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/
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Full English Accompaniment – Is financial independence achievable by anyone?

What’s piqued my interest this week?

The above question appears to be a recurring theme in our little niche of the financial blogging community. High-profile, mainstream public-facing blogs like MMM and the Frugalwoods argue that anyone and everyone can potentially be financially independent and retire early, if they take the right steps (1). It’s great for selling the story and motivating potential readers, but to me it’s selling an impossible dream.

To explain let’s draw up some basic sums. The amount most people can save towards an early retirement can be defined as:

Amount saved = (Defined pension + take-home Earnings) – (Basic living + lifestyle Costs)

A = (D+E) – (B+C)

For the sake of simplicity we’ll ignore tax rebates, dividend payments, inheritance etc. I’m not even going to bother running this on a minimum wage. Instead we’ll start at the UK Living Wage, currently £9.00/hr (2). This is built on the Minimum Income Standard, which calculates the cost of the average basket of goods required for a household to afford an acceptable standard of living (3).

A 23 year old working a 37.5hr week on £9/hr that will see a yearly salary of £17,550. Plug that into a salary calculator, incorporating 8% pension contribution with an 8% employer match. That’s D and E. The Living Wage is based upon a minimum acceptable standard of lifestyle, so we’ll use that figure again for B, with £0 lifestyle inflation cost and we get (4):

A = ((£76.79 X 2)+£1214.81) – (£1214.81+£0)

How does that lifestyle cost compare? Well the average UK 1 bed flat costs £600, but that’s skewed by London’s ridiculous prices (5). Say instead you’re sharing or living in an area with cheaper housing, it’s more likely to be £400/month, this represents ~30% of your earnings and so if a fairly accurate representation given the UK average is 25% of earnings spent on accommodation (6). If you get can by on another £600/month for all other expenses then well done, you can save £215. Add in your generous pension contributions and you’re up to £365/month put aside for the future, or £4,380 annually. Run that number through a rough early retirement calculator and we get that you can retire in 33 years. So that’s early retirement at 56 for a lifetime spent in a one bed flat and minimum acceptable standard of living.

Not realistic? Lets work another example. Example 2:

30 year old earning median UK disposable household income (2017) of £27,300 (7). Same sums, same aggressive pension match, £1715.31 take home. This time our 30 year old has got bored of living in digs, and is instead renting a two bed new build in a LCOL area. £750/month for rent gets you access to homes in 67% of the UK, so compared to Example 1 you’ll pay £350 more/month (8). Your lifestyle has inflated a bit, but not much, just a few beers now and then, a better phone, a decent tv and slightly better food. Say £100/month? So, let’s punch that into our equations and calculators:

A = ((£141.79 X 2)+£1715.31) – (£1214.81+£450)

A = £334

Retire in 44 years

Ouch. That lifestyle inflation has hit hard. Your early retirement age is now 74. So what do you do? Cut back on the house size or go back to shared accommodation? Stop drinking and eat 7p basics noodles? We know that actually, due to the benefits from our taxation system and social support services, a moderate increase in income in the lower quartiles makes little difference to disposable income (available for savings). Lifestyle inflation at this end quickly gobbles up the extra earnings as you are now comfortable, not just-about-managing. Do you make yourself uncomfortable to retire early? That requires a special type of motivation (9, 10, 11).

You have to be a high earner to achieve the % savings rates required for early retirement without living uncomfortably in some way. Ignoring this fact is dreaming. Most people will not achieve early retirement without either lifestyle discomfort or a serious increase in their earning power. That’s FIREs dirty little secret (11). To say otherwise is to sell a dream.

I don’t think this is a bad thing.

Because the world is driven by soundbites and nicely packaged information, easily digestible and understandable. The majority of the FI blogs pitched to the mainstream do just that, make it easily digestible, understandable and relate-able. A cynic would argue it funds their early retirement through a customer-facing monetised website (12). But I’m not that cynic, this is a good thing, more people should be thinking about their money matters. The UK household savings ratio is currently stuck around 4%, and has been for several years (13):

capture

The financial choices required for early retirement are for everyone. 

The’ye just a good idea. Just by thinking about your finances you’re ahead of those ignoring their accounts. To crib my fellow medical colleague, the female money doc (14):

  • Know your numbers
  • Build assets
  • Get out of debt
  • Buffer it
  • Consider extra income streams

Anyone could achieve financial independence, but not everyone can. The effort can only be a good thing. No shame in trying!

Have a great week,

The Shrink

Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading (now 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 humanity’s’ fascination with hallucinogenics, and the role of altered states of consciousness on the development of human society.

