The pound costs US$1.30, and I’ve now broken a personal record for longest time spent seething at dimwits my fellow countrymen whose stupidity democratic rejection the EU has negatively impacted my plans. My earning power, as measured in VWRL shares, has been reduced by circa 10% compared to before the referendum, and this has happened way too early in my accumulation stage for it to not matter. Perhaps I should drink more.
Give me coffee to change the things I can change and wine to accept the things I can’t.
(dude in charge of the chalkboard sign at my local café)
Other than that, it’s been a fairly benign quarter. The SIPP is filling up, slowly, the S&S ISA gets a nominal amount chucked in each month, ditto Emergency Fund.
I use ONS metrics for net worth related goals – why reinvent the wheel? Calling home equity “property wealth” might sound a tad silly, but it seemed reasonable to keep the ONS terminology when using their formulae.
Let’s take a look at the detail.
Goal 1: 60% savings rate
The good news is that summer’s over along with its excesses: boozy lunches that become dinners, impromptu parties on account of it being sunny and a weekend, purchases of outdoor gear on account of it being not so sunny and a weekend (but fuck it, it’s summer, and I’m going to enjoy it whatever it takes), and assorted treats just because it’s summer and I’ve already spent all that money on the gear, so what’s another few quid.
The bad news is that summer’s over.
As expected, the monthly savings rate has recovered from the previous lows, and the in-year average stands at 66%.
Goal 2: 10% mortgage overpayments
Goal 3: Pension
Given the status on Goal 2 and the newly added Goal 5, pension has been promoted to my FI vehicle of choice this year. Having filled this year’s allowance I’m aiming to utilise all carry forward allowance that’s due to expire this year.
Goal 4: Emergency Fund and Freedom Fund
Freedom fund has been getting its regular monthly contribution as per usual. Emergency fund is getting more than it would otherwise purely because I have to wait until March 2017 before I know my earnings for this tax year. That will determine my pension contributions (see Goal 3 above). I’m aiming to optimise so I pay as little tax at 40% as possible.
Goal 5 (added midway through the year): Pay no more than £22k income tax in 2016/17 tax year
Because they got their country back, and I sure as shit ain’t paying for it.
A couple of months ago, a post by Rhiannon Sowerbutts on Bank Underground revisited the question of a carbon bubble. This topic holds some interest to me. As someone who invests in tracker funds and entertains hopes to retire early, live long and prosper, I want to know what effect climate change could have on my plans for financial independence and early retirement.
The world’s governments have committed to limiting the global warming between now and 2050 to 2⁰C. In order to achieve this, atmospheric CO2 concentrations cannot exceed 450ppm.
Currently we’re at 395ppm1; this means we can only emit around 570 GtCO2 before we reach the 2⁰C limit.
The carbon held in the world’s known fossil fuel reserves is equivalent to about 2,800 GtCO2, of which 745 GtCO2 is owned by publicly listed energy firms.
In order to stay within the 450ppm limit the majority of these reserves cannot be burned and are therefore impaired.
The problem is actually wide than this. The so-called “permissible” warming by up to 2⁰C is bound to cause a noticeable change in climate patterns. Some further sea level rise is already inevitable. Hence the term “carbon bubble” should also encompass the medium-term risk of stranded assets (e.g. loss of agricultural land, flooding of coastal property due to rising sea levels, the impact of prolonged droughts on water infrastructure) that is likely to occur even if the Paris climate agreement is implemented fully.
I’ll refrain from talking about the danger that global warming poses to 7 billion humans. The planet itself said it best, albeit its assessment is somewhat on the gloomy side. I’m sure at least some of us would survive – a bunch of tough monkeys we are. But other than recycling, composting, walking and cycling wherever practicable, limiting my flying, using energy efficient appliances and not wasting water and food (amongst other things), there’s not much I can do about the end outcome. So for now let’s focus on the investment aspect of what many, myself included, think of as the worst disaster in human history.
Consider two future scenarios:
The humankind pulls its shit together and limits the global warming to 2⁰C above pre-industrial levels.
It does not.
