Simple Living In Somerset

Vanguard’s cautionary tale hidden in plain sight

Opening up Vanguard to add £10k of ISA contributions to buy VUSA, I come across this impressive chart of the amount of moolah a punter could accumulate, had they invested in the MCSI World Index since 1999. Nowadays you can do that easily, just go buy an ISA limit of VWRP on each April 6th, get on with the rest of your life. I don’t think VWRP existed 25 years ago, but this is what would have happened compared to saving it in cash.

What 25 years of shares ISA would have done relative to the same amount in cash ISAs, according to Vanguard

Now I am old enough to know that tax privileged share saving didn’t start with a bang due to Gordon Brown in 1999, there was something called PEPs (Personal Equity Plans), I seem to recall I dumped some Sharesave shares in one of those back in the day. They were also tax-free, I was a tyro in those days, so I didn’t get the sort of wins I am getting now. Vanguard sell this as a good news story, look at that wicked win racing up at the end.

And it’s a good story, say Maya Millennial has just come of age in 1999, born with a silver spoon in her mouth. She loads up her ISA to the max and keeps on going, across 25 years, she’s 43 now and minted, nearly 900k sods. All jolly hockey-sticks, eh? Provided she has accumulated some of the other trappings of a successful middle class career, she’s in line for early retirement.

Wait but what? Valuation matters

Let’s call up VT in the basement and get them to roll the tape back to Maya Millennial’s 31st birthday. In a distant part of this septic isle an exhausted mustelid calls control for the final approach to retire, in 2012.

Maya Millennial pulls up her Vanguard account and takes a butcher’s hook at how’s it all going. Her BFF Candi Cash won’t have any truck with the stock market – “it’s a casino full of the wrong sorts”. She uses a Cash ISA. We compensate for that fact that the Cash ISA allowance started half that of a S&S ISA because Candi is on great terms with her mum who lets her use her cash allowance too. Apologies for the tasteless use of Photoshop, but this is what Maya looks at. I have estimated the £200k position, but to be honest it’s that shape that matters.

Years and Years

2003 – Maya is 22 and ~30% down

Four years into her journey, Maya’s about a third down compared to Candi. She tells herself fair enough, I am a long term investor, just a blip on the investing horizon. She’s doing a lot better than this mustelid did, I used to have a Virgin CAT FTSE all-share ISA, great values fees at 1% AUM, Monevator’s TA would rugby-tackle you to the ground for putting up with that sort of usury these days

Why should DIY investors flay costs as if they were the tattooed agents of darkness? Because the last thing you need is to leak 1% in management charges.

Gulp. Those were the days, my friend… We got older and wiser. Anyway, I switched to L&G at a slightly lower fees and a slightly more global outlook, but in the end I sold up. Go on, guess when I sold up, round about 2005 ISTR. Mind you I did put that into paying down some of the mortgage which was in the order of 6% I think, so it earned me a real return of 6% in the interest I didn’t have to pay, plus the tax on earning that.

2007 Maya is 26, and about 10% up

Maya’s feeling chipper about her stocks and shares ISA, got about 100k, she can buy a house for that. Not quite ready for that as she’s just split up with her boyf, the mating game is tough in those years. Candi’s starting to think there’s summat in this stock market casino thing and the market is all over the papers like a rash. Her Dad looks up from the paper on one of her rare visits home and says “Whom the gods would destroy, they first make mad”, and Candi sticks with cash, though she enjoys the free drinks at the party Maya throws in a basement bar in the City, full of raucous finance worker braggarts. Candi does worry about her bestie’s taste in men at times, but you can’t argue with the quality of the champagne.

2009 Maya is 28, and she’s abut 40% down

This is not a good birthday because Maya is nursing a 40% loss, and it takes the edge off being young, beautiful and in love, particularly when both of them are fearful for their jobs. Maya is feeling a chump for 10 years of loading her ISA giving her a 40% loss, and starting to wonder if she should have spent more on Louboutins and lived it up a little bit. YOLO and all that, you only live your twenties once. Candi buys her a few drinks and tries not to say I told you so.

2012 Maya is 31 and breaks even relative to Candi Cash

The good news is that Maya has reached parity with Candi, so they buy their own drinks. Everybody’s scared shitless of the markets, and Maya looks back at her twenties and wonders where it all went. In the toilets she looks at the crow’s feet starting around her eyes, and the stress of it all makes her break down. Candi comes in and puts her arm round her, but Maya looks at her friend and observes no crow’s feet yet, and great heaving sobs shake her. She collects her thoughts and the two leave the bar together.

Maya had a tough ride and it’s a cautionary tale

Why did Maya have such a rotten ride? She started in 1999, it was the dot-com boom that was about to turn to bust. Go look at UK Dividend Stocks’ CAPE valuation chart. Maya started investing when the SPX CAPE was literally off his chart. The SPX is the largest proportion of world assets, particularly back then, so it did a lot of damage.

You’re a good little passivista and you say Meh, it’s not like Maya inherited a shitload from her grandfather and invested the lot at an all-time high CAPE. And you’d be right. Assuming Vanguard did the analysis competently, Maya dollar cost averaged into the market, and she still needed Candi to put an arm round her on her 31st birthday because of all the stress. DCA is not a panacea for a shitty sequence of returns. What gives you a shitty sequence of returns? Bad luck and high valuations.

At the time of writing, the Shiller CAPE ratio is on the high side, about 34, that’s less than the 44 when Maya started. Seeking Alpha has a chart showing if you buy the US at CAPE >34 you can expect a return of ~4%, over the next 15 years!