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://www.theguardian.com/money/2018/mar/08/how-to-retire-early-frugal-spending
  2. https://www.livingwage.org.uk/calculation
  3. https://www.lboro.ac.uk/research/crsp/mis/
  4. https://www.thesalarycalculator.co.uk/salary.php
  5. https://www.bbc.co.uk/news/business-46072509
  6. https://www.bbc.co.uk/news/business-44046392
  7. https://www.ons.gov.uk/peoplepopulationandcommunity/personalandhouseholdfinances/incomeandwealth/bulletins/householddisposableincomeandinequality/financialyearending2017
  8. https://www.bbc.co.uk/news/business-23234033
  9. https://www.thisismoney.co.uk/money/news/article-4110482/How-rich-Work-income-wealth-sits-UK.html
  10. https://www.financialsamurai.com/the-average-savings-rates-by-income-wealth-class/
  11. http://www.flannelguyroi.com/dirty-little-secret-early-retirement/
  12. https://theoutline.com/post/3840/frugalwoods-frugality-millennials?zd=2&zi=kjpt6k5u
  13. https://tradingeconomics.com/united-kingdom/personal-savings
  14. https://thefemalemoneydoctor.com/reach-financial-freedom/
  15. https://www.marketwatch.com/story/guid/FC86FC66-19DD-11E9-84BA-7B8C470F8CAB
  16. https://www.theguardian.com/money/2019/jan/17/uk-house-prices-fall-at-fastest-rate-in-six-years-on-back-of-brexit-rics
  17. https://www.gov.uk/government/news/uk-house-price-index-for-november-2018
  18. https://www.dailymail.co.uk/money/markets/article-6578873/Renewable-power-provider-Bulb-Energy-slumps-24m-loss-amid-squeeze-small-suppliers.html
  19. http://www.bbc.co.uk/news/business-46900918
  20. https://www.theguardian.com/environment/nils-pratley-on-finance/2019/jan/17/government-isnt-quite-ready-drop-obsession-with-nuclear-greg-clark-business-secretary
  21. https://www.theguardian.com/business/2019/jan/12/subprime-timebomb-back-companies-lighting-the-fuse/
  22. https://www.independent.co.uk/news/business/comment/metro-bank-profit-warning-new-branches-mortgages-challenger-banks-santander-uk-branch-closures-a8742301.html
  23. https://www.theguardian.com/environment/2019/jan/15/immediate-fossil-fuel-phaseout-could-arrest-climate-change-study
  24. http://www.bbc.co.uk/news/health-46865204
  25. https://www.theguardian.com/business/2019/jan/16/marks-spencer-selling-loose-fruit-veg-plastic-waste/
  26. https://www.bbc.co.uk/news/business-46793506
  27. http://www.bbc.com/future/story/20181217-the-best-time-of-year-to-x
  28. https://www.theguardian.com/technology/2019/jan/17/breached-data-largest-collection-ever-seen-email-password-hacking
  29. https://www.bbc.co.uk/news/business-46958560
  30. https://landlords.org.uk/news-campaigns/news/tenant-fees-bill-provisions-come-effect-june-2019
  31. https://www.express.co.uk/life-style/cars/1076669/kia-e-niro-car-of-the-year-electric-vehicle/
  32. https://www.theguardian.com/society/2019/jan/15/junior-doctors-working-past-shift-end-nhs-data-england/
  33. https://monevator.com/weekend-reading-the-house-that-jack-built/
  34. https://monevator.com/venture-capital-investing/
  35. http://www.frugalwoods.com/2019/01/18/this-month-on-the-homestead-burning-brush-and-the-life-and-times-of-firewood/
  36. http://www.frugalwoods.com/2019/01/25/hacked-sodastream-seltzer-reload-and-other-december-2018-expenditures/
  37. https://ournextlife.com/2019/01/14/one-year-adventures/
  38. http://www.retirementinvestingtoday.com/2019/01/2018-in-review-let-decompression.html
  39. https://monevator.com/the-pension-protection-fund-ppf/
  40. https://youngfiguy.com/patisserie-valerie-what-happens-now/
  41. https://youngfiguy.com/mrs-yfg-why-i-stay/
  42. https://youngfiguy.com/podcasts-like-buses/
  43. https://firevlondon.com/2019/01/20/avoiding-tax-in-the-uk/
  44. https://www.msziyou.com/2018-review/
  45. https://www.msziyou.com/2019-goals/
  46. https://ditchthecave.com/prioritisation/
  47. https://ditchthecave.com/marginal-gains/
  48. https://www.ukvalueinvestor.com/2019/01/why-i-sold-glaxo-dividend-yield.html/
  49. https://www.ukvalueinvestor.com/2019/01/thin-profit-margins-bad-investments.html/
  50. https://www.ukvalueinvestor.com/2019/01/capital-employed-growth-instead-of-earnings-growth.html/
  51. http://thefirestarter.co.uk/damp-squib-december-income-expenses-report/
  52. http://thefirestarter.co.uk/2018-review-plus-2019-goals-the-year-of-keeping-calm-and-carrying-on/
  53. https://theescapeartist.me/2019/01/17/what-to-expect-when-youre-expecting/
  54. https://thesavingninja.com/how-to-work-in-the-city-on-a-budget/
  55. http://quietlysaving.co.uk/2019/01/17/changes-afoot/
  56. http://diyinvestoruk.blogspot.com/2019/01/one-million-pageviews-for-blog.html
  57. http://diyinvestoruk.blogspot.com/2019/01/aberforth-smaller-final-results.html
  58. https://gentlemansfamilyfinances.wordpress.com/2019/01/18/geoarbitrage-how-to-survive-in-london-with-less-than-a-million-quid-in-the-bank/
  59. https://littlemissfire.com/side-hustles-report-december-2018/
  60. https://littlemissfire.com/paying-off-the-mortgage-jan-2019/
  61. https://littlemissfire.com/how-to-heat-your-home-for-free-with-a-wood-burner/
  62. https://pursuefire.com/the-power-of-compounding-the-rule-of-72/
  63. https://pursuefire.com/monthly-net-worth-report-7-december/
  64. http://www.thefinancezombie.com/2019/01/prime-your-mind.html
  65. https://indeedably.com/left-behind/
  66. https://lifeatno27.com/2019/01/23/winter-cool-calm-and-collected/
  67. http://twothirstygardeners.co.uk/2019/01/how-to-make-rhubarb-and-ginger-shrub-easy-alcohol-free-cocktail-recipe/

The Full English Accompaniment – The rise and rise of P2P lending

What’s piqued my interest this week?

P2P leaves me puzzled. I understand the premise, I understand the attraction, but where does it fit in a balanced portfolio? Some of my fellow UK finance bloggers have dipped toes in the P2P waters; Monevator, Weenie and the other TFS to name a few (1, 2, 3). For many, including new reader the Obvious Investor, it appears to be separate from the rest of their portfolio, held as an independent entity or in an oddments corner (4). P2P has come a long way since the launch of the first platform, Zopa, in 2005, with 40+ platforms catering to different appetites (5, 6). As it comes of age and into the mainstream how do you classify P2P as an asset class in a mature portfolio? Here’s my amateur synthesis.

Risks

The appeal of P2P appears to be yield, projected at anywhere from 4-10% depending on the platform (6). This complies with the equity risk premium theory, and I’d be interested to find out if research supports this. P2P rose in popularity out of the 2008 recession. Banks clamped down on high risk lending, so those with poor credit histories or weak financial positions had to look elsewhere. P2P was safer for all concerned than loan sharks/ payday lenders. Savers chasing returns followed the risk premium to P2P seeking better rates than the crappy 1% offered by bonds and cash ISAs (7). P2P sits in the ‘Return Engine’.

Inflation Risk

This is primarily the reason for investing in P2P. With inflation running at 2.7% your money is actively being eroded in a Cash ISA. Currently the RateSetter offer will give you 14% for the first year. The 4% thereafter may not look so rosy if inflation jumps to 5% and standard bank interest rates track.

Default Risk 

This is primarily where P2P makes it’s returns over traditional bank loans. The theory argues that the platforms cut out the banks as middle-men and allow savers to loan out their cash to borrowers semi-directly. To attract savers you need decent returns, which means decent interest rates, which means the interest rates for the borrowers are necessarily high. Why would you choose those interest rates? From my laymans point of view there appear three reasons for a business to choose to borrow P2P:

  1. The act of borrowing P2P acts as proxy advertising as you have to attract funders from a pool of individuals who are by definition tech-savvy, cash-rich early adopters. They may well be your target market who are interested in your product.
  2. Your business pitch is disruptive, esoteric or quirky, and therefore relies upon a funding source which capture and project the emotive or story-driven level ignored by banks and other lenders. This is something lost with the move to centralised banks, and away from your friendly local bank manager.
  3. Your personal or business financial history is absent or poor, precluding larger or traditional funding sources.

Point 1 seems a fair trade off for certain industries. Point 2 and 3 seem classical default risk. Your story may be good, your disruptive idea genius, but if your number don’t stack up well… *whomp whomp*. Banks lending criteria became tighter because the numbers tell the score, and the casual lending of the early 00s led to a financial crisis. Plus they were straight up told to by governments. P2P fills the lending pool where banks daren’t or are legislated not to go. I should point out that the counterargument from P2P lenders is that rogue and risky lending continues to occur across all debt instrument markets (8).

Liquidity Risk

Another classic, but appears to depend on the lending platform. Some platforms (Abundance, House Crowd) allow you to pick who you lend to, others select a time period (RateSetter, Zopa) and pool your investment with other (9, 10, 11, 12). Of the options I’d prefer pooled investments as it decreases the above default risk, and diversification is always better. A few platforms offer in house secondary markets for resale if you decide to cash out. Where that’s not possible your P2P investment is tied up either for the time period, or until the project/ business is completed, or can be returned for a fee (13). Both the liquidity risk and the default risk have me making comparisons between P2P and junk bonds. These comparisons are made elsewhere as well, so perhaps P2P is a bit more palatable, or smartly wrapped (14)?