In the first scenario, any displacement in the financial markets would come from a rapid transition to a low carbon economy. Most of the impacts would be felt in the next 20 to 30 years, and they would be concentrated in energy, utilities and mining sectors. Let’s call it “the 2⁰C scenario”. The effects of second “business as usual” scenario would take longer to filter through to investment performance, but they would be both more severe and less predictable.
The 2ºC scenario
It is a truth universally acknowledged, that financial markets are not pricing carbon assets in line with the 2⁰C target. However, Mercer’s excellent 2015 study found that a transition to low carbon did not have to result in negative returns for long-term diversified global portfolios. At the portfolio level, poor returns of fossil fuel assets were balanced out by superior performance of other investments, such as renewables.
Quite interestingly, according to Mercer’s models, developed market sovereign bonds were virtually immune to climate change. Renewables had good outcomes under all scenarios.
When it comes to energy supply and demand, low carbon does not necessarily mean low on energy consumption. A reduction in carbon emissions will require a change in the energy mix, but 2⁰C is a significant enough increase in temperature, and a hot planet might turn out to be hungrier for energy than a cold one. The human population is projected to grow, albeit at a decreasing rate, for the rest of my natural life. These people will have to eat. Agriculture requires more energy in adverse conditions (both in terms of soil and climate), and if water becomes a problem, desalination and purification of marginal reserves is not going to be either low on energy use or cheap. Human beings must maintain a skin temperature below 35⁰C in order to effectively cool down and avoid heat stroke. Increasing weather extremes might mean that both more heating and more cooling is required.
The business-as-usual scenario
While past performance may not be an indicator of future performance in financial markets, when it comes to people, the best predictor of future behaviour is past behaviour. Politicians are people, and to date the politics of climate change have been abysmal.
In 2006 Stern published Economics of Climate Change, where he estimated that dangerous climate change could cause a drag on GDP of 5% to 20% per year.
What’s interesting though is that the relationship between the measured GDP and human utility is not linear. For global warming, the distribution of outcomes is bound to be uneven. In certain aspects climate change could very well end up being one of several examples of bad things that are good for business2. Much like crime, pollution and cancer, it could actually increase the profitability of some sectors, at least in the short to medium term.
By the way, am I the only one who thinks that garbage robots in The Fifth Element were a bit rubbish?
Here’s one example. More than 17% of all infectious diseases are vector-borne. Most of these vectors are bloodsucking insects fond of heat and humidity. If, say, malaria moves far enough north, rich European countries will have to dish out on vaccinations. That’s good news for the pharmaceuticals sector.
Overall though, under the business-as-usual scenario, climate change would increase the divergence in returns on capital and labour, which in turn would further economic inequality – both within any given country and between countries.
According to the Mercer’s study, if we aren’t able to stay below the 2⁰C target and end up heading towards 4⁰C, the result is likely to be more market volatility, higher inflation, and, in the long term, lower overall returns due to higher production costs. Poorer countries would be impacted earlier and more severely, hence Emerging Markets equities would underperform as an asset class.
The full effects – financial and otherwise – of this scenario would begin to manifest in 50+ years, by which time I’d be in my late 80s. That’s not an ideal point to run out of money in retirement. Going back to work wouldn’t be much of an option then.
So what’s it all mean?
None of the reports I’ve read suggested that in the face of the global warming active portfolio management was set to outperform indexing. The only claim that active fund managers (Schroders and Caz. So, basically, Schroders) made for themselves was that investors who wished to take action on climate change by allocating capital away from carbon intensive industries had to rely on active portfolio management to effect divestment of carbon assets. I think, at least at present, this is true. While we have several S&P Fossil Fuel Free indexes and a few clean energy indices, there’s a lack of low carbon index tracker funds. Given McNabb’s recently publicised views on divestment campaigns, it’s quite unlikely that Vanguard et al will enter this market in foreseeable future.