Vanguard’s good news story only came good after the halfway mark

and then it hit it out of the park. But Maya Millennial needed a lot of TLC through her twenties before the rocket boosters fired. There’s a cautionary tale, too, for people starting now. Inspect the Shiller CAPE ratio for the SPX over the last 50 years

You can take a little bit of solace from the fact Maya Millennial took a couple of years of the CAPE being much higher than now. Perhaps humanity is getting a little bit more efficient in the art of capitalism that might justify the gradual lift in the CAPE over the years, extrapolate that and it is high, but not Maya Startup high.

Is there fire underground, perhaps?

Now ask yourself if you observe anything rotten in the United States, and arguably in the West in general? Do you think that AI will mean that we can happily live inside our smartphones while the shit piles up in our rivers and the doors fall off our aircraft every so often? What say you about president-elect Donald Trump? We should note he wasn’t as terrible for the stock market as you might think, though other shit was going down in the latter part of his reign to muddy the waters. The CAPE on VUSA isn’t astronomically high like it was at the end of 2021, but it’s still running a bit rich.

The trouble with the CAPE expectations is take a look back over 15 years. The Apple Iphone had only just been released two years ago. We were not to know that a rapacious ecosystem was going to grow that meant we could all be rude as hell to the people in front of us in order to live in a simulacrum of the real world in servers owned by the Magnificent Seven, who would track the bejesus out of their punters and lock the suckers in. It’s a step-change as the world of atoms gave way to the world of bits, and in the world of bits scale is everything and marginal costs are low. CAPE is a measure of what people will pay for future earnings flows. Low marginal costs can justify higher valuations.

I detest this ecosystem with a vengeance and don’t carry a ~~mobile phone~~ tracking cattle tag with me in general, but it sure as hell makes money, at scale. I can afford to take the punt on VUSA.

It’s a new ISA year, and I had to make myself lob £10k into my Vanguard ISA to buy VUSA. That’s only half of the ISA and it’s a small part of the whole. I still hate myself a little bit.

I am going to counterbalance that VUSA outside the ISA with non-USA deadbeats, where valuations will be better. I am therefore making a mild bet that the rush of blood to the head that has made us all dive into cyberspace because it’s better than our normal lives justifies the higher valuations, but that is a riff on the deadliest words in stock market investing

it’s all different now

History shows that it never stays all different now 😉 I am doing this because I am starting to struggle with the capital gains allowance on unsheltered VWRL (or currently HMWO.L, which is the same thing).

I’ve split off the US stuff, if it isn’t all different now and VUSA is at 50% then I may get to pay more tax on the non-VUSA part in the GIA. But I’ll take that risk, because when America catches a cold the rest of the world usually does too, which probably gives me time to think. I will lob the other 10k into the iWeb ISA to rebalance some of that.

Framing matters, Vanguard 😉 You wouldn’t have run that story when I retired in 2012, though you chart shows that wouldn’t have been a bad time for Maya to start and Candi to switch. Ain’t hindsight a tremendous thing…

How can I buy a Range Rover carrying CC debt? Not even wrong

The cynical bastard Wolfgang Pauli said of a particularly rubbish academic paper that it was so off

its not even wrong

And that can be applied to the Torygraph’s latest personal finance seeker of wisdom/AI clickbait¹, opening with I’m 52 with £13k of credit card debt — how can I buy a Range Rover?

From a twenty or thirty year old, that’s a fair question, though the answer is still the same. You can’t. With the rare exception that buying this Range Rover will return you the capital cost within a year by enabling you to work, or work more, or showcase it on your influencer channel earning loadsamoney. For a 52 year old, it implies you haven’t used your time well in educating yourself about the way of the world², and that’s bad – at least in the case of the young’uns they can say they didn’t know and were ill-prepared for the rapacious power of advertising inserting it’s blood funnel into anything smelling of money. It’s not just Goldman Sachs. It’s capitalism as a whole – like all concentrated forms of energy, it must be handled with care. That takes time to learn.

It’s the juxtaposition of CC debt and the Range Rover which is the epic fail in this 52-year old with no savings or pension. The two wealth managers make all the right noises about savings plans and stuff, but nobody asked the fundamental question. Can this fire be put out, given the questions being asked are of the ‘not even wrong’ sort. Range Rover? Holidays for the kids? There’s the genteel reserved Brit version of what’s wrong here, or the brash American version. Boils down to the same thing. Owe debt on a credit card you are paying interest on? STOP BUYING WANTS FFS. There’s the mustelid flowchart from way back which gives you a handy map in times of weakness

How come you have got to the ripe old age of 52 spending so incontinently? As for all the motherhood and apple pie claptrap about wanting to spend shitloads on her teenage kids, well, yes, but perhaps you can do something more fundamental for their future happiness and get a grip. I know that the wishful thinking of Rhonda Byrne’s ‘The Secret’ is a great story – ask and you will receive, or you gets what you wants if you wants it hard enough.

Look what happened to many of The Secret’s readers – hosed in the GFC³ flipping houses using Other People’s Money, which is great until it isn’t. Listen to yourself

“I like to spend money on my kids. I grew up thinking money doesn’t grow on trees, and that it’s hard to come by. It’s part of the reason I sometimes struggle with money.

Put the fire out first. My parents summed this up well enough:

Don’t buy shit you can’t afford, son. Save up for it first. There are only two possible exceptions to that in life. Your education and your house, one day.

