12 Sep 2015, 4:31pm
housing personal finance
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  • Financial advisers and the triumph of hope over experience

    I thought I had done the whole UK property tragedy in this snarl, but Monevator pointed me to an absolute corker.

    ‘I’ve inherited £15,000 aged 20. When can I buy a £350,000 house?’ [he earns £17k p.a.]

    Let’s imagine our 20-year old hadn’t written to the retired colonels of the Telegraph, but had wandered into the pop-up-shop that is the financial advisers of Ermine, Ermine and Ermine, and asked that of the grizzled mustelid 1 sitting behind a desk with a green banker’s lamp.

    The ermine is child-free, but I don’t totally lack compassion, and a small tear would appear in the ermine’s eye, but he would give it to this young pup straight, unlike the two, count ’em, two, IFAs who appeared in the article. Something like this:

    George, me old fruit, I hate to be the bringer of bad news. You can’t get there from here. You, a twenty-year old young man, have just inherited £15k, which is roughly a year’s salary. You would like to buy a four bedroom detached house. You are on less than the average wage. It ain’t gonna happen. What you need to do is focus on earning more, and also scale back your ambition here. Let me tell you a story. I was earning far more than you in real terms when I stupidly bought a house in the mid-morning of my working life, and while I have had three decades to make stupendous mistakes, no financial error gets anywhere near the magnitude of that cock-up. The UK housing market is a heartless mistress – funded by an army of BTL sugar daddies I regret to say are my age fleecing the young, themselves in servitude to Britain’s rapacious financial industry it will eat you up and spit you out in little pieces.

    Your lucky stroke is that your ambition so outweighs your means that lenders will probably save you from yourself. Invest wisely, though do have a little bit of fun to celebrate the old girl’s passing. First see to your emergency fund of six month’s wages, held in cash probably with Santander to get some interest. Then invest the rest in a S&S ISA index fund and forget about it for five years.

    Your position is not hopeless. Inform yourself about the credit cycle, and the things that drive house prices. Do scale back that housing ambition – you may well want a four-bed house to raise a family, but hopefully there will be a lady of the house who can help with the finance.

     

    Notes:

    1. one of the advantages of being an ermine is is doesn’t matters if your fur turns white, because that’s what it’s meant to be

    Actually to be fair the two advisers in the Torygraph both also say (nicely) that it ain’t gunna happen. In a rather roundabout way, but then they are probably asked to contribute a certain amount of wordage for the article. πŸ™‚

    The bit that really bothers me in what George writes is the last sentence: “He said he is open to all levels of investment risk, but would prefer the ability to liquidate his investments at short notice if the markets go against him.” NOOOOO!!! …. In other words, that flushing sound you hear is the inheritance money gently disappearing πŸ™

    14 Sep 2015, 2:13am
    by less4success

    reply

    In other words: he is not actually open to all levels of investment risk πŸ™‚

    Yup. ’tis rule 1 on page 1 of the book of investing, be no forced seller. You must be very rich to be such an investor…

    Mebbe I’m a hard man, but both of these dudes offered hope where there is none. There is no way for George to do what the wants to do. His inheritance of less than a year’s wages, for a young pup with 30-40 years of working life ahead of him, ain’t gonna shift the needle on the dial – it’s 2% tops. As an old git at the end of my working life, I could buy his 4 bed house. Like his parents, that’s because I have 30 years of accumulated wealth behind me. On the upside, George will die three decades after me, On the downside, he has to put in the sweat equity…

    “because I have 30 years of accumulated wealth behind me” …

    Quite. An important point – we’re back to a previous article of yours on the subject of rich/poor, above/below poverty line, Micawber, etc. It’s about RETAINED WEALTH and not just having a suitably impressive INCOME (“and yet we still have nothing left at the end of the month – I just don’t know where it all goes” – Christ, give me strength …)

    Actually, when I read the “I stupidly bought a house in the mid-morning” bit in the article above I couldn’t help recalling a line or two from the film “The Money Pit” (Tom Hanks, Shelley Long):

    “Here lies Walter Fielding – he bought a house and it killed him”
    “Mozart ?! Mozart is dead – his troubles are over. Help ME !”