For us lazy indexers, Mercer’s study gives some comfort that investments like VWRL can withstand the effects of carbon emissions reduction over the next 20 to 30 years if as the world’s governments work towards the 2⁰C target. If, however, it begins to look like we’re set to overshoot the two degrees, a slug of US Treasuries in the portfolio should be a good bet. And, since a larger increase in global temperatures appears to be associated with higher market volatility, the 4% SVR might come under pressure. I personally think something closer to 3% could be more appropriate, whatever the climate outcome.
It appears that, despite our best efforts, we’re going to live in interesting times.
Based on 2013 data.
The Bento Rodrigues dam disaster created an extensive clean-up operation and a huge amount of work for lawyers; cancer generates inexhaustible demand for pharmaceuticals; and crime not only provides employment to thousands of law enforcement, detention and judiciary personnel, but also fuels demand for home and industrial security systems, insurance services, and replacement goods.
Remember when Dumb Ways to Die video went viral on the internets? Then there was a sequel, and then another, then a Halloween edition, a Christmas edition … All sorts of parody versions followed (Coll Things to Find being a personal favourite).
I wish someone had released an iteration entitled Dumb Ways to Run Yor Finances.
Over the years I’ve found that my borderline ADD personality registers a message easier when the message is accompanied by a catchy tune. There’s a real possibility that I might have made fewer money mistakes if only sensible financial advise had been dispensed in two-syllable words by likeable animated characters.
There’s extensive write-up out on the FI blogosphere pertaining to financial blunders. The most entertaining commentary tends to be penned by Ermine of Simple Living in Suffolk. Monevator and Living A FI have each issued a list of money mistakes to avoid. I doubt that I could surpass the pithy eloquence here, here, here or here, hence I shan’t even try. What follows is merely my bid for a place in the medals table of A Former FI Village Idiot competition. Or at least one of those Most Improved Over Summer gold stars. Here goes.
Dumb ways to handle your pension
Work for a few years abroad in a country where employer pension contributions are mandatory. Even though you have no intention of staying permanently, make sure you invest 100% of said pension in an XYZ Smart Alpha Equity Fund (managed, not tracker). Then, as you’re moving back, “repatriate” your pension at the end of a tax year thus ensuring you get a maximum possible tax whack. Make sure to effect said repatriation as the market is crashing (late fall of 2008, for instance) against written advice from the pension fund trustee. Instead of depositing the proceeds into a UK approved pension scheme, stick them in a non-interest bearing cash account when CPI inflation is running at 3.68% and use it as an emergency fund for emergency gadgets, emergency restaurants, emergency expensive holidays and emergency sports gear.
Even thought your employer offers contribution matching and even though you are in a higher tax bracket, make sure to not save a single penny into your UK pension until you’re at least 33. Ignore all five letters (followed up with emails and voice messages) from staff pensions team. If any of your more financially literate colleagues try to suggest that saving into a pension is a good idea and by not doing so you’re effectively refusing free money, reply with a jest; something along the lines of “lottery is my retirement plan, mate” will do splendidly. They’ll never broach the subject again.
Dumb ways to invest
Make your first ever investment experience is a highly leveraged real estate side gig where you provide certain niche expertise for a share of future profits, but as a partner also share in unlimited liability to capital providers. When the subprime drought rolls in and you barely break even1 in a distressed buyout, use this as a limiting belief that any and all investment is best left to professionals (large corporates and institutionals). All debt is evil. A 100% reliance on full time employment is the only way forward for anyone sans a trust fund, and, given the sums in play, any notion of accumulating wealth by saving a portion of your employment income is beyond ludicrous. Which also renders saving redundant.
So what happens when your friends begin buying houses with deposits they saved up working jobs that pay less than yours? You don’t necessarily want a house just yet (because you can’t afford Belgravia and living anywhere else fills you with dread). However, you decide you should have some savings. An emergency fund of sorts, since Lehmans has collapsed and a global financial crisis is burning though the City and there’s carnage going on all around.
If you want to have some savings but don’t like the process of saving, have a dig through you records; you may just find you have a foreign pension you can repatriate (see above). You fill in a few forms and voila! savings magically appear from – literally – thin air. Though the proceeds may be only a third of the fund’s value you saw on the last statement, don’t worry: it’s a bird in the hand. Now stick that in a no-interes bank account and you’re sorted.
