Roll On 2021!

Cassandra cried, and curs’d th’ unhappy hour;
Foretold our fate; but, by the god’s decree,
All heard, and none believ’d the prophecy.

2020 is finally over and the long-awaited 2021 has arrived. Let’s begin the countdown to disappointment. Here are my predictions for this year.

COVID is here to stay

Rich countries will vaccinate their populations; there will be delays and fuckups along the way, but it will get done, give or take a few anti-vaccer fruitcakes. Poor countries will not. The virus will find a permanent home in Africa, parts of Asia and South America where it will carry on mutating. We will eventually find a sort of equilibrium with COVID, like we did with the flu, where vaccines just manage to stay half a step ahead of the virus. The term flu season will have to be extended to include various strains of the coronavirus.

Global economy will recover

But it will take more than one year to get back to pre-COVID levels. Whatever fiscal firepower the G20 still had, and I didn’t think there was much to begin with, that is now all gone. The monetary policy is close to its limit, and I don’t think we will invent the permanent household-grade fusion reactor this year. So it looks like we’ll have to dig ourselves out of this shithole the old fashioned way.

The routing of the middle class will accelerate

This working from home in our pants thing that we have come to appreciate so much is teaching our employers what else can be outsourced to India, Nigeria, Bulgaria and such. And – surprise, surprise! – it’s pretty much every fucking desk job there is. It will start slow, with multinationals “rationalising geographically” new job creation without embarking on expensive redundancy programmes, business to business and professional services will follow suit shifting more of their junior roles to lower paid areas… We’re not totally screwed just yet, but a snowball it is, and roll down the hill it does.

Interest rates will stay low for a few years yet

Rich western economies are in debt up to their teeth and can only afford to service their debt if interest rates remain low until inflation erodes the principal to a manageable level. No central bank will risk causing a downgrade of their country’s sovereign rating by hiking interest rates too soon. When you take this into account, shares no longer look all that expensive.

Low inflation is no longer a priority

In an economic recovery scenario, inflation will be allowed to run above target, yet investment grade bond yields will remain low. Because: insurance companies and defined benefit pension schemes have nothing else to invest in.

Stealth taxes

The Chancellor will have to find new and creative sneaky ways to raise revenue. I don’t expect any news in the spring 2021 budget statement, but come autumn I’ll be watching for warning signs. The annual pension allowance, ISA allowance and capital gains allowance are obvious candidates. Not moving the tax bands in tandem with inflation is an old Tory favourite. Also, something will have to be done about the taxation of the self-employed, hence further restrictions on single-director companies might be on the cards.

Am I right? Time will tell, I guess. 🖖

Don’t Forget to Claim WFH Tax Relief in Your 2019/20 Tax Return

A bull, to Neptune an oblation due,
Another bull to bright Apollo slew;
A milk-white ewe, the western winds to please,
And one coal-black, to calm the stormy seas.

This is a public service announcement to the 10 people who visit this blog rather than a regular blog post. Just in time for the 31 January deadline.

If your office closed in mid-March due to COVID, you can claim £4 per week as a WFH tax relief for the 2019/20 tax year without having to supply proof of additional costs. For me that comes to 12 English pounds! Yes, it’s peanuts, but having seen the sheer scale of the economic mismanagement, bullshit and waste that this government is trying to pass for a fiscal response to the pandemic, I’ll be damned if I pay a single pound more in tax than they can legally extort from me under a threat of prison and pillory.

If you can be bothered coming up with evidence (e.g. comparative electric and gas bills) to justify the additional cost incurred due to working from home, you could potentially claim more than £4 per week.

Additional costs include things like heating, metered water bills, home contents insurance, business calls or a new broadband connection. They do not include costs that would stay the same whether you were working at home or in an office, such as mortgage interest, rent or council tax.

You can also claim tax relief for any work equipment you have bought that has not been reimbursed by your employer. The full set of HMRC rules can be found here.

For the 2020/21 tax year the WFH tax relief will increase to £6 per week. So that’s a total of £312 for 52 weeks of working from home. If your marginal tax rate is 60%, this means £187.20 in your pocket and not the Tax Man’s.

Good luck, and don’t miss the 31 January deadline, lest they fine you £100 for being a day late! 🖖

Risk Capacity

Of many things some few I shall explain, Teach thee to shun the dangers of the main, And how at length the promis’d shore to gain.

In early 1953 Thames breached flood defences and swept across the marshes of Belvedere and Erith (now London’s Thamesmead and Woolwich), also flooding houses and roads in Bexley, West Ham, and even Richmond. Plans for a flood barrier began soon after. The Thames Barrier opened in the 1980s, and since then it has been raised 180 times to stop tidal surges.

