23 May 2016, 10:57am
personal finance:
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  • Brexit or not – opportunities and hazards?

    In about a month’s time the UK will have a referendum on leaving the EU. I’m not going to spend much time on the merits or not, because the result will be whatever it is. I will observe, however, that you get to know something about your destination if you look at your fellow passengers on the bus. And the passengers on bus Brexit seems to be folk I don’t want to ride with – people who haven’t realised that the sun set on the British Empire a very long time ago and a few random chancers and headbangers from the Tory party. The one thing I do hope and pray for is once the result is known, whatever it may be, we don’t get to do this again for another 40 years 1. I suspect by then it will be a moot point for different reasons.

    The quality of discourse about which way to vote is terrible, largely because so much is inherently unknowable. Osborne stands up and says house prices may fall by 18% if Leave wins. To which I ask myself exactly WTF this is regarded as a bad thing in the first place? Is it really so terrible that some of our young people might actually get to be able to buy a house and some borrow-to-letters get to know the deep joys of negative equity, and secondly, what is Osborne’s confidence interval on this stat? How certain is he of the assumptions behind this ridiculously precise-to-two-figures assertion – the range is probably between -50% and + 25% and he may as well say God knows. The same charge can be levelled against the other side – deciding to leave is a complex and chaotic process that depends on many variables that are inherently unknowable, open to fate and the whims of other people and countries. I’m not clever enough to have an informed opinion, and that probably goes for most 😉 So this is not about the merits of either course of action, and headbangers of either side aren’t welcome in the comments.

    Financial hazards and opportunities

    The choice is between the status quo and something different, and it’s probably fair to say that financial markets in the short term don’t really like ‘something different’ in general. That’s not specifically to decry the putative upsides the Leave camp are making – if they are right these upsides will show up over the five, ten, twenty year timescales. Certainly if one is convinced by the Leave economic case the course of action is to buy UK equities into the post-June whirlwind and sit tight for a few years – a mix of VUKE and some UK small-cap index fund would cover most bases.

    I’m not personally that convinced. There is also the slow run on the pound which is already 25% down from the financial crisis, as a chart of IMF special drawing rights (a basket of foreign currencies to try and average out individual country forex swings) per UK pound shows

    1605-gbpxdr

    Which has no doubt made my ISA look better than perhaps it really is because there is now a fair amount of foreign stuff in it – indeed it is making my Charles Stanley ISA, which is purely a index fund of Dev world ex UK look better than it really is. And since that is over 50% US and I think the US is shockingly overvalued it’s not what I want to do. But sometimes in investing you have to invest in stuff you don’t believe in. The US isn’t a bad place to have a lump in if I am expecting turmoil in the UK and perhaps also Europe more widely. Obviously there’s the potential turmoil of the follically challenged trickster becoming POTUS in November 2, but let’s tackle the nearest fire first, eh. Oh and let’s not forget the Greek crisis and other tribulations. One of these days that damn Euro is going to go titsup…

    Now a run on the pound could be countered in many ways. Buying foreign stuff, indeed buying forex or spreadbetting it. Buying gold isn’t a bad way to go, although I already have a bit too much gold from late last year. But I’m not after optimizing my long term asset allocation. I am looking for a defensive position until after the referendum.

    There are two outcomes I can see. One is that remain wins. My asset allocation is broadly where I want it to be at this stage, and in five years time the referendum will have been a hiccup in the general trend. The only opportunities in this eventuality is if the uncertainly before the referendum makes prices cheaper. I bought some VUKE a couple of times earlier this year, this holding is currently 7% up. Should the turmoil of Brexit send that below par, or close, I am tempted to buy more of that sort of thing. Although a Brexit win will probably hit those firms, they are big fish and 70% of earnings come from overseas they can probably come good over time.