Legislation

Speaking of wrappers, the attention of governments is an indication of just how far we’ve come. First IFAs were able to recommend P2P lending options, and then in April 2016 the Innovative Finance ISA was born (6, 15, 16). These operate in parallel to traditional Cash and S&S ISAs, offering a tax-free wrapper for your investments. They have their own pitfalls and complications I won’t go into here.

Legislation is a work-in-progress for P2P, but already as companies have grown they have begun to expand. This month Zopa has been granted a banking license by the FSCS, and declared it’s intention to open a traditional savings arm as a challenger bank which will be protected by the FSCS guarantee (17, 18). The FSCS guarantee won’t cover Zopa’s P2P lending.

No P2P lending/ platform is covered by the FSCS guarantee.

All invested money is at risk.

Returns are not guaranteed. There are plenty of stories in the news of people losing out where their loans default (19). The lines blur with junk bonds further. After all, you can invest directly, P2P, in small companies by buying bonds/ shares/ investments. Monzo recently ran a round of crowdfunding (20, 21)Brewdog continues to run it’s Equity for Punks V, with an eye-watering valuation (22). Those investments would also sit in a little ‘oddments’ pile of your portfolio.

Counterparty Risk

Here’s the nub of my concerns. As we look at the coming bear markets, the rogue wave in our recent trade winds, how will P2P fare. The last week has been the worst since 2008, when Zopa etc were in their infancy (23). Those times place stresses on weak companies, which fold, and default. How will P2P platforms fare? Performances and default rates are entirely based upon the platform (24). Zopa expected a 4.52% default rate in 2017, the last time it approached that was 2008 (4.2%) (15). Some platforms have provision funds to protect savers (5, 13, 15). This hasn’t stopped black holes appearing in the ledger books of lenders such as Ratesetter, forced to buy out the debts of bad investments (25). Some are bullish in their outlook, seeking further institutional investment to expand (26, 27). It remains to be seen how many P2P platforms will succumb to bad loans.

Summary

These are merely an amateur’s thoughts and ramblings on P2P. YFG has also done an analysis from a more professional point of view (28). As always, do your own research.

Have a great Christmas,

The Shrink

Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Fools and Mortals – Bernard Cornwell – finished this – good but not Sharpe or Uhtred

Rivers of London – Ben Aaronovitch – the new bedside fiction

Smarter Investing 3rd edn – Tim Hale – very close to finishing this

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://monevator.com/ratesetter-high-interest-offer/
  2. http://quietlysaving.co.uk/2017/06/08/investment-strategy-updated/
  3. http://thefirestarter.co.uk/november-income-expenses-report-well-the-run-had-to-end-somewhere/
  4. https://obviousinvestor.com/p2p-lending-portfolio-update-nov-2018/
  5. https://www.theguardian.com/money/2015/mar/06/peer-to-peer-lending-p2p-returns-investment
  6. https://www.which.co.uk/money/investing/types-of-investment/peer-to-peer-investing/innovative-finance-isas-explained-aq1tx2u2ms9j
  7. https://www.moneywise.co.uk/investing/peer-to-peer/how-p2p-can-be-high-income-kicker-investment-portfolio
  8. https://www.mortgagesolutions.co.uk/specialist-lending/2018/11/20/why-the-recent-criticism-of-p2p-lenders-is-misplaced-assetz-capital/
  9. https://www.abundanceinvestment.com/investments
  10. https://www.thehousecrowd.com/property-investment-opportunities
  11. https://www.ratesetter.com/
  12. https://www.zopa.com/lending
  13. https://www.moneywise.co.uk/investing/peer-to-peer/understanding-the-risks-peer-to-peer-lending
  14. https://www.proplend.com/news/bonds-vs-peer-to-peer-lending/
  15. https://www.moneyobserver.com/should-savers-be-seduced-peer-to-peers-strong-returns
  16. https://www.lendingworks.co.uk/innovative-finance-isa/setting-your-ifisa-what-you-need-know
  17. https://www.thisismoney.co.uk/money/saving/article-6458247/P2P-lender-Zopa-reveals-plans-digital-bank-launch-receiving-banking-licence.html
  18. https://www.bankingtech.com/2018/12/zopa-unleashes-uk-challenger-bank/
  19. https://www.theguardian.com/money/2017/jun/03/peer-to-peer-lending-funding-circle-promised-returns-losing-money
  20. https://monzo.com/invest/
  21. https://www.moneywise.co.uk/blog/edmund-greaves/investing-monzo-and-what-you-could-consider-instead
  22. https://www.brewdog.com/equityforpunks
  23. https://www.bbc.co.uk/news/business-46654064
  24. https://www.ftadviser.com/investments/2017/04/28/six-things-to-know-about-p2p/?page=1
  25. https://www.telegraph.co.uk/business/2018/12/09/ratesetter-falls-deeper-red-acquiring-carcass-motor-finance/
  26. http://www.p2pfinancenews.co.uk/2018/12/13/funding-circle-outlook-risk/
  27. http://www.p2pfinancenews.co.uk/2018/12/07/funding-circle-1bn-waterfall/
  28. https://youngfiguy.com/p2p-lending-a-review-of-the-market/
  29. https://www.theguardian.com/business/2018/dec/20/us-stock-markets-drop-interest-rates-hike-looming-shutdown
  30. https://www.theguardian.com/business/2018/dec/19/federal-reserve-interest-rates-raised-trump
  31. https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals
  32. https://www.which.co.uk/news/2018/12/should-you-consider-getting-a-seven-year-fixed-rate-mortgage/
  33. https://www.autocar.co.uk/car-news/industry/jaguar-land-rover-‘poised-cut-5000-jobs’
  34. https://www.bbc.co.uk/news/business-46590130
  35. https://www.theguardian.com/politics/2018/dec/16/brexit-is-a-business-bankrupter-small-firms-brace-for-no-deal
  36. https://www.bbc.co.uk/news/education-46591500
  37. https://www.moneywise.co.uk/news/2018-11-19/uk-house-prices-fall-more-5000-sharpest-falls-the-south-sellers-lower-expectations
  38. https://www.theguardian.com/society/2018/dec/16/vulnerable-teenagers-helping-hand-finances
  39. https://www.dailymail.co.uk/money/pensions/article-6507381/Im-saving-400-month-projected-pension-65-puny.html
  40. https://www.theguardian.com/commentisfree/2018/dec/18/ivan-rogers-brexit-bombshell-digested-home-truths
  41. https://www.theguardian.com/politics/2018/dec/22/frankie-boyle-review-2018-forget-brexit
  42. https://www.autocar.co.uk/car-news/advice/winter-tyres
  43. https://monevator.com/vanguard-readying-its-personal-pension-sipp/
  44. http://quietlysaving.co.uk/2018/12/18/very-muscular-and-other-things/
  45. https://www.ukvalueinvestor.com/2018/12/how-to-measure-a-companys-growth-rate.html/
  46. https://www.ukvalueinvestor.com/2018/12/why-dividend-investors-should-look-at-free-cash-flow.html/
  47. https://theescapeartist.me/2018/12/15/now-thats-what-i-call-financial-independence-14-2/
  48. https://theescapeartist.me/2016/01/21/the-3-numbers-that-can-make-you-a-millionaire/
  49. https://theescapeartist.me/2018/12/11/reset-how-one-family-changed-their-life/
  50. https://littlemissfireblog.wordpress.com/2018/12/15/the-problem-with-the-traditional-business-model/
  51. https://littlemissfireblog.wordpress.com/2018/12/18/tried-and-tested-can-you-make-money-with-be-my-eye/
  52. http://www.msziyou.com/female-money-doc/
  53. https://youngfiguy.com/healthcare/
  54. http://www.thefrugalcottage.com/dividend-income-november-2018/
  55. https://pursuefire.com/monthly-net-worth-report-6-november/
  56. https://gentlemansfamilyfinances.wordpress.com/2018/12/13/the-dangers-of-double-counting/
  57. https://gentlemansfamilyfinances.wordpress.com/2018/12/21/how-to-survive-a-bear-market-attack/
  58. https://indeedably.com/what-do-you-do-when-you-do-what-you-do/
  59. https://indeedably.com/fire-extinguisher/
  60. http://diyinvestoruk.blogspot.com/2018/12/finsbury-g-i-trust-final-results.html?m=1
  61. https://www.retirementinvestingtoday.com/2018/12/moving-to-cyprus-from-uk-part-1.html
  62. http://twothirstygardeners.co.uk/2018/12/christmas-gift-guide-2019-gin-beer-whisky-stihl-bauble/
  63. https://www.countryliving.com/uk/homes-interiors/gardens/g25624008/garden-trends-2019-society-garden-designers/