Did I live that? No. I bought a preamplifier for three month’s gross salary with an interest free loan in my first year of work. But I paid it off in the six months allotted, because I was living at home, and I learned something useful that way, as Mark Twain related the acquisition of empirical knowledge of a feline nature

A person that started in to carry a cat home by the tail was getting knowledge that was always going to be useful to him, and warn’t ever going to grow dim or doubtful

It’s the tragedy of parenting. You cannot forestall the folly of the fruit of your loins. But you can shorten the recovery time by arming them with a roadmap of the way out, just never say I told you so 😉

Continue reading “How can I buy a Range Rover carrying CC debt? Not even wrong”

Capital gains and the US versus the Rest

Monevator has an article for those who are frightened of the frothy US markets (paywall). I got into slight hot water last time by oversharing one of those so I will summarise that if you are frightened that 60% of your world tracker is the US then you can lean against that, unsurprisingly by investing in some ETF ex-US.

At a gut level I have the feeling that the US is way OTT. In the end we can’t all live inside our smartphones which is the inference of the Magnificent Seven, because people do need to eat and have clean water and live somewhere. It’s difficult to see what value most people can add while working in the virtual world, particularly ‘real value’ whatever that may be.

However, I have already given return up post GFC taking a US was overpriced line, and only got myself above the ‘what would have happened if I had gone balls-deep in VWRL, had it been available when I started’ by shorting Covid, so I have become less active since, because a) I have enough and b) I probably got the right answer for the wrong reasons.

I want to abuse the principle of that article in a slightly different manner. I hold a fair amount in a reasonable sized GIA. The ISA has a significant amount of VWRL already, and I accumulated more than a yearly ISA contribution worth of VWRL in the GIA, which has already drifted up by > 10% and is uncomfortably more than the current CGT threshold of 6k, so I want to get rid of it this tax year.

Continue reading “Capital gains and the US versus the Rest”

Hinterland and FI/RE

There seems to be a pushback on the whole idea of FI/RE of late by a twin axis of Calvinists who think work is good for the soul, and perhaps the slow realisation that the goal is getting harder as times go by. There are a few reasons for that increasing difficulty – the people who started out of the GFC got the massive free gift of very good valuations. Fifteen years of wage stagnation in real terms don’t help, and increasing wage multiples going into housing is another headwind. I can understand the people who are going off the idea because it seems increasingly difficult, perhaps it was of its time. It was fascinating reading old_eyes’ FIREside chat, here was a fellow who started a few years before me, and indeed made a much better fist of his career than I did. He said some kind things about these scrivenings <blush> but also emphasised some of the wins that I gained from, though some were fast disappearing even if the few years since he began (I am a few years younger).

I am also acutely aware how lucky I have been, not only in having a good and satisfying career, but also in being born at the right time. A time when defined benefit pensions were the norm, student debt was unknown (apart from sometimes having to grovel for a tiny, tiny overdraft), and homes were an understandable multiple of earnings.

Fifteen years down the line from when I concluded FI/RE was for me, I wonder if these factors played harder than I’ve given credit for. It’s a mixed bag. The times were harsher in some ways and kinder in others, you gotta play the hand you’re dealt. Being a student was nutty in many ways.

There was very little of the pastoral care that you have now, I recall getting absolutely blotto and suddenly realising we had to keep one dude talking, because he was looking for a one-way ticket out of all this. A tough ask, to keep the wheels running across the small hours and the inevitable blood sugar drop, until the break of day when we could send out a runner into the grey dawn to find a phone box¹ to seek more competent help. Nowadays you’d whip out your mobe and google Samaritans 116 123, but the past is a different country.

Student life was edgy then – massive upside potential for sure, but nothing to catch you if you fall. I recall going back to Imperial to the Physics department to ask them for a reference to go for an SERC grant to do a Southampton MSc and the head of dept Prof XX said no. You had potential, but you blew it. I Googled XX and he is still alive, and I read some of his backstory, and I could see how some young cock who failed to step up to the grade pissed him off. He didn’t know why I had made a mess, and anyway, the times didn’t believe in taking prisoners or making allowances for non-academic frailties.

My primary school headmaster had said I didn’t suffer fools gladly and with Prof XX I got to look at this in the mirror. I assumed Prof XX had cashed in his chips by now but while he is a Prof Emeritus he is very much still on this mortal coil so I am glad I checked first and didn’t slander him in this post. Thanks to the Manpower Services Commission for stepping up enabling me to redeem a pedestrian² first degree. I actually had the money saved from working, to pay my fees and my board, but it was nice not to need to use it, so I could spaff it on a house a few years later³. While I tip a hat to old_eyes’s narrative, the path to that sort of success was narrow back in the day.

I didn’t want to pollute his inspirational story with any cynical mustelid grizzle, so I decided to STFU on that thread. It is inspiring – I can relate to allocating resources to Mrs Ermine after I am gone, but to throw the key 30-40 years into the future, as old_eyes’ feels he owes his son due to infirmity, I don’t know how you get from here to there.

Calvinist ice

Decades after materialist rationalism emptied our churches and turned them into silent disco-halls a new creed spreads – the Calvinist redemption through work. If you don’t want to retire when you get to FI, well, don’t. Take the money you don’t need and give it away, drop it out of helicopters or simply stuff it in your mattress and admire the precioussss. Just don’t make out this is the only way to the Good Life, because some of us haven’t lost sight of the elementary fact that there is more to life than work. And for heaven’s sake don’t come out with cock like this from Humble Dollar (H/T monevator) with condescending old man’s wisdom for the young

we might pick a career less for its income and more for its joy—because we envisage doing it for as long as our mind and body allow. As the saying goes, if we can find a job we love, we’ll never work a day in our life.

Well, this a new riff on the ‘young ‘uns can’t afford to buy a house because they spend too much money on smashed avocado on toast and lattes’. Presumably the fellow with a Deliveroo sack on his back and Amazon logistics workers failed to think of that? How remiss of them. Let’s deconstruct this old git brain fart. Here’s a Venn diagram of the Life/Work/Crap ontology. The relative size of the blobs will vary for different people, but I’d say the overlaps are the same for all.