This is an excellent example of good risk management. London lies on a floodplain, and about forty five square miles of it, populated by more than a million people, are below the highest recorded water level. The area includes tens of tube stations, many miles of underground track, hospitals, power stations, as well as the Palace of Westminster, Tate Modern and the National Gallery. The cost of the barrier (£1.6bn in today’s money) is commensurate with the wealth it protects.

A sense proportion

The principle of proportionality is central to risk management. That’s why black swan events are such a pain in the arse: when the likelihood of occurrence is negligible and the impact both enormous and hard to quantify, how is one to come up with a proportionate cost-effective response? But I digress.

For risk management in personal finance two key principles apply:

  1. The risk you take as an investor has to be within your risk appetite; and
  2. Investment return has to adequately compensate you for that risk.

What constitutes a fair risk-adjusted return, and which asset classes offer such a return at any given time is subject to debate. People smarter than me are paid a shedload of money for their well publicised opinions on this matter, so I’ll be taking my tuppence elsewhere.

What’s my risk appetite?

That’s a good question, and the answer varies depending on how much money my portfolio happens to have lost recently. Or gained. Seeing red numbers on the screen tends to curb one’s enthusiasm for risk.

This is what my FinaMetrica risk score was at a time when my portfolio was less than £100,000 and included about £20,000 of unrealised gains. The result doesn’t seem unreasonable, and is comparable to the risk appetite score I was given by the IFA risk capacity survey at around the same time.

FinaMetrica Score

I don’t know this for a fact, but my guess is that, had I taken the same test with a portfolio of £500,000 that had just lost 30% of its value, my score might have been somewhat lower. Unless you’re a seasoned investor and can speak from experience, it’s hard to tell how well those test result will hold up under stress.

Bottom line: online testicles (is that what we call a test equivalent of a listicle, btw?) are fun to take, but a much better approach for beginners is to match the duration, set up a regular investment instruction by direct debit, and then never look at your investment account balance. Vanguard’s LifeStrategy funds are good for that sort of thing, they do the rebalancing for you.

… for shits and giggles…

According to risk appetite questionnaires, my capacity for taking on investment risk is decided by:

  1. How soon I’ll be needing the money. The longer the investment horizon, the longer I can afford to wait for any short-term losses to reverse, and hence the more risk I can take. I agree.
  2. Whether I enjoy a gamble. The larger my cojones, the less likely I am to panic and sell at the bottom of the market. That applies to volatile investments but not ones subject to a turkey distribution.
  3. My financial IQ. Presumably, when the urge to sell at the bottom of the market hits me, I can use my understanding of how markets and volatility work to talk myself out of it. I’m not sure about this one, doesn’t this (wrongly) imply that volatility is the only measure of risk?
  4. My income. The risk scoring people appear to suggest that the higher and more stable my income, the more risk I should be able to take. Sorry, but I have to call bullshit here. Because: buffering the day-to-day spending is the job for the Emergency Fund, not the long-term investment portfolio.
  5. My current net worth. And again, I fail to agree. It is my humble opinion that someone with a net worth of £600,000 who’s just lost £300,000 to a risky venture does not feel any better about the loss than someone with £60,000 who’s just lost £30,000.

And that’s why I’ve stopped wasting time on online risk appetite tests. This time, I feel, is better spent watching cat videos on YouTube;)

This is Why I Drink: Credit Rating Agencies

BFI IMAX

Experian and I go way back. The relationship is complicated.

Nine years ago my property purchase was almost derailed because of something Experian’s computer system did to my credit history. That was the gist of Experian’s explanation, anyway. My explanation: as an organisation, Experian are a bunch of dipshits entirely unfit to be the custodians of records. Equifax are no different.

I hate owing anything to anyone, and I hate being hassled, which is why I avoid debt where I can, and I never miss credit payments. So why oh why did my Experian credit score take a sharp dive for no apparent reason, before recovering back to where it had been, also for no apparent reason? 

I moved house.

Following the move, I, being a slightly obsessive and a very paranoid individual, notified all relevant banks, insurance companies, investment brokers, pension providers and electoral registration offices of this happy occasion. The following month my Eperian credit score went from the excellent 999 to 977, and then to 955 in the month after, before returning back to 999 thirty days later. 

experian

ClearScore, who use Equifax data, were also far from clear. Their credit score went from 533 to 424 to 545 over the period of three months. The only change in the real world was the postcode.

So here it is: credit rating agencies and their methods of raking people in the order of creditworthiness make no effing sense whatsoever. But we already knew that, didn’t we?

Stocktake: Q4 2019

What’s new?

A dog. A bad financial decision whichever way you look at it, but worth it 😉

2019 has been quite good, albeit I would’ve quite liked the late 2018 mini-bear market to have lasted for a bit longer.