    The other is of course that Leave wins, in which case gold will have been the right way to go because the pound is likely to come under severe pressure for a while. I’m still okay with the FTSE100/VUKE which I think will come good in the end. So, undecisive bastard that I am, I have chosen to do all three. I have switched the cash in my TD ISA with gold ETFs, I have brought forward my monthly purchases of the L&G Dev xUK index fund for the next three months and if FTSE100 starts to tank in the runup to the referendum I have a full year’s worth of ISA allowance to put into Charles Stanley, although I’m not going to use all of it on this. In the end I can’t protect myself against the downside, but I may as well try and lose a little less in the worst case, and if possible profit from the volatility in the best case.

    The FT has a piece on Brexit finance ramifications and a poll tracker as does the Economist. But in the end William Goldman has the edge on all the pundits  – “Nobody knows anything”. He was talking about movies, but it applies just as much to Brexit and its outcomes or not.

    Notes:

    1. in which case it’s highly unlikely to be my problem either way
    2. I don’t necessarily agree with all of the Spectator’s conclusion, but it’s a fun description and one by Americans rather than a slightly more balanced way of saying the same by us effete Europeans, which seems right in something that is essentially an American choice

    “you get to know something about your destination if you look at your fellow passengers on the bus”

    That is of course assuming you are able to get on the bus in the first place, that there is enough room for you to squeeze onto it and for the bus to not break down on the way to it’s destination due to too many people on board and not enough maintenance funding.

    “you get to know something about your destination if you look at your fellow passengers on the bus”

    So elegantly put, hard to better. As you say, you can only prepare for any volatility & it’s just a bonus if it doesn’t happen, but if it does, you make a plan & just do your best at the time. Anyone who thinks you can really do any more than this is deluding themselves.

    These events are an inevitability of life, the only guarantee being changes will always happen. FI is a coping survival mechanism, one of the best tools to help you navigate the rapids. Rather have a good raft, paddle & life vest than be the helpless plankton …. then you can even try & enjoy the ride 🙂

    I agree that “nobody knows anything”, I certainly don’t. But I’ve been asked to give my opinion and it is vexing me that I feel I’m kind of throwing a dart at a board with a blindfold on. So, given that I’m Scottish and I hated what I saw as the small-minded, backward looking and insular attitude of the supporters for Scottish Independence, I have to think that I’ll probably vote to Remain. On the whole, I don’t think stringent nationalism is a good thing. However, if I was to look at the people on that bus, ye Gods, can’t I take a train?

    Brexit…… Up to you brits to decide of course.
    Thoroughly depressing though that the EU is in such a state that people consider leaving at all. I was hoping for more positive campaigning from both sides, but alas, it was not to be.

    Brexit or not, live goes one, and…..

    Yeah ! Last working day today…
    Future, roll on !

    > Last working day today

    Now that is something to lift the spirits on this post. Congratulations – another one makes a break for freedom!

    24 May 2016, 8:53am
    by Neverland

    reply

    Personally I think the EU works pretty well and many of the people thinking of voting for Brexit can’t actually comfortably afford the possible short term consequences

    But if you look at the overpaid, smug members of the Establishment on the Remain bus, I don’t my fellow passengers on there very much either

    The Federal Reserve is meeting a week before the Referendum and a US rate rise has been slated as a growing possibility. Whether it happens or not, that sows sufficient doubt for me to sit on my small cash pot until the dust has settled because I have both significant global and domestic exposure in different elements of my equity investment portfolio. Cash for me seems the safest buffer prior to these two events, because frankly my ability to gamble prior to outcomes just never works.

    http://www.economist.com/blogs/freeexchange/2016/05/fed-ruins-summer

    A wise position. I know I shouldn’t but timing’s worked for me a few times. And the overall shift I’m making is small as part of my portfolio – I’m not going to throw my entire PCLS into into it

    25 May 2016, 10:56am
    by Grumpy Old Paul

    reply

    See the cognitive biases known as ‘Halo Effect’ and ‘Anti-Halo Effect’. Just because the bus passenger seated next to you stinks, that is no justification to disregard her opinion!