Clearly the world contains more than you can do, or are interested in. I’ve heard as much as I want to of Balkan throat singing, while being glad it exists, in a what a weird and wonderful world sense. Even interesting stuff has some things you’d rather avoid – learning anything goes through a long and frustrating region of being crap at it without knowing if you will develop or remain a tyro forever. There are many people for whom paying work you could do overlaps hardly at all with your interests. Budding artists and resting actors know this feeling only too well.

The intersection of world, work, crap, and interests

Despite interview claims of having a passion for flipping burgers or crap jobs like chicken eviscerator, we all know that it’s just playing the game. Let’s take a closer look at the overlap between the teal work you could do bit and the yellow interests bit.

Let’s hear it from Joseph Campbell on HD’s joy, finding your bliss

“The way to find out what makes you the happiest is to focus on being mindful of your happiest moments—not simply excited, not just thrilled, but deeply happy.”

How does that gel with the work you could do side of things? The trouble is that fun things are popular! Everyone else wants to do it too. Continue reading “Hinterland and FI/RE”

Capital Gains cogitations

Monevator has a new decumulation strategy article (paywall). That is more of a deep dive than the general pack-drill, 100 – your age in bonds. Bonds turned out to have more complexity that most people expected. In particular while you can know what a specific bond pays out if you hold it to maturity, if you hold a bond fund of a similar average maturity it turns out that since these cycle bonds in and out of the fund and don’t hold to maturity so you don’t get the same result, and very much so not the same result, to your detriment, in interest rate hike eras.

I haven’t generally done bonds or bond funds, since I regard my DB pension as close to bonds in its offering. There’s a lot more stuff in Monevator’s article, some of which is above my pay grade and some outside my requirements. However, I did like the deconstruction of equity diversification for decumulators, who are much more sensitive to networth drawdowns. A GFC suckout for accumulators may cause some of them to fall off the passive indexing wagon but for a decumulator means at best switching from Waitrose to Aldi and at worst bankruptcy and ending up on the street.

The general thrust is that you have equities for gain, bonds for security and some commodities including gold for other edge cases. The author clearly doesn’t like gold and looks to run it down early

we can only profit from gold if some greater fool will pay a higher price than we bought it for.

I don’t personally expect to make any real gain on gold, it’s there to get some reprieve against governments devaluing the real value of a currency. Store of wealth, not a replacement for BTC or National Lottery tickets. A whole bunch of other people will spark up at this point and point to times when it hasn’t done that, and another cohort will say ETF gold isn’t real and you really should have sovereigns dug into the garden. Gold is like that, it raises passions in a way other assets don’t, perhaps with the exception of residential property. It’s not just Smeagol who was changed by contemplating the precioussss too much.

The idea is to use gold as ablative armour to absorb any early crisis. Then, once it’s gone, it’s gone.

He’s looking to run it down, roughly at the time of drawing the State Pension (SP). Which is a way into your retirement for you early retirees, indeed, I would be more than fifteen years older than when I left work before I become eligible for the SP.

The article highlighted the difference between the various asset classes, and in particular their different characteristics in terms of income/yield (none in the case of gold)/capital gain – not so much in the case of bonds and so on.

different wrappers for different asset sub-classes

ISA and SIPP wrappers save you from capital gains tax. ISAs save you from income tax too, and this led me to observe that it might be sensible to distribute the various asset classes amongst the various wrappers to reflect the nature of the expected gains.

By their nature, decumulators will normally be at on just after the high-water mark of their capital wealth. Some hold capital outside the tax wrappers; if you have good fortune to need more than those wrappers you get to think about tax and CGT, and it’s not straightforward at all. CGT and the tax you pay on dividend income is at about half the rate of the tax you pay on earned income unless you are a higher rate taxpayer. A SIPP transmogrifies CGT and dividend income into regular income – that’s not a useful thing for me.

Everybody’s tax position is different. I have no basic rate tax allowance left due to pension income. I ran my SIPP out under the personal allowance before I drew the DB pension, then I ran the remaining annual contributions out to hedge the possible instigation of NI¹ on SIPPs.

If you’re earning and have spare for pension savings and can live with the embargo to 55-ish, a SIPP usually gives you most bang for your buck. Particularly as a higher rate tax (HRT) payer, though basic rate tax (BRT) payers do well if they can use salary sacrifice to recover employee NI. The ISA has more tax advantages in is not age-embargoed like a SIPP but since contributions are post-tax and NI it can be hard to use those advantages while working.

wrapper pros and cons

The three wrappers available to me are

ISA: free of CGT and income tax. Rate limited to £20k a year

Good for: things that I expect to appreciate in value, and those that pay a dividend; these are not usually the same things, but generally fall into the equities bracket since I don’t do bonds. At the time that I kicked the gold out of the ISA this logic prevailed

SIPP: free of CGT but not income tax. Rate limited to £3.6k in my case.

It can be free of income tax, I transferred my SIPP into my ISA tax-free while I had a low income after retiring. The SIPP included DC pension savings while I was working (AVCs, most people will use a plain SIPP). I can’t do that again.

However, a SIPP is unattractive for me because a SIPP comes out as income. It is better to pay about 10% tax on capital gains than convert it to income since I pay 20% income tax on income, but for those with some personal allowance to spare this conversion could eliminate CGT. They are still better off at dividend tax rates because these are lower but the calculation is a little bit messy – dividends burn up your personal allowance too though the tax is at a lower rate.

These limitations mean the SIPP is functionally useless to me, apart from the minor benefit of churning £3600 in cash through it, where the 25% tax-free allowance means I get to take away a profit of £180 p.a. I hold just over £1k of VWRL in the account to keep it open, £180 profit on a static £1k deposit is an 18% interest rate, it’s not much but it’s worth the turn, given I already have the account.