    In many ways I’m damn grateful to have made it across the often stress-riddled property-owning-via-a-mortgage minefield unscathed – I fear there’ll be a lot out there that won’t be so lucky in the coming years.

    I’m clearly not the only one wondering why buying a HOUSE on huge leverage is considered fine, when buying SHARES on similar leverage is considered to be monumentally risky.

    “Smooth strokes, up and down – paint, don’t tickle” … Haven’t watched the film for quite a while actually, hmm … πŸ˜‰

    Ain’t the intertubes wonderful. Many a true world is said in jest, eh

    The point is, you get to capitalise on a fellow human being’s misfortune. That’s the basis of real-estate

    Imagine, our young lad George says out loud to the IFAs – hey, I’m going to borrow 20x my salary and put it into stocks. Nice easy spread of VGLS100, some L&G world tracker and and HSBC tracker to diversify against counterparty risk.

    They’d wrestle him to the ground and yell “are you crazy” and yet he’s be better diversified and have much more liquidity in an asset class whose long term (30-years or so) performance is similar to houses πŸ˜‰

    Oh yes, I’d forgotten about that particularly appropriate observation – well spotted.

    As you said in another article “never be a forced seller”, yet people continue to put themselves dangerously close to being just that when over-reaching on property: transactions are largely “all or nothing” (unlike shares), and often take months (or even years !) to execute (again unlike shares). The transaction costs probably don’t bear close scrutiny either, particularly when you consider stamp duty.

    On a slightly different note, I remember seeing an article a few years ago that suggested of the top ten “property improvement” projects undertaken by home owners, only a couple of them actually added any meaningful value to the property. Most only made the property a bit easier to sell. These were properly done building projects as well, not the stuff that ends up on one of those DIY disasters series on TV !

    I have owned a house for 42 years. About the only thing I can say is “it’s paid for.”
    Any money invested in it is essentially dead apart from imputed rent. We paid the mortgage off as soon as we could and then got down to serious saving so we’d have cash in retirement to do stuff we wanted to do.
    The lady who shared my life all that time thinks it’s nice. She paid her share so I go along.

    > She paid her share so I go along.

    there’s some sage advice πŸ˜‰ In all fairness 42 years of imputed rent probably adds up to a handsome sum of money. In Blighty the BTL ROI is about 5% on capital cost, and this squares roughly with what it would cost to rent my own house. So after 40 years you are in the money – you typically pay twice the sticker cost in real terms buying a house with a 25 year mortgage!

    I figure after deducting rent and maintenance costs I get about a 3% tax free
    ROI on the money I have in the house – but it is a nice place, I don’t need the cash from it to live on. I agree I am certainly in the money after this length of time.
    If we do eventually sell it would be for lifestyle considerations. My parents had their own place until their 80s before moving to a retirement community.

    I meant taxes not rent in deducting costs. Duh..

    The young so have no idea how badly they are shafted that it’s not even funny. I wonder how they will react when they realise in big enough numbers that their future has been stolen – jobs taken by robots/other computers, homes for investment purposes only, public spaces more & more stealthily privatised & walled off for pay-per-view entertainment only, no pensions or other public services ….the NHS, BBC & schools being quietly bled to death.

    The unborn will have it even worse because they will look at their broken parents & accept the conditioning that this is your lot, you are what you are born & can’t change it – back to feudalism, Europe’s very own caste system.

    Financial independence is going to gain traction as a prerequisite for survival, not a weird, quirky, philosophy for those with OCD – it may be the only way to ameliorate these attacks on a decent quality of life for many…..

    On entering my establishment, George would be slapped around the chops and asked WTF he was thinking, reading the Telegraph, aspiring to a 4 bed semi in a quiet town and taking financial advice. It’s not 1955, plenty of time for that crap when you feel the Grim reaper breathing down your neck.