Investment Strategy Statement – Part 3 – Allocation

So here’s the guts of my ISS, which may or may not ruffle feathers.

Asset Allocation

My timescale is long, my employment is (in theory) secure and my pension scheme is (supposedly) generous. All money going into my portfolio is that which I can afford to lose. My current lifestyle, while not extravagant, is comfortable and by limiting lifestyle inflation I hope to increasingly channel spare cash into investments. I’m happy to take a reasonable amount of risk in my portfolio on this basis.

In choosing my asset allocation split I’ve tried to read widely, including the usual Smarter Investing 3rd edn – Tim Hale, Monevator etc (1, 2, 3). There’s an argument that given my timeline is 15+ years I could go wholly into equities, however I’m going to try and include my whole net worth in the picture.

Allocation will initially be set at 70% equities, 15% cash, 10% alternative or exotic assets, 5% property (4, 5, 6). Equities are split between a core 80% passive tracker portfolio and a testbed active portfolio (10% active funds, 10% stocks) aimed for growth. Allocations will be reviewed and re-balanced quarterly. Re-balancing will be covered in Part 4. Cash holdings will target high interest and liquidity, through usage of high interest current and savings accounts with FSCS cover. Alternative and exotic assets will be covered separately. Property is currently equity in our own home, but will encompass owned property plus REITs.

Fund/Brokerage Allocation

I intend to allocate across ETF/ fund providers. Rules here are loose, but the intention is that no provider will hold more than 25% of my holdings. To minimise risk I’ll also allocate across brokers, with the intention of simultaneously reducing TER and minimising tax burden (7).

World Allocation

It would be very simple to put all my money in a LifeStrategy 100 and be done with it, but I’m a contrarian at heart. As fits a diversified passive-focus portfolio the central core of my global equity allocation will mirror world markets, using all world tracker funds and ETFs (8). Beyond this statement and with caveats for other sections of my portfolio I diverge from the norm.

Testbed Active Portfolio

This section of my portfolio is largely UK-based, and a mixture of 10% stocks and 10% active funds I find interesting. Themes here are disruptive companies, and early investing and venture capital, counterbalanced with commodities. I will explain more about this in a separate post.

Core Passive Portfolio

My global allocation aligns to two main beliefs:

  1. Broadly match global market capitalisation (so far so normal)
  2. Global market capitalisation reflects top-heavy population demographics (… que?)

I understand the broad investment logic behind investing in your own country, and holding trackers to your domestic market. The protection against inflation a home market affords (9, 10). I too feel the deep rooted psychological reasons for supporting UK industry.

But much of my active testbed, cash, property and other assets are in the UK. I’m already 40-50% UK inflation vulnerable/protected before even looking at passive equities. I’m therefore ex-UK in my passive section. The sensible answer would be an Ex-UK All-World Tracker. But then how do you slice your pie? Contribution to Gross World Product? Global market capitalisation? If global cap whose data do you use?

My figures are a blend of the above taken from a seeking alpha blogpost, the PWC yearly report plus the Credit Suisse Yearbook (11, 12, 13, 14). Factoring in ex-UK active investments with the passive core I aim to hold:

  • 40% US
  • 35% Emerging Markets
  • 15% Developed Ex-US/ Ex-Euro
  • 10% Euro

Standard All-World trackers hold heavily in the US, which I consider to be over-valued for a number of reasons I won’t go into here. China ranks second in PWC and third in Bloomberg Global Market Caps, with India closing the gap (11, 12) . I aim to capture these as part of a quite aggressive 35% emerging market weighting (15, 16). Emerging markets appeal for a number of reasons, but one I really favour is young demographics. This is also the reasoning behind my 15% targeting Developed Ex-US and Ex-Euro markets. Here, like Firevlondon, I’m looking at English-language Commonwealth nations with expat potential, favouring Australia and Canada (17). These markets also have a sector mix which balances the tech and service heavy US/ Eurozone.

In summary

Despite all my waffling, it’s probably a fairly stock allocation profile. 40-odd percent in the UK, 20-30% in the US, with the rest scattered about the developed and emerging markets. I’ll review this yearly with new world data to see what changes need to be made.

In Part 4 – Funds, Accounts and Rebalancing.

References:

  1. https://amzn.to/2Sthjtv
  2. https://monevator.com/asset-allocation-construct/
  3. https://www.bogleheads.org/wiki/Asset_allocation
  4. https://monevator.com/asset-classes/
  5. https://youngfiguy.com/how-i-invest-my-money/
  6. https://en.wikipedia.org/wiki/Alternative_investment
  7. https://www.bogleheads.org/wiki/Asset_allocation_in_multiple_accounts
  8. https://monevator.com/investing-for-beginners-the-global-stock-market/
  9. https://www.investopedia.com/articles/basics/10/protect-yourself-from-inflation.asp
  10. https://youngfiguy.com/how-i-invest-my-money/
  11. https://seekingalpha.com/article/4202768-u-s-percent-world-stock-market-cap-tops-40-percent
  12. https://www.pwc.com/gx/en/audit-services/assets/pdf/global-top-100-companies-2017-final.pdf
  13. https://monevator.com/world-stock-markets-data/
  14. https://indeedably.com/home-market-bias/
  15. https://monevator.com/emerging-markets-index-fund/
  16. https://www.investopedia.com/terms/e/emergingmarketeconomy.asp
  17. https://firevlondon.com/2015/06/17/my-ips-2-of-5-asset-allocation/

The Full English Accompaniment – boggled by Bogle

What’s piqued my interest for my 50th post?

This week, in an editorial in the Wall Street Journal ahead of the release of his new book Stay the Course: The Story of Vanguard and the Index Revolution, John C. Bogle sounded a warning on the growth of index funds (1). The article is paywalled, and mostly taken direct from the book. I have replicated the crux here:

“Equity index fund assets now total some $4.6 trillion, while total index fund assets have surpassed $6 trillion. Of this total, about 70% is invested in broad market index funds modeled on the original Vanguard fund.