GIA: (general investment account) considered unwrapped from tax shelters.

I use this for gold and for shares. Sub-optimally at the moment.

Diversifying deadbeats

Monevator’s article offsets half the world equity tracker with a multifactor fund tilted away from the US Big Fish. The alternative is half the equity allocation with

full-throated allocations to UK shares, the emerging markets, REITs, and small caps.

I have some of this, because I thought I wanted income much earlier than in fact I did. Historically I have some high-yield portfolio, some individual UK shares and a reasonable amount of EM index ETFs which I added for diversification. I have a bit of REITs and a bit of small cap IT too. In retrospect I would have been better off going balls-deep into VWRL in 2012, which is a win for the principle of all you need is a world equity tracker, but I caught up over the Covid period.

Diversification is inherently a question of sub-optimisation, in the interests of reducing the volatility of the whole amount. Which led me to thinking I could distribute my existing assets more intelligently to reduce tax – boot some of these sub-optimal deadbeats into the GIA. In the past the dividend and capital gains allowances were high enough that this didn’t matter so much for my level of GIA, but the reductions in these allowances mean it may be worth using them more intelligently.

Everybody expects US equities to grow into the sky, and say emerging markets to be like De Gaulle’s pithy observation on Brazil – the country of the future, and always will be. We should, however bear Hemingway in mind – how will it go titsup in the United States markets? Two ways – gradually and then suddenly.

Dedollarisation could be a suddenly, given what happened to Russian assets held in dollars, which may makes some countries more circumspect about the security of dollar assets. There is the loose cannon formerly known as the last POTUS sat at the controls from November this year. But until the denouement, the US may still be gangbusters. Half of VWRL is the US, this would support holding VWRL in the ISA. Not so much VFEM.

I hold 25k of VFEM in my ISA and I hold over 40k of VWRL in the GIA, as well as a much larger lump in the ISA. There’s a strong case to kick VFEM into the GIA because it doesn’t produce a lot of income, and doesn’t have the same sort of expected gain as VWRL, Quicken tells me I have eaten a 10% loss on VFEM over the years. Every dog may have its day, but this one has yet to bark.

I could sell the 25k VFEM in the ISA, buy 25k VWRL with the proceeds, buy another 20k VWRL with new ISA cash and sell out all my 40k VWRL in the GIA, perhaps using 20k of the cash to put in the ISA. I can then buy the 25k VFEM in the GIA, retaining the diversification, or perhaps even buying more of it.

Another diversifying deadbeat I could buy in the GIA is a broad commodity fund. I have to first give some thought as to whether TA’s risk tolerance is way down on mine, the DB pension stiffens my spine, and I am closer to getting the SP. He’s not advocating a huge allocation to commodities, and let’s just say I am sorted for gold in the GIA mix.

I am aware this anomaly between earned and investment income may not survive a change in government.

Rich Dad, Poor Dad – tax on cash savings

An indicator that this discrepancy was instigated by the elites against the little people is the higher taxation of the interest on savings compared to investments, little people don’t have real investments, they “invest” in cash as a rule 😉 I was had by this anomaly last year, because I displayed some Poor Dad muppetry as outlined by the book Rich Dad Poor Dad, strapline What the Rich Teach Their Kids About Money That the Poor and Middle Class Do Not.

I am a basic rate taxpayer from my pension, so I get the privilege of paying income tax on savings income. It’s not the worst problem to have, given the alternative is sleeping under the railway arches. Everybody has their unique foibles regarding taxes they resent peculiarly, and it turned out tax on cash interest is mine. For rich parents the Room 101 is IHT and they fill up the Telegraph with the evils of inheritance tax, asserting it to be the most hated tax in Britain – which is bonkers, as this bunch of accountants deconstructs.

perhaps an education programme to support a tax that will bring in £15bn a year by 2032 without affecting 96% of the population should be part of the government’s pre-election agenda

My bugbear is paying tax on interest on savings. It appears you can get £5k on savings tax-free if your income is below the personal allowance but for basic rate taxpayers it’s £1000, and just like the thought of paying higher rate tax as a pensioner jars some people off in spades, the thought of paying tax on cash interest hacks me off.

Let’s put the roughly 5% ‘interest’ on savings into perspective. This is a compensation for half the loss in real value due to inflation. If you could buy 100 loaves of bread last year with the cash then you can buy 95 this year with those savings + interest, and then HMRC come along and demand another loaf of bread? Fuck off.

After paying £600 tax on savings last year I transferred most of my cash savings to Mrs Ermine, because I am quite happy to forego the £3k interest to avoid paying £600 in tax, as far as I am concerned Mrs Ermine is a better recipient, and if I can’t have it then HMRC can definitely not have it. Which is, of course, exactly the same sort of thinking as the Telegraph’s IHT whingers who want their wastrel kids to benefit, but I only filled up a couple of paragraphs of this blog post with it rather than years worth of newsprint. And I did something about it after getting had the first year unlike the King Tutankhamuns of the Torygraph IHT grizzlers 😉

Tax on investments – capital gains tax and dividend tax

Both of these are about half the rate for basic rate taxpayers compared to the tax on income. Capital Gains tax is the odd one out of many taxes, because you can usually pick the time of battle, which Sun Tzu approves of

He will win who knows when to fight and when not to fight.

In comparison, income tax you pay as you incur the income, same for dividend income and tax on cash interest. CGT is not always elective, there are some corporate events that mean you crystallise a capital gain. It’s complex to calculate if you build up a holding over time, and for God’s sake don’t hold accumulation units in an unsheltered investment account because trying to unpick the split between capital gain and interest will take for ever.