    Anyone got any thoughts on preparing for Trump as the next POTUS? For what it’s worth, Paddypower gives the odds as:

    Clinton 4/9
    Trump 2/1
    Sanders 20/1

    I figure it’s pretty much like when the captain of the plane goes “we’re going down” – head between your knees and kiss your backside goodbye. Some things are too big. Although I guess it may bring the S&P back down to earth, and for someone with far too low an allocation the the US I could use that. But you know what they say, “be careful what you wish for. You may just get it”…

    “The choice is between the status quo and something different”: no, that’s quite wrong. The people who voted Yes to the Common Market certainly haven’t been given the status quo: it morphed into something quite different.

    I expect the force of inertia (or, if you like, complacency) to win: in other words, people will be what they suppose is conservative.

    “people who haven’t realised that the sun set on the British Empire a very long time ago”: we obviously live in very different worlds. I’m a good deal older than you, and yet I’ve not met anyone subject to that delusion since the sixties.

    @all the bus analogy clearly didn’t totally go down well, certainly my perception of the leave campaign is that I’d rather prefer not to be in an enclosed space with the protagonists compared with the other lot, though overall I’d like to take my bike and get away from them all 😉 Some of the talk reminds me of the 1970s, and in an unhappy way. But the result will be what it will be. OTOH I get nearly all my news in written form from the web, because I don’t do TV and am not really that keen of video presentation generally. Perhaps they come across better that way, or perhaps I am projecting some of those memories of the 1970s like the Battle of Lewisham on it.

    @dearieme isn’t this a case of the sunk cost fallacy? The choice in June is between what we have at the moment, and yes, an expected course on the current trajectory, ie the current 2016 state of affairs and changing this.. It doesn’t compare with the choice in 1975 vis a vis now, because that’s not on offer. OK, in a narrow sense never in political action do you ever have the choice of an unvarying status quo.

    I detect some hankering back to the halcyon days of Britain’s Imperial past in p15 “We regain our influence in the wider world and become a truly global nation once again”

    26 May 2016, 7:31pm
    by grey gym sock

    reply

    sticking to the investment-related issues … first, i think the long-term economic effects of this decision are a big unknown. on balance, i would have to guess that we’d probably be a bit worse off out, but t
    his is far from certain, and it almost pales into insignificance compared to all the other uncertainties we face when investing. so i’m really just thinking about the short-term effects on the markets.

    i guess that the UK stock market, and the pound, have both fallen a bit because we might vote to leave; and would both fall further if we do vote to leave; or both recover, if we vote to remain. though that is
    all with the caveat “other things being equal” – and they may well not be, as usual.

    i think we _will_ vote to remain. i’ve always assumed this, and the bookies seem to agree, so i’m sticking with my opinion.

    i’m therefore wondering about adding a bit to my UK equities before the vote, on the basis that they are a bit depressed, and will bounce back after a vote to remain. and if i were adding to ex-UK equities, i’d
    be more inclined to postpone that until after the vote, when the pound might (assuming the vote is to remain) be higher.

    to be clear: this is all at the margins, i.e. where i have a bit more money that could be invested. i’m _not_ doing anything more bold, such as switching my ex-UK equities into UK equities before the vote, inte
    nding to switch back after the vote. that tactic would be conly turn out to be bigger.about what will happen in the short-term, but i’m not _that_ confident in these opinions; and even i’m right about how the r
    eferendum will affect the markets, they will also be affected by other, unknown factors – which could easily turn out to be bigger.

    no opinion on how this affects gold – i prefer to steer clear of it altogether.

    I’m with you on that I suspect remain will be the result, and the bookies seem to be of the same view. That may reduce the FTSE index opportunities, perhaps I should put in some necky low limit buy orders orders next month.

