The Full English Accompaniment – Wealth whispers

What’s piqued my interest this week?

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

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

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

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

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

Have a great week,

The Shrink

Side Orders

Other News

Opinion/ blogs:

The kitchen garden:

What I’m reading:

Fools and Mortals – Bernard Cornwell

Tim Hale’s Smarter Investing – hur-bloody-rah

Enchiridion by Epictetus – Bedside reading for a bad day

References:

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

 

 

 

 

 

 

 

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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, 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://www.amazon.co.uk/Smarter-Investing-Simpler-Decisions-Financial/dp/0273785370
  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 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 Financial Dashboard – November 2018

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

The goals for October and November:

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

Checking the assets and liabilities:

Nov AssetsNov Liab

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

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

Goals:

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

Goal achieved: Sell five more items

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

Goal achieved:  Establish weekly and monthly joint grocery account expenses

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

Goal failed:  Service the red car

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

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

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

Goal failed: Finish reading Tim Hale’s Smarter Investing

Read fiction whilst away. Will finish it this month.

Budgets:

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

In the garden:

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

Goals for next month:

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

What’s in the pipeline:

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

Happy December everyone,

The Shrink

 

The Full English Accompaniment – 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 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/

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/

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