Fast forward a year or two. You’ve grown older and wiser and begun saving a portion of your income on every payday. According to the internets UK average saving rate is 8%, and you’re saving 20%. You financial genius, you! Well done. And there’s more. You’ve opened some of the mail your bank regularly sends you and found there’s a cash account you can get interest on.
Now, you’ve heard of a thing called a cash ISA, but there’s one tiny little problemo there: when your company moved your life and banking from overseas to the old Blighty, the bankers who handled the move obligingly stuck you into their international banking client division. Belonging to it offers perks such access of exclusive managed investment products2 and extensive free insurance3. This international banking product is designed for non-doms, who by definition can’t have an ISA. But you’re not a non-dom. You could open an ISA with your bank if you transferred from their international banking division to a pedestrian banking division, but you like having access to perks you don’t use (just in case one day you might). Obviously, going to a different bank is out of the question. Having two online banking log-ins and passwords to remember is way too much hassle, no-one would suffer such inconvenience. Solution: you leave your savings in a taxable interest bearing cash account. Oh, and your marginal tax rate is 60%.
Dumb ways to buy a property
You’ve upped your “base” saving rate to 40% over the past couple of years. In addition, you’ve saved you last two (almost three) bonuses, and it turns out your employer, virtually unbeknownst to you, had given you some share options, which have now vested. A plus: you have enough for a house deposit. A minus: forget Belgravia, it’s 2011 and now you can’t afford even the fucking Fulham. Also, a thought of having a mortgage makes you break out in hives. The financial crisis has made you a gun-shy borrower: a grand or two on a credit card is OK so long as you pay it off at the end of the month, but woe betide anyone who borrows more.
Now even juniors in your team are buying properties. Everyone you know, including hedgies who got burnt on MBSs and had forsworn anything and everything House are talking of London’s resilience – as in the employment market, real estate, financial globalisation… Everyone says renting is for suckers.
So you decide on an area you can afford, where, incidentally, some of your friends happen to have moved to. It’s green, leafy and it’s on the A3. You can get to Portsmouth in under two hours, though you won’t be buying a boat after all.
Having seen a total of six properties the whiny five-year-old who lives inside you pipes up with a “cut the torture, let’s just be done with it already” and so you plump for the house with the largest patio, which should come in handy if you went kitesurfing and it started to rain so you’d have to roll up the kite wet to be dried at home later. You make an offer, but there’s a complication: someone else is also interested; he ups his offer. What to do, what to do? Well, I’m surprised you’d even ask, my friend. It’s a bidding war, of course, and it’s on. You. Never. Walk. Away.
Result: you have a house, but now your mortgage is both larger than you wanted it to be and more expensive because you’ve broken into a higher LTV bracket. You genius. You spend the next couple of years broke and stressed using every spare pound to overpay the blasted mortgage.
One good thing comes out of it though: you finally learn to save.
You haven’t lost any money aside from a couple of grand on legal and taxman fees, etc., but any work you’ve put in on weekends and evenings after your day job has gone uncompensated.
Which would be useful if you had any intention to invest.
It covers everything you don’t own, e.g. a house, and excludes the things you need to insure for, e.g. third party liability for extreme sports.
The conventional delusion about self actualisation at work centres around the notion of The Gift. Turns out we all have a special gift – our creative contribution to the world – and if we want to be completely deliriously happy in life we must share this gift with the humankind. In theory this should render retirement redundant1. All you need to do is recognise what your gift is and then find a way to make this into a career and be compensated for it. Which brings me to the 33rd annual British Social Attitudes Survey.
The Survey found that, in 2015, 71% of people in work said they had a “good job”, and 62% said they would carry on working even if they didn’t need the money. Blimey, looks like the 62% are living a dream.
If asked, I’d say that I have a good job, and, objectively, I do. It’s interesting a lot of the time, I spend my days in a warm, reasonably quiet, well lit office in a comfortable chair in front of a properly positioned screen – all vetted by workplace health and safety consultants – away from heavy mining equipment, jackhammer noise, flying bullets, and such. Would I continue doing it if I didn’t need the money? No.