    And if this isn’t the clearest reason to get out of gold I don’t know what is. I’ll consider half splitting mine. I know you shouldn’t but… 😉

    Here’s a headline to get you spitting.
    ‘We’re struggling to get by on £200,000 a year’

    It’s the usual story though. Children, public schools and parents who live through their children even as they pass into into adulthood.

    In the 1960s you were expected to be independent of your parents at 16, drifting to 21 when I came of age for university students, and now it seems you are only expected to be financially independent of your parents at 45.

    Let’s hope the daughter gets a decent return on investment for all that shocking public school expense. If they tossed it into investment rather than schooling they might be able to establish a trust fund for her instead 😉

    #PrayForNisha is a hoot, though. So little love for her predicament…

    I thought that in spite of her absurd case, she makes one sharp point.

    She said something to the effect of the rich can afford lots, the poor get everything provided, it’s us in the middle who get stretched to pay for everything. So as long as you accept that the middle stretches from (say) £30k p.a. to £200k p.a., she’s right. There’s no one else to pay all the taxes that an extravagant welfare state demands. There aren’t enough rich, who anyway have sharp accountants, and the poor will argue that they can’t afford to pay, so there’s only the middle left. That seems entirely uncontentious to me: how could it be otherwise?

    Her love for being a spendthrift is a separate point altogether.

    You don’t have to be poor to benefit from free State schooling in the UK, indeed if she is going to pay a shitload of money on schools perhaps she needs to look into moving house to a better school area and place the investment there. She lives in Croydon, FFS. South of the river and where hope goes to die unless you’re Kate Moss. Most of Nisha’s problem lies in the stupendous sense of entitlement that her rugrat is a special snowflake, one of the 7% destined to lord over the rest of us because private schools aren’t necessarily better at teaching the three Rs but they do teach command presence, a sense of entitlement to lead and leadership itself. That’s gonna cost money, the FT makes the case that the customers are now drawn from a global pool, so the bar will drift higher.

    I’ve taken the piss often enough on the feckless poor with their flat screen tellies, but even my heart of darkness can’t agree with this wannabe ingenue’s assertion the poor get everything provided. The instrument of mental torture for the unemployed, the DHSS and its pettifogging sanctions is downright evil because there’s a target on the number of sanctions rather than sanctions for independent reasons. Roll on the universal income and perhaps we can ice all the child related benefits – it’s a lifestyle choice but it should be possible for two people on the universal income, just not necessarily much fun.

    Budgeting isn’t Nisha’s problem, and I don’t think she is a spendthrift as such. Her issue is an irrationally optimistic estimation of the ROI she/her daughter will get for the outlay on private schooling. She’s basically been suckered by the independent school marketing machine and isn’t rich enough to carry the cost. She’s also taken the ‘I’ll do any/everything for my child’ to it’s literal conclusion, there’s a bottomless pit of things you can spend money on to do something for your child, and consumerism is great at pulling the heartstrings to turn a profit.

    The changes is public policy re child benefit are only £1000 according to the FT, that’s not enough to shift the needle on the dial that much in two hundred sods.

    The previously wealthy countries of the industrialised northern hemisphere have lost their competitive advantage through complacency & hubris since almost the entire planet’s surface has now been scoured over for profit.

    This is why their elites are reduced to canibalising their own populations with the corresponding injustices leading to the ever-increasing inequality that used to be directed towards weaker nations in the ‘good times’.

    So as we decline gently into relative genteel poverty, all the losers in the great game are turning on each other now in frustration, chasing nostalgia by turning to populism …..which is what this referendum really is about.

    But that doesn’t solve the real problem, the fact that the social compact has broken down between the elite who rule and the masses who for the most part are reduced to mindless consumers.

    In that planktonic relationship, the average person on the street was supposed to see enough evidence to support the illusion that the special snowflakes they bred would have a better life than themselves, generation after generation….. the first world dream. They’re waking up & smelling the coffee, & even they are beginning to work out that it’s ersatz from Lidl/Aldi, not Waitrose or even Sainsburys…….