Savings rate: 50%

The actual year to date average is 53%. Pass…

4q19-savings-rate

… without flying colours.

I think I need to get on top of my spending again. I kind of broadly know what I’m doing, still, the savings rate is all over the place, and the spending rate is quite dreadful, for an aspiring FIRE’er that is 😉 .

4q19-expenses.png

Property wealth: reduce mortgage by £45k

Didn’t happen; I only managed £30k this year. I think I’ll still try to kill the mortgage ASAP, and I think it should be manageable over the next 3 to 4 years.

4q19-mortgage

I recon a recession is coming, if not in 2020 then in 2021, and share prices are high at the moment. I know I’ve said no market timing, so I’ll still invest my ISA and pension allowance in tracker funds as and when these allowances roll over in the next tax year. However, any cash I have on top of that will go towards overpaying the mortgage as opposed to being invested in taxable stocks and shares accounts.

Even if I’m wrong and there’s no recession in the next couple of years, I think I’ll find it difficult to regret being mortgage free when it does eventually arrive.

Pension wealth: use up all available pension allowance

Pension is on track. Pass.

4q19-pension

Financial wealth: Emergency Fund & Freedom Fund

The Emergency Fund is full. Pass.

Remaining ISA allowance for the current tax year £ nil. Pass.

4q19-progress

Overall, I think my progress to financial independence is satisfactory. The freedom fund is a little light, but I don’t think I’ll manage to retire before the next bear market arrives, and so I might just as well fill my boots with cheap shares as and when it happens (see my ramblings in the Mortgage section above 😉 ).

4q19-total

Total net worth has increased quite a bit thanks to the financial markets. The poor returns in 2018 have reversed in 2019 … I did chuck what I could into VWRL in November and December 2018 though 🙂 .

4q19-saving-hard

Tax: pay no more than £47k of income tax in 2018/19 tax year

Pass.

Stocktake: Q3 2019

So fought the Trojan boys in warlike play,
Turn’d and return’d, and still a diff’rent way.
Thus dolphins in the deep each other chase
In circles, when they swim around the wat’ry race.

This summer flew by, and I don’t even know what happened with the autumn. It’s almost Christmas, people, Christmas! Which I’m looking forward to spending in my underpants, seeing as we’re not going to entertain this year (thanked be the gods!).

I need a holiday. Yes, another one.

See, that’s why I’m certain I’d make an excellent early retiree. There’d be none of that what-shall-I-do-with-myself-slash-work-experiment bullshit. Are you bored staying at home? Get a dog. Take up scrapbooking. It beats the commute. I hate the commute. There, I said it. I love living in Surrey – the fresh air, the green wide open spaces – I only wish Surrey was in central London.

Enough moaning though. Let’s get on with taking stock of the third quarter.

Savings rate: 50%

I went off the rails with spending this summer. The occurrence itself isn’t unique, but the sheer magnitude of it is. Not good.

In case anyone wondered why I reduced my savings rate target to 50% this year (from 60% the year before), it’s because I’m overpaying the mortgage a little more than usual.

The tracker deal I got late last year has been working out alright so far with the Brexit uncertainty keeping the BoE rate low, and I’ve been making hay in this sunshine by utilising the unlimited overpayment feature. There isn’t much to invest in anyway at present, with the markets at record highs and the pound not that far off record lows.

Anyhow, the year to date savings rate is still 57%, so Pass.

3q19-savings-rate

Property wealth: reduce the mortgage by £45k

In progress. Might not happen, but we’ll see…

Pension wealth: use up all available allowance

Done.

Financial wealth: Emergency Fund & Freedom Fund

The Emergency Fund is full, and the ISA allowance is now fully utilised and invested.

My portfolio distribution is beginning to resemble what I’d like it to be…

3q19-pension

… and my Freedom Fund is slowly catching up with the overall progress to financial independence. I’ll need this pot of money to live on before I’m old enough to draw my pension, so it’s kinda important 🙃.

3q19-progress

The Freedom Fund is 60% world equity, 20% government bonds, 10% property securities and 10% gold. It’s not very adventurous, I know, but if I’m going to retire in 5 to 6 years, then the investment profile of this interim stash needs to be pretty tame. It’s different with my pension. I won’t be able to access it for a while still, and so I can afford to take more risk there.

Tax: pay no more than £47k of income tax in 2018/19 tax year

Done.

Stocktake: Q2 2019

Cakes
His country gods and Vesta then adores
With cakes and incense, and their aid implores.

What’s new?

New job, new house, new life…. Or at least that’s what it feels like.

I stopped watching the news. Because: depressing. And I’m behind on my portfolio tracking. Because: plenty of more exciting things to get on with 😉.