I was therefore surprised by recent blog posts on Monevator and SexHealthMoneyDeath where folks put forward reasons in favour of working hard to achieve financial independence and then… carrying on working. Huh?
To each his own, I guess, and there’s no accounting for milkshake flavours, and if you have indeed found your gift and are sharing it with the world within the context of paid employment then more power to you. But in that case, why be financially independent? An intelligent chap with a marketable set of skills not opposed to learning some new tricks as times move on will never be in want of employment opportunities. There may be some compromises, but there are always compromises. If it were me, I’d take this and use it as an excuse for buying tickets and eating out. Alas, I hate shopping.
However since my gift does not lie in securitisation vehicles (which at least to some extent is a relief) it’s reasonably certain that I’m not going to have a “but I still have so much to contribute” moment when I reach FI. I’ll very happily give up this:
For more of this, this, and this:
All being well, it’s just nine more years left to go.
Bummer if your special gift is giving people retirement advice.
What’s all the fuss about climbing three small mountains in under 24 hours? Yours truly sets out to investigate.
It starts at 7am with a 40 minute train ride to Gatwick. After a short flight we arrive in Glasgow decked out in our Snow+Rock gear, and find our mountain guide waiting at the agreed pickup location. We’re going to be skipping sleep and climbing mountains for a full day. We’re rearing to go.
The clock starts at Ben Nevis. It’s sunny at the bottom and snowing at the top, and there’s mist, rain and sleet in between, in whichever order. We lose interest in photos about halfway up, then ski jackets come out of backpacks. It’s an August afternoon. We cross a field of hard packed snow and ice, climb up a little higher, and we’ve reached the summit. Or so our guide tells us; we can’t see anything through the thick cloud.
It’s a six hour drive to Scafell Pike, we reach it after midnight. At about a third of the way up there’s a knee deep stream, which we traverse before continuing the long haul on what is known as “the staircase”. Fuck the staircase. I’m tired, I’m freezing, my socks are wet, the mountain’s upper slopes are covered with loose scree, and it’s blowing a gale. In torchlight we make out the summit marker and stumble towards it like newbie zombies on their first walkabout. The marker provides a little shelter from the wind, we huddle together behind it and try not to whimper. But we have to move, the clock is ticking.
I nap on the way to Snowdon, it’s a much needed boost. The path begins on a gentle incline, then, as we approach the plateau, the terrain turns steep and rocky. My knees have formed a union and are threatening a strike. Finally we reach the top, take a photo on the summit, begin the descent. The timer stops when we return to the carpark: 24 hours and 27 minutes. It’s a fail.
Why couldn’t we make it back in time? The mountains aren’t that tall, the trails aren’t that difficult, even in bad weather. Climbing either of the three peaks is not that hard. The hard part is having to do all three in succession, tired, cold and bored (let’s face it, grass and rocks and trees and grass and rocks begin to look all the same after a while).
A quest for FI is in many ways similar to the three peaks challenge. Anyone can save money. The challenge is keeping it up month after month for years whilst dealing with life’s minor frustrations of wet feet, cold hands, achy knees and wondering why the hell I’m doing this to myself when most other people are warm at home sitting on a sofa in front of a telly eating Doritos. I like Doritos. Then there’s the weather factor: market adjustments, recessions. They might not happen from the outset, but it’s a question of when, not if.
Mind-over-matter only works for so long. Reading other people’s blogs, like the one that Monevator guy writes, certainly helps with staying focused. But what’s helped me the most so far was something LAFI once said about changing the mindset from “I’m saving money” to “I’m spending money on my future financial independence”. I’ve tried it. It works.
So I’m not trudging up some stupid mountain in the dark at 3am on a Sunday in a gale-force wind. I’m walking towards my sweet, sweet pack of guilt-free Doritos, which I shall wash down with sauv blanc as I’m showing my friends photos from the trip. It will be worth it.