    Get on a plane, live in a squat, go study something, start a business – come back and see me in 5 years… if you still care.

    Well, I thought at least the young man was trying to do the right thing with his windfall. Although maybe Nathan’s advice might lead to more fun, adventure and perhaps ultimately to a richer life (in the broadest sense)… I guess a year’s salary landing unexpectedly probably feels like all the riches in the world…and of course, we don’t REALLY know what he believes, its all mediated through the TG journalist writing for an effect…
    Anyway, at the other end of the spectrum, what how would the Ermine counsel a young person who discovers they are due to inherit nearly 7 figures at age 25? (true scenario btw) Invest it and try and withdraw 2%? – not really quite enough to live off forever, but could keep you going in a bohemian sort of way for quite a while… Invest it and try and forget its there until he needs to buy a house, meantime learning to earn some money? Start a BTL empire (heaven forbid!)? Answers on a postcard…

    @Nathan I like the style of Nathan and Nathan firm of IFAs. “George, young man, it’s always good to check the destination of the bus you’re about to get on to see if it’s going where you want to go” – and yours said pipe and slippers πŸ˜‰

    @Carter > a year’s salary landing unexpectedly probably feels like all the riches in the world… This is why it’s so heartless having young folk buy a house in their 20s. They haven’t learned yet through the bitter experience what the value of money is when it comes to quantities bigger than an annual paypacket.

    A seven figure sum is easier to qualify. It is life-changing – it’s not enough to retire on in your 20s but it gives you serious options. I’d put half down to long-term equity investments, about 10% to a fun fund, 5% (10k max) to an emergency fund in cash and then the remaining 35% into medium term investments ( VGLS60 or the like). Then use the fun fund to take time out and work out what I really want from life at that stage in it. If more than half the spending were on Stuff or The Beach I’d try and think again πŸ˜‰

    The rationale is the 50% would give his 35+ older self some serious options. The medium term stuff would be largely hedged against inflation and would give his 30+ self some options and hopefully feed into his older self. The 5% stops him being a forced seller early on. And the 10% to give him options now to think, because his path in life is inevitably different from that of his peers, and to do that well you need to get to know who you are and what you stand for, else you will misallocate the rest of the capital. But hey. that’s me, and I wonder if Nathan, Nathan and Nathan would slap me round the chops with a wet haddock and say blow the first 5% on trying ayahusca πŸ˜‰

    Thanks for your thoughts. But do you think a person in their 20s really has any idea what they want to do with life? And, one of the things that concerns me most is the idea that their ‘path in life’ is different from their peers – that sounds potentially lonely and isolating to me.

    > But do you think a person in their 20s really has any idea what they want to do with life?

    The trite observation would of course be, “if not now, when?. For sure what you want to do with your future life changes as you grow and hopefully deepen. You are a dynamic and adaptive being, and when the process of adaptation arrests, you begin the long final approach, for some that starts at 30, for some the decline is called short by physical demise.

    You take a hold of the steering wheel when you start out on a journey, no? Someone in their 20s has the delightful freedom because they aren’t bogged down with all the paraphernalia of job, kids, expectations, mortgage etc. Turning that freedom into action can be part of the quarter-life crisis, but doing it is more rewarding than not. Even a 20 year old is losing a day of life 24 hours at a time…

    > And, one of the things that concerns me most is the idea that their β€˜path in life’ is different from their peers – that sounds potentially lonely and isolating to me.

    There is greater commonality in your life experience at 20 than at 40, because there are many common and shared experiences ordained by society. But the attempt to tread the same path as peers is a source of missed opportunities and wasted effort in those early years. Well, it was for me πŸ™‚

    Many of the vectors of consumerism are based on FOMO. It is liberating to finally realise most people are far more concerned with their own world to give a toss about if you have the right this that or the other. Yes, individuation is potentially lonely and isolating if it goes wrong, but is also potentially rewarding and joyous when it goes right. Many things have their yin and yang. Becoming truly you is one of those things, IMO.

     

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