Yes, U.S. index mutual funds have grown to huge size, with their holdings doubling from 4.5% of total U.S. stock-market value in 2002 to 9% in 2009, and then almost doubling again to more than 17% in 2018. Even that penetration understates the role of mutual fund managers, as they also offer actively managed funds, and their combined assets amount to more than 35% of the shares of U.S. corporations.

If historical trends continue, a handful of giant institutional investors will one day hold voting control of virtually every large U.S. corporation. Public policy cannot ignore this growing dominance, and consider its impact on the financial markets, corporate governance, and regulation. These will be major issues in the coming era.

Three index fund managers dominate the field with a collective 81% share of index fund assets: Vanguard has a 51% share; BlackRock, 21%; and State Street Global, 9%. Such domination exists primarily because the indexing field attracts few new major entrants.

Why? Partly because of two high barriers to entry: the huge scale enjoyed by the big indexers would be difficult to replicate by new entrants; and index fund prices (their expense ratios, or fees) have been driven to commodity-like levels, even to zero. If Fidelity’s 2018 offering of two zero-cost index funds has established a new “price point” for index funds, the enthusiasm of additional firms to create new index funds will diminish even further. So we can’t rely on new competitors to reduce today’s concentration.

Most observers expect that the share of corporate ownership by index funds will continue to grow over the next decade. It seems only a matter of time until index mutual funds cross the 50% mark. If that were to happen, the “Big Three” might own 30% or more of the U.S. stock market—effective control. I do not believe that such concentration would serve the national interest.”

A range of solutions are then postulated, including references to a draft paper released by Prof John C. Coates of Harvard. The solutions are drastic, and most unworkable. They range through requiring index funds to spin off assets into independently managed entities, limiting each funds exposure to market sectors, requiring an independent supervisory board, to limiting corporate share voting rights of index managers. Perhaps the most workable is implementing full transparency and public disclosure by index funds of their voting policies. A ban on indexing has been hypothesised, but seems impractical and unworkable.

The Fire Starter pointed me towards a good retort by Cullen Roche at Pragmatic Capitalism (2, 3). The riposte is that not only are indexing firms a long way from owning 50% of the stocks on the market, never mind the 80-90% people are worrying about, but also that these firms invariably follow management decisions. These are not active firms. They are passive by their nature, and follow the natural flow of the company.

My own concerns comes more down to allocation. The FTSE 100 already includes Hargreaves Lansdown and the Scottish Mortgage Investment Trust (4). Neil Woodford’s Patient Capital Trust and Terry Smith’s Smithson have joined the FTSE 250 (5). Should the number of investment funds in these metrics begin to increase then allocating becomes recursive. The spread across FTSE 100 companies either becomes the FTSE 95 + 5 globally diversified funds, or the FTSE 95 alone, decreasing your diversification. If your aim is to stay invested in the top-performing UK companies then you get derailed. There is the potential to make your portfolio much more globally diversified, as some of those funds will track companies way outside your intent. It also has the potential that you end up with compounded holdings of companies you don’t want exposure to (*cough* FAANG *cough*). Not to mention the headache in calculating global and sector allocation percentages.

I’m merrily beavering away at my own allocation conundrums, but it appears to me that investors will need to put a lot more thought into strategies if they want to maintain a specific philosophy as more funds climb the FTSE ladder. Or they can just buy an All-World tracker. Different strokes…

Have a great weekend,

The Shrink

Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Fools and Mortals – Bernard Cornwell

Religio Medici and Urne-Buriall by Sir Thomas Browne – the theological and psychological reflections of a C17th doctor. Getting to the end of this now, and it’s been a slog. Written in C16th prose, you really have to get your head in the right place. Some fantastic philosophical points, with moments of period debate thrown in; e.g. is glass the most divine substance as all can be rendered into it through fire?

Enchiridion by Epictetus – Bedside reading for a bad day

References:

  1. https://www.wsj.com/articles/bogle-sounds-a-warning-on-index-funds-1543504551
  2. http://thefirestarter.co.uk/
  3. https://www.pragcap.com/john-bogle-wrong-index-funds/
  4. https://www.hl.co.uk/shares/stock-market-summary/ftse-100
  5. https://citywire.co.uk/investment-trust-insider/news/woodford-can-t-shake-off-rival-smith-as-both-enter-ftse-250/a1183397
  6. https://www.nytimes.com/2018/12/04/business/yield-curve-recession-stock-market.html
  7. https://www.reuters.com/article/us-usa-economy-yieldcurve-analysis/one-part-of-the-us-yield-curve-just-inverted-what-does-that-mean-idUSKBN1O50G1
  8. https://www.bbc.co.uk/news/business-46462858
  9. https://www.bbc.co.uk/news/business-46469575
  10. https://www.thisismoney.co.uk/money/bills/article-6418111/Small-energy-firm-Outfox-Market-hikes-prices-time-year.html
  11. https://www.theguardian.com/science/2018/dec/04/scientists-develop-10-minute-universal-cancer-test
  12. https://www.bbc.co.uk/news/uk-wales-politics-46447290#
  13. https://www.bbc.co.uk/news/uk-wales-46221656
  14. https://www.theguardian.com/money/2018/nov/27/is-a-property-crash-coming-we-answer-the-20-most-pressing-personal-finance-questions
  15. https://www.thisismoney.co.uk/property/article-6437727/Do-live-one-happiest-places-Britain-asks-Rightmove.html
  16. https://www.marketwatch.com/story/these-people-left-their-jobs-behind-to-retire-early-then-life-got-in-the-way-heres-how-they-coped-with-fire-plans-gone-wrong-2018-11-29
  17. https://monevator.com/how-to-stick-to-saving-goals/
  18. http://www.retirementinvestingtoday.com/2018/11/fire-day.html
  19. https://firevlondon.com/2018/12/02/november-2018-returns/
  20. https://thesavingninja.com/savings-report-5-november/
  21. https://littlemissfireblog.wordpress.com/2018/12/06/december-income-and-expenses-report-2018/
  22. https://littlemissfireblog.wordpress.com/2018/12/04/each-way-sniping-update-november-2018/
  23. https://littlemissfireblog.wordpress.com/2018/12/02/my-1-year-blog-anniversary-and-100th-post/
  24. http://www.msziyou.com/net-worth-updates-november-2018/
  25. http://fiukmoney.co.uk/november-18-net-worth-and-monthly-updates-4/
  26. https://gentlemansfamilyfinances.wordpress.com/2018/11/30/month-end-november-18-assets-and-spending/
  27. https://gentlemansfamilyfinances.wordpress.com/2018/11/27/the-best-thing-about-business-travel/
  28. https://gentlemansfamilyfinances.wordpress.com/2018/11/26/places-i-hide-my-money-abundance-investment/
  29. https://indeedably.com/normalcy/
  30. https://indeedably.com/subversion/
  31. https://youngfiguy.com/the-double-whammy/
  32. https://agentsoffield.com/2018/11/18/new-surroundings/
  33. https://sharpenyourspades.com/2017/12/04/9491/
  34. https://paulnelson90.wordpress.com/2018/11/25/a-new-allotment-adventure/

The Full English Accompaniment – Not all advice is good advice

What’s piqued my interest this week?