There is an asymmetry in capital gains tax between losses and gains. If you declare a loss² in one year, you can roll it forward year on year. If you don’t use the CGT allowance one year, you don’t get to carry it forward.

The CGT allowance has dropped massively, for a long time it was £12k p.a. and it will be a quarter of that next year. Let us assume that you are targeting the typical long run average market gain of 5% and inflation is not running at 10% as it has recently, say you target a nominal 7% return. If you invest in growth stuff that pay hardly any dividends, then back in the day you could target a capital base of 150k before CGT would become a headache, now it’s about 40k.

Shares are volatile, so one question is how should you play your capital gains to pay as little as possible. Because of the shrinking allowances, for last year and this tax year, use as much of this year’s capital gains allowance as you can. I used all my 12k allowance churning my gold holdings, selling SGLP and buying SGLN to crystallise a capital gain on SGLP. There is the cost of the turn there, which is non-trivial on over £100k. I also collected some gain on BP and minor holdings to get the £12k gain.

This year I’ve already collected £1800 gain on PSH H/T Monevator leaving me £4200 space, looking at my holdings I could use that space up by flogging about 30k of VWRL. There’s an HSBC world ETF I could buy if I wanted to stay in the asset class in the GIA. If I am going to move VWRL into the ISA then I don’t need that switcheroo.

From a gut feeling, once the CGT threshold has settled at £3k, it seems that it would make sense to either use up the allowance and not crystallise any losses, or if you are going to crystallise losses save ’em up and roll them forward, and hit all the losses. This does, of course, assume you are in a fungible asset class where one ETF can be swapped for another. Individual shares are sui generis, you can’t really swap AZN for GSK with the same equivalence as VWRL/HMWO. Crystallising a loss does expose you to the anticipated gain on holding the asset, but if you are rolling forward the loss then whenever the gain shows you have a rolled forward loss to offset, which lets you choose the time of battle.

I already have a CGT loss of £10k that I keep rolling forward. You don’t have to offset a roll-forward loss against gains in any one year – last year I could make the £12k gain, declare it against the allowance, but still roll forward the £10k loss. As opposed to burning the 10k loss against most of the 12k gain. The value of the loss falls due to inflation, so bumping a loss on for decades to retain optionality is losing out in a subtly different way.

There is no NI on pensions at the moment, but it would piss me off to pay more tax at 32% than the tax 20% bung on the way in. ↩
the loss has to be an aggregate loss. You can’t just say that I will take a £3k capital gain within the limit and oh by the way the 2.5k loss on this other share I want to roll forward. Doesn’t work that way. ↩

Mustelids mulling a new year at megalithic sites

A new year, a new world. There are good things in it – looks like Pine Martens are building their ranks in England, after having been persecuted to extinction by the landowning aristocracy, which have a dreadful attitude to the entire mustelid family.

I collected £1500 from, Monevator’s Mogul’s tips, which pretty well covers the cost of entry. I had built up a pin-money stake in PSH sometime in May and June on the back of this tip article. Obvs Monevator disapproves of that, but reading ‘twixt the lines of his GFC era posts has served me well. I liquidated this holding not because I believe PSH is going titsup, but because it’s come to my attention that the main protagonist has a penchant for pursuing personal vendettas a la Elon Musk, and the Twitter share price is the cautionary tale. I don’t give a shit about the vendetta¹ or the issues, it’s neither my circus nor my monkeys, but I don’t want to yoke a wagon to a horse with the emotional incontinence of a two year old, no matter how clever. Collecting a 25% uplift made the choice easier. I don’t generally have principles in investing, but when the lead has such a key influence then character matters, and emotional incontinence is not good. I’m happy to hold Tesla in VWRL, even if the CEO is sociopathic scum, but I don’t want to hold it explicitly due to CEO brain-fart risk.

Moguls can drift into Rich Kids of London territory in rarefied air these days. I read this broker article and thought to myself well, yes, I share the viewpoint that the FSCS £85k cap makes the guarantee not tremendously useful, but as for the tribulations of a family office, that is way above my pay grade 😉 Mind you, I didn’t know that Hargreaves Lansdown cap platform fees at £0 on a GIA if you avoid holding funds so I learned something new.

Like Monevator’s FIRE-side Jake I’m nominally better off than I was this time last year, though of course that has to be sat against double-digit inflation. I collected my £12k CGT in the GIA last year, and it will be easy enough to hit the 6k this year. After that, well, who knows what the rules will be. I’m not ideologically opposed to paying more tax if I get a Britain what works less badly than it does now, but I’m not going to volunteer for it 😉 The ISA continues to chunter away, the VWRL holding doing most of the work now, though my legacy HYP produces a useful amount of income should I need to go that way, though at the mo I reinvest that.

New Years resolutions – January’s a terrible time to do that, all dark, and cold, and dreitch. I don’t get the Calvinist Dry January thing, surely it’s better to ease off on getting hammered in December rather than going bonkers and then running into the abstinence when you could really do with some cheer 😉 I see some poor souls going running on the cold roads, and I wonder if we would do well to heed the words of Paul Kingsnorth.

it has helped me to understand something about the world I grew up in: we wanted the feasts without the fasts.

In the original Christian traditions, the fast came before the feast. We have this all ass-backwards, fasting after the feast, to shake off the lard of the excess mince pies and booze. I wonder if those previous generations were wise and knew a thing or two about the human condition, and fasting before the feasting is better for the spirit, including the secular form of the term.