Savings rate: 50%

The actual year to date average is 64%. Pass.

Property wealth: reduce the mortgage by £45k

In progress.

Pension wealth: use up all available allowance

Done.

Financial wealth: Emergency Fund & Freedom Fund

The Emergency Fund is full at £30k.

I haven’t used up the ISA allowance in a sense that I haven’t transferred the cash into the S&S ISA yet, but I have the cash set aside for that.

Tax: pay no more than £47k of income tax in 2018/19 tax year

Will be paying £32k this year. Woohoo!

Stocktake: Q1 2019

Welcome to Year 4 of my quest for financial independence.

What’s new?

The featured image above was going to be my reaction to the Brexit day, which has now been deferred, but given how that gods forsaken process has been going so far, I believe the visual is still appropriate.

I’ve changed jobs. Some said I was crazy to resign a few months before the Brexit Day (ROFL), but it could not wait. I might explain in a different post someday, or maybe not. Probably not.

Anyway. Let’s see how I’m tracking against my 2019 goals so far.

Savings rate: 50%

The actual year to date average is 69%. Pass.

Property wealth: reduce the mortgage by £45k

This one is a stretch goal. We’ll see.

Pension wealth: use up all available allowance

Done.

Financial wealth: Emergency Fund & Freedom Fund

The Emergency Fund is at the level where I want it to be.

I have the money set aside to deposit into the ISA, but haven’t done it yet. Because: those fuckwits Hargreaves Lansdown. I’m currently having a bit of a dispute with them with regards to a matter that relates to their complete and utter incompetence. I haven’t decided whether to accept their offer for resolving the complaint or to wait for the ombudsman.

Tax: pay no more than £47k of income tax in 2017/18 tax year

Done.

Rental DIY Step 1: Find a Tenant

The quarters of the sev’ral chiefs they show’d;
Here Phoenix, here Achilles, made abode;
Here join’d the battles; there the navy rode.

For those who missed don’t give a shit about the latest update from my personal life, I’m moving in with my other half, who owns a house out in the sticks. Surrey – brace yourself – here I come! 😉

And so it happens that I’ve become an accidental member of the landlord class.

I’ve been reading this property blog, and I like it. One gets a distinct impression the author doesn’t have much time for high street estate agents. He thinks they rely on Rightmove and a busy rentals market, and little else. And their fees are extortionate.

I agree.

Having considered taking the conventional approach, which involved having two high street estate agents come ’round for a rental valuation, I’ve decided to do it myself and use an online agency instead. The fees that the high street guys and gals were proposing to charge me beggar belief, but what really put me off what their refusal to fuck off after the tenant is found, referenced and settled.

I agree that it’s fair, in principle, to charge a fee for a property management service. But if there is no ongoing management service, then the transaction should be simple – they find me a tenant, I pay them, and then they leave me and the tenant in peace.

The agents I spoke with didn’t want to hear of it. In addition to me paying them between 11% and 9% of my gross annual rent for putting a tenant in place, they wanted to continue to stick around to collect the rent (via a direct debit from the tenant’s account) before paying it on to me later, and to charge me again each time a rental agreement expired. Say you sign up a tenant for a year, and after the year is up they want to stay for another year. Then I’d pay the same fee again for the so-called “renewal”! Based on an annual rent of £25,000, that’s a 2,500 for nothing. Literally. Because: once the Assured Shorthold Tenancy Agreement expires, there’s no legal requirement to do anything at all. Because: it automatically rolls into a Periodic Tenancy.

So yeah, I went the DIY route. I had to use an online outfit to post my ad on Rightmove and such, but only because Rightmove, Zoopla, et al don’t do business with individuals. Instead of the £2,500 plus sundries I paid just over £100, which included a Rightmove premium listing. And I had to fork out £26 for a set of iPhone camera lenses on Amazon. Because: wide angle photography.

It took 6 days and 4 viewings to find a tenant. I didn’t go for the maximum rent that the high street agent valuations suggested. Pricing it at mid-point in their range allowed me to pick the tenant I wanted from the 3 offers received. It still gives me a pre-tax rental yield on cash invested in home equity (i.e. not the total property value) of 8.6%, which isn’t bad at all. Also, the tenant signed up for 2 years, which hopefully means less hassle by way of not having to re-advertise in 12 months.

As for the rental agreement, I used the Model Agreement provided by the Ministry of Housing, Communities and Local Government. It doesn’t appear to be updated for GDPR, but who cares. The IO registration that’s required of all private landlords is ridiculous anyway, and the repercussions are zilch.

Oh, and the just in case anyone needs practical advice on renting a property, the Property Investment Project blog is a great starting point. The author sounds like a reasonable landlord, who takes it all seriously.