    Another top rant, sir 😉 Reminds me of the defining myth of our culture which is starting to look even more sick six years down the line. OTOH Aldi’s ground coffee is okay IMO!

    Yup, you nailed it in that earlier post – that’s why I enjoy your site so much, it’s lonely & hard being a seer in today’s world, so every so often you need the reassurance that you’re not mad. The strategy of our fearless elites’ leadership seems to be arrogantly not to change a thing, no matter the warning signs en route. It reminds me of the Nixon philosophy – if two wrongs don’t make a right, try a third !

    A person could be forgiven for wondering if they are wrong if everyone around them is often of the opposite opinion …..logically you assume the vast majority can’t be mad rather than one individual. Yet herds are easily spooked with irrational fears, so do stampede over cliffs, thus the few sites like yours are a refuge for those who feel they have at least one working eye in the valley of the blind.

    Ok, you got me Sir – full disclosure – I haven’t actually tasted Aldi coffee, but one of Lidl’s that I tried can make a person’s eyes water a bit. 🙂

    After reading a number of finance blogs, but mainly the excellent Monevator, I decided that the best investment strategy for me was to have everything in Vanguard LifeStrategy 80. I realised that I am too much of a worrier and a fiddler by nature to do anything more active. Having carefully considered the risks of possible Brexit I have decided that the best investment strategy for me at present is to have everything in Vanguard LifeStrategy 80.

    But I do hope that the polls are wrong, and that on the day the majority of voters will do the right thing and vote Remain. If they do, of course, I shall have to revert to my old strategy of having everything in Vanguard LifeStrategy 80. Life can get so complicated!

    9 Jun 2016, 9:42am
    by The Rhino

    reply

    after enduring a weekend wedding with everyone banging on about brexit, it struck me that they, along with you in this article, have fallen foul of attribute substitution, i.e. substituted the difficult question ‘what will happen if britain brexits’ with the easy question ‘do i like people who are pro brexit’.

    I don’t think the latter helps much with the former.

    I think the outcomes will be complex, therefore hard/impossible to forecast – and different from one individual to the next.

    therefore, from a stoic perspective, it makes no difference one way or the other. The rational thing for me to do is abstain.

    Even if britain brexits we will still have a government led by and full of key people who are staunchly remain. You’d imagine talking to people that voting to brexit is actually electing UKIP to govern.

    In the long term, it probably makes no difference if we are in or out. We’ve done well in the past without being part of the EU, we’ve done badly in the past without being part of the EU. We’ve done well in the past with being part of the EU and we’ve done badly in the past with being part of the EU.

    in the long run we’re all dead..

    who gives a shit? why worry about the unforecastable?

    Accepted on the attribute substitution, I am not clever enough to have a decent feel within any decent confidence interval of what would happen with an exit – for all I know the land of milk and honey being painted is one possible, outcome. But the referendum, if Brexit, will energise and give more power to people who are pro-Brexit. And I am somewhat pissed off that this particular faction of the Tory party wants to exorcise its demons with my future.

    It’s probably more likely that the referendum will reflect a more general primal scream about living standards. We shall see. On the financial front at the moment it seems the FTSE100 isn’t really going my way as a potential buyer, though I guess there are a couple of weeks yet 😉 At this rate I will end up with Duncurin’s approach by default.

    9 Jun 2016, 2:55pm
    by The Rhino

    reply

    or perhaps too clever in as much as you actually know what you don’t know – I can tell you there weren’t too many of them at last weekends big-do. They knew exactly and categorically what would happen in either event.

    I think you may still get your buying opportunity. Theres a *lot* of poor quality thinking swilling around and that can usually be exploited for financial gain.

    Did you read about the hedge funds funding their own exit polls fractionally prior to other exit polls in order to make a quick buck? ingenious..

     

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