We took time to go to Avebury in the brisk and short January days. The car park was closed due to flooding, but I know the site reasonably well, so there were other ways. Punters were thin on the ground, and the skies, though leaden had an attractive character.

punters were thin on the ground. This is the closest section to the car park so usually well occupied

After a bracing walk into the site we stopped for a coffee and then lunch at the Red Lion. It’s a standard Chef & Brewer so not gastronomic excellence, but it served us well enough and the fire was welcome.

the Red Lion (left) was a welcoming sight on a cold day

Refreshed and renewed it was time to take on West Kennet Long Barrow. The winterbourne of Swallowhead Springs flooded the path at the start, I tested the quality of Grisport Exmoor walking shoes and can report they are up to the job.

Continue reading “Mustelids mulling a new year at megalithic sites”

Jezza budget special, meh but early retirees watch yer class II NI

Jezza’s at it again. Much is made of a 2pc drop in National Insurance, which is all very well but given the £12570 tax threshold was frozen since 2021 and would now be worth £14874 you’re paying £400 more in tax anyway. Sure, every little helps as they say. You have to be earning £21k¹ before the 2% knocked off NI beats out the increased tax you pay due to fiscal drag.

A gotcha that FI aspirants may be in for is the final abolishment of Class II NI contributions. I had feared this since Nick Clegg’s crew had this in their gunsights pretty much as I retired. The devil is going to be in the detail I don’t have.

If you’re lucky, declaring as self-employed for a year would get you a paid-up year of NI subs for free rather than the £150 I paid, in which case I paid more than I needed to. I had seven years to make up. I can’t argue with that, I got 97% off what an annuity of equivalent value would have cost.

If you’re unlucky, there will be a minimum profit requirement to get those NI credits, in which case you will be SOL unless you meet that profit requirement. This was articulated in 2015. Continue reading “Jezza budget special, meh but early retirees watch yer class II NI”

Decadence, drawdown and deceptive sales

Monevator has a weekend reading where the general sentiment is that investors have been taking some heat of late. I have become a pussy, it seems, as I can’t really say I have taken such a lot of stick, although the high rate of inflation makes that hard to observe. I found it hard to get excited about investing this year. I ended up buying some VGOV this year because I couldn’t think what to do with it, but I took @Jam’s comment on board. I’ve already given gold the order of the boot from the ISA and I don’t want to replace it with another bed blocker where there are acceptable alternatives. I kind of like @ZXSpectrum48k’s poetic comment

You don’t buy gold. You sell something else and gold is where you wait hoping for the problem to pass.

It’s true for those who trade it, which makes sense for younger folk. For me it is to reduce the ulcer index, so I don’t trade it against something else, its job is to help me look at other hits with equanimity, although I will take the CGT harvesting of gains/offsetting losses function. But it shouldn’t be in the ISA, until I have exhausted all other unwrapped investments. There is nothing wrong with trading gold, but you don’t reduce the ulcer index doing that. But you do get the profit from rebalancing – it’s a different aim, more suited to those in accumulation.

I clearly have no talent for this index investing malarkey, I buy in Vanguard, usually some in May and a larger part towards the end of October and then transfer these index holdings after April the next year to HL, where they go to die it seems. HL is my dump for Vanguard stocks, my main ISA is still with iWeb.

It’s not as bad as HL show, since the gain in Vanguard isn’t copied over, they are marked to market on entry to HL, but yes, I’d say the last couple of years has been a wash for indexy types. One problem is brokers show you P/L on the cost of buying the shares relative to current price. For a young gun who is all about growth that gives a good approximation to the performance, but for an old git shifting to income that writes off all dividend income, which I use to buy more shares, often in something else. Brokers treat that as you putting in more cash. In a transfer ISA you can’t put in more cash. I track the overall PL using Quicken and R.

There’s some scuttlebutt that Jezza may raise the ISA allowance to 30k. Dunno if that’s from next year, or if I can top up this year by 10k on top of a fully loaded ISA. I intend to grab about as much as I can of this, ahead of a change in government. The Budget is on the 22nd November. It’s a clear sop to the better off, while I was working it would have been a very serious challenge to fill a 30k ISA, and pay the mortgage, and get to eat…

decumulation diversions

I read Monevator’s recent decumulation post (paywall). TA has started his decumulation journey relatively recently, retiring a couple of years ago (non-paywall), and crunch from the shift of the gearstick from forward to reverse is hard on the nerves. It’s difficult to gauge your future ride. Maybe I am getting decadent, but I am now wasteful compared to TA. I suspect that TA has rather more in hand than the example, though he says it bears a passing resemblance to his situation. As he says ¹

any deaccumulation portfolio is going to be a one-size-fits-none affair.

Nevertheless, I am going to stick my neck out and agree that £28k for a child-free couple feels quite tight. I have lived the decumulation life for over 10 years now, I have gotten used to the sound of the engines in the final approach. They are old, and the sound is rough and noisy – there was a recent week when my networth saw more lift than the annual salary I earned at the high-water mark of my erstwhile career, there will be days of more suckout I am sure. Continue reading “Decadence, drawdown and deceptive sales”

No more income tax cuts

Many years ago, Thatcher made a big song and dance about wanting to cut the headline rate of income tax, which was 30% at the time. Higher rate tax was at a much higher rate, the Beatles who were so pissed off about it they wrote a song about the taxman. Thatcher was right, a top income tax rate of over 90% was probably too high 😉 Notable about post-war Britain was it was flatter in income than today, a lot of money came in the form of the aristocracy, which is still there but somewhat drowned out by the nouveaux riche in the last 40 years. The aristocracy didn’t have too much problem with income tax because their riches came in the form of capital.