Express
Screams the Daily Express (1). Le sigh.
Unpicking this is a good exercise in publication analysis. A team from the Institute of Nuclear Physics of the Polish Academy of Sciences, Krakow, are the ones making the forecast. Clear valid prior experience. They predict a massive worldwide financial meltdown “such as never before” in the mid-2020s. Helpful. They performed a “multi-fractal” analysis of financial markets, published in the journal Complexity. To be clear, I looked up the journal Complexity (2). Studies are appropriately archived, but the journals impact factor is a measly 1.829, and it’s a pay-to-publish open access format. This publishing model is not well-regarded, but increasingly common and predatory. The author, Prof Stanislaw Drozdz, at least has previous for a number of interesting fractal theory publications. This paper was published in September and can be read here (3).
To summarise very briefly, the team used an analysis to look for multi-fractal formulae across the S&P 500 and NASDAQ stock market indices. Their hypothesis was to prove that investor nervousness, measured by proxy through market volatility, followed fractal patterns. They looked at the Hurst exponent, which has assumed values from 0 to 1 reflecting the degree of susceptibility of a system to a change in trend. The Hurst exponent has continually stabilised after dropping during repeated ‘stock market crashes’ over the past 30 years, each time stabilising at a lower level. The time intervals decreases between falls, and never reaches it’s previous level. The eventual tipping point is somewhere in the mid 2020s (4).
So a functionally derived measure of an assumed value measure predicts terror at an vague point in the future. Interesting reading, but is it going to change my plans? Probably not. But it does prompt the thought experiment (Hi Savings Ninja) ‘what if we had another Great Depression’?
This would harpoon the latest MMM blogpost. In it MMM has many sweeping statements, including:

“If you start with $1.2 million chunk (a 3% withdrawal rate), it is overwhelmingly certain that you’ll have a growing surplus for life.”

“A fixed chunk of money is about as safe a retirement strategy as you’ll ever find.”

“Stock market crashes are never permanent. In the long run, the market always goes up. So all that happens during a crash is that those few shares that you do sell during those brief times when the market is down, will hurt your account balance just a bit more. Within a year or two, the market is back up and your remaining stocks are more valuable than ever. If you want even further reassurance, you could just choose to spend a bit less money during this time.”

Eggs and baskets spring to mind. MMM advocates holding your money in a Vanguard ETF, tax-sheltered via your chosen domiciles methodology. You’re diversified across markets. MMM does qualify his claims:
“Now, these statements do all depend on the continued existence of a productive human race which continues to innovate and trade and not destroy its own productive capacity.”
Which is fair enough, but I seriously disagree with his suggestion to go wholly equities. Diversification out of the market and into other avenues is far safer. MMM goes on to say:
“Heck, even if you are stuck with a $1 million house occupying a huge part of your net worth, you can convert that into livable money: sell the house, put the cash into index funds, and use the resulting cash stream to rent a spiffy but reasonably priced house or apartment in the lovely walkable area of your choice.”
Which to me is nuts. Worst case unimaginable scenario the stock market falls through the floor/ a global hacker collective wipes debt and investment records/ Brexit causes the collapse of British industry and ‘the city’ etc, what happens to you? It’s all gone. We mourned this week the passing of Harry Leslie Smith, one of the last vocal writers who lived through such a time, the Great Depression (6). I recommend reading his experiences. His eldest sister died of Tuberculosis in a workhouse when he was 3 because his family couldn’t afford a doctor. She was buried in an unmarked paupers’ grave because they couldn’t afford a funeral. He worked as a barrowboy from age 7, then delivered coal aged 10 to support his family. He lived in and remembered a world few of us can now imagine experiencing. Here’s his memory of the Christmas of 1930, during the Great Depression (7).
MMM is a fantastic advocate for financial independence, but putting all your financial eggs in one basket is a risk. We can calculate that risk is vanishingly small, but we can’t predict the future. Is Prof Drozdz’s prediction came true, how would you fare?Diversification reduces risk, at the cost of potential returns. Maybe this is a risk you’re willing to take?
Have a great weekend,
The Shrink
Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Fools and Mortals – Bernard Cornwell

Religio Medici and Urne-Buriall 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.express.co.uk/finance/city/1051072/Global-financial-crash-warning-hyper-crash-world-economy-Lehman-Brothers-Black-Monday
  2. https://www.hindawi.com/journals/complexity/
  3. https://www.hindawi.com/journals/complexity/2018/7015721/
  4. https://eurekalert.org/pub_releases/2018-11/thni-itf112218.php
  5. https://www.mrmoneymustache.com/2018/11/29/how-to-retire-forever-on-a-fixed-chunk-of-money/
  6. https://www.theguardian.com/books/2018/nov/28/harry-leslie-smith-obituary
  7. https://www.independent.co.uk/voices/christmas-great-depression-poverty-war-1930-a8127166.html
  8. https://www.theguardian.com/politics/2018/nov/26/theresa-mays-brexit-deal-could-cost-uk-100bn-over-a-decade
  9. https://inews.co.uk/inews-lifestyle/money/brexit-house-prices-property-market-crash-after-consequences/
  10. https://bit.ly/2QoBZFf
  11. https://www.theguardian.com/environment/2018/nov/26/uk-flooding-threat-people-moved-michael-gove-climate-change
  12. https://www.independent.co.uk/news/uk/home-news/scotland-climate-change-greenhouse-gas-emissions-renewable-energy-electric-vehicles-a8551541.html
  13. https://www.independent.co.uk/environment/solar-panels-government-cuts-funding-british-tesla-a8500051.html
  14. https://www.bbc.co.uk/news/business-46386858
  15. https://www.theguardian.com/business/2018/nov/29/network-rail-faces-fines-after-worst-performance-in-four-years
  16. https://www.bbc.co.uk/news/business-46387030
  17. https://www.irishnews.com/business/2018/11/30/news/brexit-hastening-business-automation-study-suggests-1497453/
  18. https://simplelivingsomerset.wordpress.com/2018/11/25/anti-fire-the-yolo-train-wreck-edition/
  19. https://www.theguardian.com/business/nils-pratley-on-finance/2018/nov/26/it-will-take-more-than-a-merger-for-bdo-to-challenge-rivals
  20. https://theescapeartist.me/2018/11/27/honestly-could-this-investing-lark-be-any-easier/
  21. https://littlemissfireblog.wordpress.com/2018/11/29/reselling-update-november-2018/
  22. http://diyinvestoruk.blogspot.com/2018/11/another-fine-mess-olly.html
  23. http://thefirestarter.co.uk/your-fi-dreams-cant-wait-you-need-to-start-them-now-guest-post/
  24. http://fiukmoney.co.uk/thanks-for-doing-the-washing-mum/
  25. https://thesavingninja.com/what-is-merch-by-amazon/
  26. https://thesavingninja.com/minimalism-part-1-my-never-ending-journey-toward-decluttering-my-life/
  27. https://tuppennysfireplace.com/guest-post-cant-use-snowball-method/
  28. https://drfire.co.uk/financial-lessons-video-games/
  29. https://indeedably.com/poverty/
  30. https://indeedably.com/healthy-wealth-and-wise/
  31. http://twothirstygardeners.co.uk/2018/11/how-to-make-leaf-mould/
  32. https://lifeatno27.com/2018/11/19/fungi-a-plants-best-friend/

Property Renovation Lessons I

Gather ye round students.

