21 Aug 2015, 4:40pm
personal finance shares
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  • A distant sound of thunder

    Ah, the lazy hot days of summers are conducive to all sorts of rumblings – here in East Anglia there is a strong predilection to thunderstorms. But there’s another sound of rumbling in the distance, and that’s the sound of distant promise in the markets…

    thunder and lightning, very very frightening...

    thunder and lightning, very very frightening…

    You start getting people talking about global plunges (though bear in mind it’s silly season and news is thin, so this may still not stick yet) and running pictures like this –

    1508_tradersand the ermine feels the slightest waft of a breeze across the whiskers, and the snout twitches to point in the direction of the interesting scent of fear… I have been bored shitless by the markets these last couple of years, I’ve made some desultory purchases like HRUB and a bit of EM stuff, but they didn’t really feel right (and weren’t right) but not enough of them to make any big hit, indeed the time may come to add to these. Most of the time I’ve been selling my own stuff back to myself to get it wrapped in an ISA – that sort of tedious business is what markets hitting new highs are for. But these new straws in the wind seem to indicate things could start to get interesting again…

    When I left work in 2012, I transferred my entire AVC fund into cash, because I did not know when I would have drawn down the cash I had saved, and would need to draw my pension early. At the same time I would have needed to invest this AVC fund, saved specifically to compensate me for the loss of taking it early. It looked like the market was on a high at the time, which turned out to be patently not true.

    I only have the choice of these two finds in my AVCs and cash

    I only have the choice of these two finds in my AVCs and cash (the FTSE100 isn’t as bad as it looks since I would get dividend income). The blue one already served me very well 2009-2012

    Okay, so I sold out at a local high in March 2012, but it then proceeded to make half as much again. I can be sanguine about that because there’s a lot more than this in my ISA, the overall value of which has tracked up by more than the blue line 1  Obviously had I a decent crystal ball I’d have held on and sold three years later, but I don’t regret this, because I have learned one thing about shares, and that is

    be no forced seller

    The rough rule of thumb here is that money you will need to call on within the next five years has no business being in the stock market. I did not know in 2012 what the future held. At the time, before Osborne’s changes, I believed I would need to draw my main pension and spring this cash tax-free, possibly to backfill any money I’d had to borrow in the meantime, alternatively to invest it. So cash it was, I accepted the 8% loss to inflation over that period. The insurance of cash against market turmoil has a cost, life is like that. If you’re a forced seller caught on the hop, you could get to eat a 50% loss and have to make a 100% gain to be back where you started. You really don’t want to do that.

    But now I will get a lump of this tax-free and have a steady strategy to pull out a personal allowance-worth each year. Unfortunately I’ve already contributed 2/3 of this year’s ISA allowance selling my own unwrapped shares back to myself to use this year’s capital gains allowance, but it starts to look like there will be a stronger case to commit new money to the market if there is a decent rumble. I can do that in my SIPP and with the remaining part of the AVCs – these in particular I know I won’t touch for another five years. I would have been windy of committing them to the markets in the recent highs, but some of that objection is falling away. Five years is a long time in the market – even if I were so unlucky as to buy the FTSE100 at the peak before the financial crisis (6730 on Oct 12 2007) I would be at 6487 five years later (and would have received five years worth of dividends). The odds improve no end in market swoons, and this one starting seems to be a general worldwide across the board throwing in of the towel, so something nice and boring like VWRL seems to be worth buying into in moderate monthly amounts across the next six months with the rest of my ISA allowance.

    Extracting the AVC money seems to grind like the mills of God, exceedingly slow, but hopefully the market won”t have recovered by the time I get a definitive answer as to whether I can transfer part of it as opposed to the whole lot. If part I can shift the residual AVC fund into that L&G 50:50 global index because I know I won’t be needing that for 5 years, if not then I will do something with VWRL in my HL SIPP. It looks like the markets are set to get a bit kinder to me, and all the other net buyers out there. Now that I know my time horizons I can use the information to allocate more money to the markets.

    So I raise a glass of summer wine to fear and loathing in world stock markets. Of course, it could be the final surrender as capitalism gives up the fight in the face of shocking government debt, Chinese overhangs and falling productivity. Or it could be the second shoe dropping of the financial crisis – all the stuff desperately batted into the air by governments who didn’t want to face the facts. But in that case we’re all stuffed anyway, que sera sera.

    Notes:

    1. note that this is not because I am an ace investor, the share uplift has indeed been most decent when I unitise, because over the last few years it didn’t matter what you owned, you were going to do relatively well. But of course over those three years I have contributed three years of ISA allowance too.

    Today’s moves were actually pretty big! I’ve already started deploying my ‘messing-around-pot’ and have increased the amount dripping into my sensible long-term bucket.

    If I were you, I’d be tempted to pick some Investment Trusts at a discount rather than VWRL – perhaps with an EM tilt. If discounts really open out, I’ll be selling my defensive Asia OIEC (good work, First State!) and putting it into an IT.