Inocme share over time. The bottom 10% have been mullered, particularly since the GFC. Presumably there were no poor people years ago because they didn’t register in the stats

The grocer’s daughter backfilled the hole in the Government’s finances before launching her tax cuts, largely through the free gift of North Sea oil, and selling off anything publicly owned that wasn’t nailed down. The personal finance motto holds – save before you spend on elective nice-to haves, a gracenote that the Liz Truss “I was right all along” tribute band didn’t find the need to play.

In doing that Thatcher established a shibboleth that income tax is in and of itself wrong. In her time, given where she started and these two free gifts, it probably was higher than it should have been.

The first free gift of North Sea oil revenues we seem to have parked in house prices, imagine what we could have done with that otherwise. The beneficiaries of this are primarily Gen X and Boomers¹, and their legacy to their greedy kids as time goes by. Everybody wants to favour their kids over everybody else, this will lead to feudalism as time goes by, hopefully this is will not happen fast enough to be my problem. See the concept of private schools and the bizarre claims that inheritance tax is the most hated tax in the UK. The torygraph gets its knickers in a twist over IHT all the time and comes to exactly the wrong conclusion after acknowledging the rising amounts of dynastic wealth. As for the journalistic flannel of calling it a tax on the dead, if there’s ever an occasion that you can resolutely tell HMRC to eff right off it’s from six foot under. What are they going to do, put your stiff in prison? There’s not enough place for the living as it is. Continue reading “No more income tax cuts”

A late summer visit to Isaac Newton’s falling apple tree

We decided to use the end of the school holidays to visit East Anglia. A joy of getting the work monkey off your back is you can take time to travel, so we staged the journey, first stopping off at Worcester where we would leave the M6. We went into the city to have a look around, and I was pleasantly surprised – unlike some British urban areas which seem to be in steep decline, Worcester was jumping, the High Street was reasonably lively and there were very few closed shops in the main drag. Indeed, I have been generally reasonably pleased with urban parts around Britain’s second city.

Liverpool used to be larger, until Thatcher’s managed decline after the Toxteth riots. I did some work in some of Liverpool’s schools in the less well-heeled parts of the city in the early 2000s. Let’s just say the place was edgy – rows of terraced houses boarded up with steel, and the security around schools impressed me, though I have since realised that all schools are treated like high-security prisons all over the country, with high-rise steel fences and access management. When I was at school you could just walk in off the street 😉 Containerisation, Felixstowe and the fall of Empire probably all did their bit for Liverpool, so now Brum it is.

I have never been to Birmingham itself, but the surrounding regions seem to have jobs enough, even if the council is bankrupt.

Worcester was a pleasant walk along the river, somewhat intimidated by the flotilla of swans which were at least on the other side! Flooding still seems to be a problem in that part of the country.

Wilko was the poster child for the cost of living crisis and closing down shops, the exception to the general rule

Wilko-tastic – this High Street fight is lost

A general air of civic affluence otherwise.

there was a somewhat Masonic feel to the Guildhall and some of the stained glass windows. I didn’t actually find Joachim and Boaz inscribed on the two pillars

The work conundrum

I lauded our Millenial overlords last time, who seem to have the right approach to work, and today it seems to be the time of the over 50s to join the ranks of the shirkers, while also being lauded for their great unretiring. I was surprised to read the diagnosis of “You have stress-related heart disease” in that writer – while I had observed it enough at The Firm it seems that it has now become A Thing in the ten years following my observations. I managed to dodge that bullet at work, but I saw it impair people’s quality of life and saw it take three people out before they reached three score years, never mind and ten. As the study showed, work becomes less important as they age and leave the workforce – seriously, you get paid to say that?

I saw an interesting critique of why jobs have been becoming more shit as I went through my career. Obviously part of it is the increasing push to efficiency, which drives out some of the wrinkles that were more fun to explore, some of it is that globalisation means you are now in competition with the whole world which was not the case when I started work. But that piece drew out the specific case that if you have more opportunity to exercise judgement and/or the task is more varied this makes the job better in and of itself. Matthew Crawford picked that up a decade ago in Shop Class as Soulcraft, the case for working with your hands.

The trend towards outsourcing inherently tends toward defining the job via a prescriptive service level agreement, combining with the metrics and crap makes work more shit in and of itself. Still, if you think that’s bad, wait until you see what AI in the form of Microsoft Copilot can do for you at work

generative A.I. tools that make attending meetings, writing emails, scheduling travel, and catching up on projects vastly easier.

Am I the only one to think this is Not A Good Thing? White collar work is going to end up as some sort of expensive tournament between jousting AIs as people use the tools to raise their profile. I suspect a lot of meetings are performance art, but this will raise it to a whole new level. Given that AI has show a respect for the truth that put Donald Trump in the same veracity class as the apocryphal hatchet-wielding George Washington, our companies will seize up with duelling AI bullshit. Maybe we will need a new layer of humans to adjudicate the battle. It doesn’t sound like an obvious recipe for efficiency. The answer to too many meetings is to shoot the incentives that make people call too many, rather than skimming an AI enabled higher level of excess noise trying to parse it for a signal.

There’s a case to be made that AI will be the greatest cartoonist of the human condition ever, showing us a disastrous pastiche of our excesses. I don’t have Skynet fears about AI, it’s what it will do to people that I have a bad feeling about. Driven by the profit motive AI will pollute the information space of the world with so much shit that we’ll be unable to tell which way is up.

Rupert Murdoch hung up his boots at just the wrong time. He clearly got a terrific rush from bringing out our darkest desires, and AI is the chance to weaponise that – truly a boot stamping on a human face, forever. I am sure that his son will be able to carry on the good fight of feeding the darkness of the human soul with new! improved! AI! edge!

Newton’s Apple Tree

the manor house where Isaac Newton was born and did some of his work in the year of discovery

Continue reading “A late summer visit to Isaac Newton’s falling apple tree”