It’s a peculiarly British fascination that we own our homes. Your home is your castle.

The default setting for those with spare-cash in their middle-years appears to be adding to your castle, working up the property ladder or buy-to-let. Yet it’s a route full of pitfalls, and BTL is fast becoming a mug’s game. MrsShrink and I have been fortuitous in turning a £20k deposit in 2014 into a £52k deposit this year (~38% annual return). We did this by buying a fixer-upper and working our socks off in our spare time. MrsShrink comes from a family of serial renovators, and spent some time learning painting and decorating with a professional family member. I come from building trade stock, and have plied the hod and trowel. I know which end to hold a hammer. So here’s the lessons from along the way that we applied to our second house purchase and renovation.

Location Location Location

  • Buy the worst house on the best street in the best neighbourhood you can afford

Classic Sarah Beeny this one. Waiting for the rough looking house to come up can pay dividends, however there’s plenty of property developers also looking to do this who probably have cash on hand to swoop quickly (1). As an alternative look at what has been on the market a long time, work out why and knock them down for it if it’s overpriced. That unappealing quality avocado bathroom could be £15k off the asking price for a fed-up seller. The primary issue here is that due to Sarah Beeny, DIY SOS, The Renovation Game etc every man and his dog thinks they’re a property developer by ripping out a 30 year old fitted kitchen and banging in a Wickes’ budget MDF job (2). Shame that.

  • Check the location using Rightmove’s school checker, look for local shops and public services like bus stops, libraries, parks etc (3).

This again is partly straightforward. Even if you don’t have kids being in a good school catchment improves resale, although worth bearing in mind that schools can turn around quickly. Less thought about are bus stops; schoolkids yelling outside your house can pretty quickly turn a night shift worker potty. Likewise parks and outdoor sports areas.

  • Check the local streets on your councils planning portal and local area development plan

Is your neighbour about to be converted to an HMO? Is that spot of derelict land at the end of the road turning into a block of flats with no parking allocated. This is exactly what is happening a few streets over from us, and the next-door owner is currently selling up as their current uninterrupted view over the city is due to be replaced by six stories of students. Those planning applications may be the prompt for the sale. Also check your councils local area development plan (or equivalent). This may suggest (as for our current location) there are planned infrastructure, zoning or conservation changes which could dramatically impact the appeal of an area.

  • Check long term floodrisk maps

Published by the government, this shortcuts going through the purchase process only to find on your surveys that your new dream home floods any time we get fair-middling drizzle. For England see here, Wales here, Scotland here (4, 5, 6).

  • Google Streetview is your friend

Check the roof, neighbours gardens for a sense of upkeep of the local area, evidence of building work and other nearby extensions. Four doors up may have a single storey extension that makes getting your planning permission in five years time that much easier. What’s the rear access like? Does Streetview show the rear lane blocked by idle taxi drivers?

  • Check the street at rush hour and mid-evening.

This is a bit involved, hell some people buy houses without seeing them! However if you go to a house viewing at 2pm on a Saturday the quiet tree-lined street with great school access may be a different picture to the school-run mummy-chariot car park. Likewise mid-afternoon could get very different to mid-evening if your excellent local gastropub has less than polite clientele.

Kerb appeal

It’s not just about from this (1):

to this:

Though that first impression counts. If the house looks down at the heel then a clean and a coat of paint may do wonders. Here’s a short list of what else to look for:

  • Doors and windows – wood/ PVC/ aluminium?

Is the wood rotten? Is the PVC discoloured or warped? Is the aluminium corroded? Are the windows double glazed and if so what state are they in? If there is misting inside the windows, like below, it suggests the double glazing has ‘blown’, and is no longer sealed (7). This will still be warmer than single glazing, but lets less light in and obscures your view! Budget at least £500/window for decent replacements (8). Sash windows and wooden casements will cost more, but sash are more desirable and wood will last a lot longer if maintained. On older properties original sash windows can be retrofitted with double-glazing by specialist companies, and this can work out cheaper than having new units made (9). Finally, check the state of the external locks, as many insurance companies will give you better rates for a BS-standard 5 lever deadlock.

  • External walls – clad/ brickwork/ render/ pebble-dash/ stone/ other?

We’ll start with brickwork as in many ways it’s simplest, and most of it also applies to stone. Older and underburnt bricks can suffer from years of frost damage and degrade, a process called spalling, so check for evidence of failure like below (10). Stone will also erode over time (particularly limestone in acid rain, and sandstone mislaid with a vertical grain) (11)

Check for evidence of degradation of the mortar in joints which will require re-pointing (12).

Look for external cracking. In previous centuries lime mortar was used which allowed a degree of flex in the joints due to it’s softness, but as building has moved to stronger and easier concrete/ cement the joints have become inflexible and unyielding. Cracking can have multiple causes but it usually down to building settlement. A degree of settlement is normal over the course of a properties lifetime, and particularly after periods of heavy rain or prolonged drought when the soil underlying the foundations moves. Small cracks are nothing to worry about, but bigger ones may suggest faults with the foundations which can require costly underpinning work. When next to gable walls it may suggest the wall is pulling away from the rest of the house, requiring insertion of wall ties and structural work. If around windows/doors then it may suggest rotting, movement or inadequacy of the sill. If in doubt get a professional survey.

 (13) (14)

Render can have similar issues with cracking as above, but is utilised to offer a layer of protection to the underlying stonework. This was traditionally used where unfinished structural stonework was rougher/ cosmetically poor, or in exposed areas – coastal etc. Breathable lime-based renders were used on older buildings, and replacement with concrete can cause damp issues. Newer buildings have concrete render, which will usually last about 20 years. Certain areas of the country (in my experience Cornwall particularly) have issues with render staining which requires cleaning (15). Budget a couple of thousand pounds, plus VAT and scaffolding costs for a re-render (16, 17).

Pebbledash and roughcast are essentially a different form of render where pebbles are sprayed on or added into the render. It came to be used during the Arts and Crafts Movement, but is often associated with ’20s and ’30s housing where it was used to cover cheap and quick brickwork (structurally sound but not aesthetically pleasing) (18). It offers a greater degree of weather protection than standard render. Don’t write off a pebbledash home. Removal is time-consuming (read expensive), but painting can make a huge difference (16)

Cladding is it’s whole other separate post. Replacing cladding is a good way to bring an out-of-fashion exterior bang up to date. Cladding may require planning permission under permitted development rules, or further consideration in conservation or national park areas (19).

  • Check for cavity wall injection points

Cavity walls, where there is an air gap between the inner and outer skins of the wall, became mainstream in the 1920s (20). The two skins are tied together either with bricks placed perpendicular across them, stones, or now with metal ties. The original usage was to prevent the passage of moisture into the building from outside. Insulation in the cavity became compulsory in the 1990s. In older houses is became common to use an injection method to insert insulation into the pre-existing cavity, leaving behind tell-tale holes where drilled (21). Cavity wall insulation divides opinion. The added insulation can in principal save a fair amount on heating. I dislike retro-fitted cavity wall insulation due to the potential for air and moisture-bridging, especially across damp courses lower down in the wall. This allows moisture to track across where there was previously an air gap, or through osmosis past the damp proof course. In modern houses the damp proof course sits below the insulation as it is inserted during construction, and with the use of modern backed insulation boarding it is less of an issue. Do your own research.

