on comfortably (11).

Coming back to people facing their own mortality, and a decline into frailty, did you include the care home fees in that cost? The answer to the previous question is that the average care home price per year in the UK is £29,270 for a residential home, £39,300 for a nursing home (12). That’s average too, as with everything the South is more expensive, and we all like to imagine ourselves in our twilight years in a beautiful peaceful home, and not being roughly manhandled by someone on minimum-wage with no dignity or care, before being hauled up on a CQC newspaper expose (13). If you want to see what it’s like in your area, the UK Care Guide has a number cruncher and area analysis (14). You can decide to stay in your own home, but there the costs can mount up too. 24 hour care can be more than £150,000/year (13). And again for perspective, your life expectancy from a diagnosis of dementia in your 60s – 6.7 years, in your 90s – 1.9 years (15).

Where’s my cradle to grave?

Too right, where’s the NHS and social care system in all of this? Broke, that’s where. Historically there were jobs that provided care and nursing homes for their retired workers as part of their payment plan (although I can’t imagine anything worse). Now the burden falls on the social care system. The boomer population is ageing, and everyone is living longer. Social care reform remains a political football as no side wants to try to tell people that their lifetime of NI contributions and tax wasn’t enough to pay for their care (16). The “squeezed middle” baby boomers (le sigh) are already paying up to £10k a year to look after their ageing parents, and this will only get worse (17).

To try and at least partially cover care home fees, the central and local Govs have created an Orwellian masterpiece of committees with opaque criteria to make decisions about who gets support and who doesn’t. It’s called NHS Continuing Healthcare when the NHS is involved, i.e. if there is ‘sufficient medical need’ (17). If you can’t qualify for that you get means tested by the local social care trust/ provider (18). AgeUK make a fair stab at explaining it on their website (19). I’ve seen people die before any decision on who will pay has been reached.

http_com.ft.imagepublish.upp-prod-eu.s3.amazonaws

The final stretch of this little essay is about the means testing that social care can use. It’s not actually free at point of care. The system used is fairly complicated in it’s own right, but the Money Advice Service has a good page breaking it down (18). Your income and capital are assessed. If you live alone, and in certain other circumstances, your home will be counted as part of your capital (18). The local authority can and will sell your home to pay for the fees, even if you don’t want them to (20. 21).

If the local authority deems you have deliberately disposed of assets, for example by gifting your child your home, to avoid paying means tested fees, it can claim them back. This quietly introduced piece of legislation is called Deprivation of Assets (22). The rules have subsequently got much tighter around gifting any asset; housing, jewellery, money, objects (23). As always, do your own research.

We can’t take it with us

To summarise, as a culture we fear death and avoid considering our own mortality or old age due to the association. This is a shame, as people are more active in their old age and living longer than ever before. We underestimate the costs and expenditure we will have in retirement. Old age will cost more than we collectively think. The last few years cost A LOT MORE. Don’t ignore your final years, embrace those calculations, and spend them in luxury if you can.

Have a morbid time!

The Shrink

References

  1. https://www.reddit.com/r/financialindependence/comments/8fyu65/do_longterm_care_costs_factor_into_your_fire_plans/
  2. https://www.millennial-revolution.com/freedom/early-retire-uk/
  3. https://www.newstatesman.com/politics/2014/10/hunger-filth-fear-and-death-remembering-life-nhs
  4. https://www.bupa.co.uk/health/bupa-on-demand/gp-services
  5. https://www.theguardian.com/healthcare-network/2018/may/22/south-wales-town-forged-nhs-points-future-tredegar
  6. https://www.reddit.com/r/financialindependence/comments/8zx7iq/health_insurance_as_a_barrier_to_fire_in_the_usa/
  7. https://www.ftadviser.com/pensions/2017/11/28/most-over-50s-underestimate-life-expectancy/
  8. https://www.madfientist.com/safe-withdrawal-rate/
  9. https://en.wikipedia.org/wiki/Trinity_study
  10. http://www.retirementinvestingtoday.com/2018/07/sobering-retirement-income-drawdown.html
  11. https://www.moneywise.co.uk/news/2018-07-03/savers-vastly-underestimate-the-cost-retirement
  12. https://www.moneyadviceservice.org.uk/en/articles/care-home-or-home-care
  13. https://bit.ly/2OiBuIN
  14. https://ukcareguide.co.uk/care-home-costs/
  15. https://www.bmj.com/content/341/bmj.c3584
  16. https://www.independent.co.uk/life-style/health-and-families/nhs-social-care-uk-reform-aneurin-bevan-health-poverty-andy-burnham-a8429571.html
  17. https://www.moneyadviceservice.org.uk/en/articles/are-you-eligible-for-nhs-continuing-care-funding
  18. https://www.moneyadviceservice.org.uk/en/articles/means-tests-for-help-with-care-costs-how-they-work
  19. https://www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-a-care-home/
  20. https://www.ft.com/content/34c336e8-3e5c-11e8-b7e0-52972418fec4
  21. https://www.telegraph.co.uk/finance/personalfinance/insurance/longtermcare/11441163/Why-you-WILL-have-to-sell-your-home-to-pay-for-care.html
  22. https://www.ageuk.org.uk/information-advice/care/paying-for-care/paying-for-a-care-home/deprivation-of-assets/
  23. https://www.which.co.uk/elderly-care/financing-care/gifting-assets-and-property/343063-what-are-the-rules-for-gifting-assets