    I would be worried about the coming actual storm messing up my first ever live Test Match (I have day 4 and day 5 tickets), but England seem to have done that themselves…

    Curses! it’s very inconvenient being still in debt emergency / emergency fund accumulation phase. All my money is earmarked elsewhere at present. Could you ask them to hang on few months to bottom out for me please Ermine? πŸ™‚ (3 or 4 months will do…)

    I remember the taper tantrum a couple of years ago when the previous fed governor talked about raising interest rates

    He backed off and all was recovered

    Many parts of the world economy rely totally on cheap limitless debt

    Obviously this is not permanently sustainable but they managed the trick for about 25 years after the second work war

    […] But valuation has served me well three times now, and hopefully will serve me well again if the sound of distant thunder turns out to be an incoming […]

    @Greg I see what you mean about ITs with the amplification of sentiment from the discount/premium, certainly food for thought!

    @Mike S – a decent bear market takes a good while to get a head of steam. There is an argument to be made that if there isn’t decent value to be had in a few months then maybe there isn’t decent value to be had full stop. Although I suspect I’ll be going over the top after Greg soon, but I am pretty sure I’ll regret it in the early stages.

    Of course it’s particularly tough to enter a grinding bear market after a year and a bit of falls…

    @Neverland It was that Warren Buffet fellow who reminded us just how worthless a modern dollar is compared with what it used to be. We really, really, hate paying tax above the line. Below the line, we don’t see it…

    Heh – this is where ice cold temperament comes into its own. My first tranche (of which I only have a few) of my gambling pot (which is small, but not small enough not to be annoying if I lose a large amount, e.g. >80%, of it) is down 25% so far…

    Why I need the cold temperament, it because I’m itching to buy more, but must keep control over how much I’m in for.

    Crikey, I haven’t even managed to get my boots on with this one. I hadn’t really been giving the markets much thought until some of this Chinese stuff, but I still didn’t really expect it to do us any good. Looks like it’s doing just that.

    And now it’s kid in a sweet shop time. Head says I really should do some rebalancing and see if the S&P ever comes into my range, since I’ve hated the price of the US for about four years now. I’ve set a cheeky 13.9 limit on VUSA because, well, 40% off would suit me. But then there’s also JII which I missed out on a while back, maybe 340…

    but I’m also looking at more modest discounts of ~15% elsewhere. I discovered I have 2/3 of this years ISA because I couldn’t bear to invest the last third I put in in July.

    As routs go, this looks like a good ‘un – seems to finding its legs, hopefully we have a long way to go πŸ˜‰

    Personally, I don’t think it does, at least in the short term. I think that was probably it.

    We’ll see. (Probably overnight.) In the medium term, I still think there’s a long way further up to go, though possibly with bigger wobbles than this.

    All mere speculation though. My gambling pot is currently just that – I’m focussing on it because it is interesting, but it’s a mere side show.

    Anyone fancy BRWM? πŸ˜€

    “Extracting the AVC money seems to grind like the mills of God, exceedingly slow, but hopefully the market won”t have recovered by the time I get a definitive answer as to whether I can transfer part of it as opposed to the whole lot”

    Did you ever get a reply from “The Firm” administrators ? I am likely to be in the same position in the future, and have really struggled to get clear answers to “what can I do with my AVC” questions. I would like to pull some out to a SIPP, and leave some in till I take my DB, so selfishly interested in the outcome of your struggles πŸ™‚

    @James it still grinds like the mills of God – kick the process off six months before you want it to happen, but –

    The Firm’s pension administrators are reasonably on the ball. You can transfer your AVC to another suitably regulated SIPP without harming your DB pension. You must do it in it’s entirety. They will send you the forms which include a current valuation quote (this is preliminary if you have the AVC in funds rather than cash, reasonably so) and two sets of two forms, one is your authority for them to transfer and then release hold on them for the AVC funds, and the other is one for your SIPP provider to fill in, and both should be sent to The Firms admin. An interesting part of this guff is chapter and verse as to what the current actuarial reductions would be on your DB scheme, which are of interest, particularly how much the five year shift to NRA hammers the value of the pension accrued from 2009-2012 as opposed ot the previous 20 years.

    Where you are likely to come unstuck is if the AVC is more than about 30k then you receiving SIPP provider will probably make you take independent financial advice. I got that eventually down to Β£500. The receiving SIPP provider wants to be indemnified against future mis-selling claims.

    This process is not grinding away ‘twixt HL and The Firm. I guess it’sd less than four weeks since I managed to get all the forms into HL’s hands, and they confirm they have received it, but as for something happening, well, the tumbleweed is rolling. Just as well that I only want to start drawing as of the _new_ tax year. But I’m not counting on it πŸ˜‰

    Thanks for the reply ermine,

    Its a shame its all or nothing on the AVC transfer. I am still contributing using SMART, and being able to transfer some to a SIPP ( preferably now rather than when I am 55) would have been great.

    NI savings through SMART, transfer excess to SIPP to give freedom to take some before the DB. Actively tune the AVC to 25% of the DB+AVC pot and take the AVC as a PCLS alongside the DB. That would have been a cherry on top :-).

    The all or nothing means I need to decide between the large PCLS at 60 versus the earlier taxed options in a SIPP. Lots of spreadsheets and cashflow calculation needed I think πŸ™‚

     

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