What lies above?

  • Check the roof

I won’t go into different roof materials, again it would be a whole other post. Stand on the other side of the street and look at as many elevations as you can see. Are there any slipped slates/ tiles? Any missing ridge tiles? These can all be sources of leaks if the roof lacks underlay (22). Most tile roofs can last 50 years if maintained, while slates can last a hundred (23). Budget £5000+ for new roof. This could escalate if the underlying joists and rafters are warped, damaged or rotten, indicated by a sagging area of roof. If the whole roof appears bowed under weight then it may be less of a worry; this is usually the result of replacement tiles being heavier than the originals, gradual settlement over time, or the effect of weight following a period of heavy snow (24).

Damaged or degraded flashing is a common cause of a leaky roof. I would bring binoculars to look at the roof when I was viewing a house. Lead is generally used and is very durable, but can fatigue or come loose. More rarely zinc, copper, aluminium or galvanised steel has been used. Budget £1000-1500 as a minimum for remedial work including labour, materials and scaffold (25, 26).

Chimneys… where to even start? Apply all of the brickwork damage section here, particularly spalling. The heat expansion and freeze/thaw effects combine to result in rapid degradation. Check for mortar breakdown around flashing at the base, a common source of ‘falling damp’ which is water leaking down the chimney breast. Check for vertical cracks in the chimney, vegetation, nesting animals, degraded cement caps and loose chimney pots or cowls. All can cause problems (27, 28). We’re currently trying to have our chimney repaired as preventative maintenance, with quotes between £1500-2500. Getting the agreement of our neighbour as it is a party wall has proved troublesome (rented property). We can’t go ahead until we have their agreement, but hopefully they’ll go half.

  • Check the gutters, soffits and fascias

Again a multitude of materials and a cause for ‘falling damp’. Traditionally gutters were cast iron and painted. These with maintenance can last many, many years. For a short period there were asbestos and fibre gutters, before moving over to PVC or plastic forms. These don’t last as long but don’t need the maintenance (and are cheaper).

Firstly, check for vegetation or any signs of blockages in the gutters themselves. This causes rainwater to overflow (a cause of damp), but is easily remedied with a ladder (or if you really fancy get a bloke with a pressure washer). Then check downpipes and ground-level drains (gullys). Are they securely attached and are they all connected. Again a common cause of internal damp is a leaking external downpipe (29). I hired an aluminium scaffold tower for a week for £120 this summer and had a great old time digging years of rotting vegetation and a few carcasses out of our blocked gutters, before rodding out the downpipe and running new ground-level pipes. I also took the opportunity to repaint our soffits and fascias. Cheap fixes and maintenance preventing future problems.

Your guttering will be attached to the fascia, with the soffit covering the underhang (30). These used to be made of wood, which would need to be periodically painted. In more recent years they’ve been replaced with PVC. Sometimes this covers and is fixed to a wood board, or is fixed to the older fascia or soffit. Watch out for where people have covered a rotting old fascia with PVC to hide it, as it will continue to rot and the guttering will fall out.

The hidden costs

  • Check utilities services

What do I mean by this? Check where the stopcock and meter are externally if it’s obvious. Check where phonelines enter the building. Both can be a pain to track down. More importantly – check the drains! Where does the external surface water drain to? Are there obvious access hatches to inspection chambers? Learn from my error, when I spent a wintry December week breaking up our concrete yard and digging down two feet to expose a broken salt-glaze pipe containing 12 foot of backed-up liquid faeces. If you’re planning to rework a property then knowing where the utilities is essential for plumbing planning.

  • Check the garden for Japanese Knotweed & other pests.

Look for the plant below, Japanese Knotweed. The effect on the value of the property is massive. It’s an invasive non-native species which is classed as hazardous waste, and any land containing it is counted as contaminated. It’s difficult to get rid of, spreads like wildfire and grows up to 10cm a day (28). A survey by YouGov and Environet UK estimates that 5% of UK homes have Japanese Knotweed (31). Finding Japanese Knotweed will knock 10% off that value of the property (31, 32, 33). Also take the opportunity to spot for evidence of wasps nests, bats, rats or mice.

Finalement

So that’s outdoors briefly covered. In part two I’ll cover indoors, reflecting on what to look for in your first and second viewings when considering a house, and the mistakes we did and didn’t make.

The Shrink

 

References:

  1. https://www.telegraph.co.uk/property/buy/should-buy-worst-house-best-street-turn-ugly-duckling-swan/
  2. https://www.dailymail.co.uk/news/article-3114485/Want-make-money-property-Buy-house-avocado-bathroom-Artex-ceilings-quadruple-investment.html
  3. https://www.rightmove.co.uk/schools.html
  4. https://flood-map-for-planning.service.gov.uk/
  5. https://naturalresources.wales/evidence-and-data/maps/long-term-flood-risk/?lang=en
  6. https://www.sepa.org.uk/environment/water/flooding
  7. https://www.eygwindows.co.uk/lifestyle-blog/why-does-double-glazing-mist-up
  8. https://www.theecoexperts.co.uk/double-glazing-costs
  9. https://www.renovategreen.co.uk/building-fabric/retrofitting-double-glazing-into-old-windows/
  10. https://www.designingbuildings.co.uk/wiki/Defects_in_brickwork
  11. https://www.heritage-house.org/damp-and-condensation/types-of-damp-what-have-i-got/damp-problems-caused-by-cement-pointing-of-brick-or-stone.html
  12. http://www.loughboroughproperty.com/repointing/
  13. https://www.diydoctor.org.uk/projects/settlement.htm
  14. https://gharpedia.com/diagonal-cracks-brick-walls/
  15. http://www.colinsquire.co.uk/red-stained-walls/
  16. https://www.homebuilding.co.uk/render-faqs/
  17. https://www.thegreenage.co.uk/cost-of-external-render/
  18. https://en.wikipedia.org/wiki/Roughcast
  19. https://www.homebuilding.co.uk/cladding-new-facades-for-ugly-homes
  20. https://en.wikipedia.org/wiki/Cavity_wall
  21. https://www.fixmyroof.co.uk/videos-and-guides/pitched-roof/repair-a-slate-roof/
  22. https://www.roof-stores.co.uk/guides/tiles-and-slates/roofing-tiles-slates-lifespan/
  23. https://www.designingbuildings.co.uk/wiki/Flashing_in_building_construction
  24. https://www.homebuilding.co.uk/roof-repairs/
  25. http://essexroofingandfascias.co.uk/portfolio-items/damaged-chimney/
  26. https://www.karnakcorp.com/roof-conditions/damaged-flashing/
  27. https://www.homebuilding.co.uk/repairing-gutters/
  28. https://www.jjroofingsupplies.co.uk/blog/what-are-soffits-and-fascias/
  29. http://surveyingproperty.blogspot.com/2018/#.XAATl9v7SM8
  30. https://www.independent.co.uk/news/business/news/japanese-knotweed-house-prices-property-value-mortgage-insurance-how-to-treat-a8557971.html
  31. https://www.telegraph.co.uk/property/uk/property-buyers-sue-50000-japanese-knotweed-problem-homeowners/
  32. https://www.moneywise.co.uk/news/2018-09-28/japanese-knotweed-blight-has-slashed-uk-house-prices-20bn