The Full English Accompaniment – Beginner’s guides to investing

What’s piqued my interest this week?

Over the last few weeks, in the breaks between sanding, painting, filling, sawing, strimming and all the other fun that comes with a new house, I’ve been reading lots of basic investment guides. Not the ‘you should invest here’ type, but general overviews of the mechanisms. Tim Hale’s Smarter Investing is of course in my reading pile (second, behind an exam textbook), but blogs and videos are excellent for five minute tea (or beer) stops.

My attempts at being more frugal, and aiming for some sort of FI life, started by lurking on the UKpersonalfinance subreddit. A long forgotten post pointed me to Monevator. The Investing for beginners guides there got me started (1). I was pointed to the MoneyMustache, and Weenie’s Quietly Saving. DiyInvestorUK and UK Value Investor have taught me more in depth about passive and active options.

Monevator’s weekend reading this week highlights a millenial-focussed investing and financial advice series from the FT (2,3). A more cynical person than I would say that millenials are more finance savvy out of necessity rather than choice.

Lately I’ve been really enjoying The Plain Bagel, a YouTube series by a young guy called Richard Coffin (4). As he’s based in Canada, a lot of the tax-reducing products discussed are Canadian or American, however it’s great for the basics. His ‘fundamental series’ consists of 13 <10 minute videos covering investment mechanisms, vehicles and psychology. Here’s a little sample:

Hopefully he gets support to keep producing great videos.

Have a great weekend,

The Shrink

Side Orders

News:

Opinion/ Blogs:

What I’m reading:

Eric by Terry Pratchett – light relief

Religio Medici by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. http://monevator.com/investing-for-beginners-why-do-we-invest/
  2. http://monevator.com/weekend-reading-thrifty-business
  3. https://bit.ly/2m07LHQ
  4. https://youtu.be/I81xqr8HzBE
  5. https://www.theguardian.com/business/2018/jun/25/countrywide-property-sales-uk-estate-agency-profit
  6. https://www.moneywise.co.uk/news/2018-07-03/savings-update-rates-the-rise
  7. https://www.telegraph.co.uk/business/2018/07/04/savings-crisis-uk-households-8bn-red
  8. https://www.moneywise.co.uk/news/2018-07-06/japanese-knotweed-ruling-could-lead-to-more-claims
  9. http://diyinvestoruk.blogspot.com/2018/06/brexit-vote-revisited.html
  10. https://www.moneywise.co.uk/news/2018-06-25/buy-to-let-the-elephant-the-room-the-housing-crisis
  11. https://www.theguardian.com/environment/2018/jun/27/gestation-crates-farming-cheap-bacon-how-shops-and-shoppers-let-down-our-pigs
  12. http://www.schroders.com/en/uk/the-value-perspective/blog/all-blogs/five-famous-market-gaffes/
  13. https://www.wealthsimple.com/en-gb/magazine/money-diary-hector-bellerin
  14. http://aswathdamodaran.blogspot.com/2018/06/twists-and-turns-in-tesla-story-boring.html
  15. https://www.ukvalueinvestor.com/2018/06/uk-shares-uk-property-better-value.html/
  16. http://monevator.com/does-the-passive-label-put-people-off-index-funds/
  17. https://www.fool.co.uk/investing/2018/06/23/why-there-could-be-huge-opportunity-to-build-an-income-stream-with-ftse-250-dividend-stocks/
  18. https://simplelivingsomerset.wordpress.com/2018/06/22/the-concept-of-financial-freedom-is-an-unattainable-chimera/
  19. https://www.mirror.co.uk/money/money-saving-expert-martin-lewis-12766455.amp