2 Dec 2016, 12:49pm
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  • An accidental tourist in the world of Matched Betting

    A big meme in the UK personal finance scene is matched betting. I was cynical about this for many reasons, but particularly because I assumed that this was arbitraging odds. Capitalism tolerates arbitrage, but you normally have to be very well-heeled to to do it. Your stockmarket platform uses arbitrage, hedge funds to, banks do it all the time, middlemen of all sorts. End consumers, not so much, and punters are are end consumers at the bottom of the food chain. Turns out I was wrong about the arbitrage – although that is one way people make money out of matched betting, the primary way seems to be making money out of freebie signups. Arbing odds seems to be an easy way to run into trouble. Gambling is very lucrative for the bookies, they throw zillions of promotional freebies out there, and you can pick up a few pennies from the firehose of offers to part prospective punters from their money.

    1612_coral

    what an online bookie looks like – Coral in this case

    By betting on both the result and the anti-result you can eliminate the risk of the result and extract some of this free cash. There are many catches – it’s time consuming, you have to prostitute your personal details to many bookies, presumably your bank looks at the string of gambling transactions and won’t even think of advancing you a mortgage. On the plus side it’s a bit of a game, and particularly interesting for me is that it is tax-free. One of the things that holds me back from taking some jobs is the problem of accounting for piddling bits of money. I don’t ever want to work for a salaried job again, but on the other hand although I quite like the idea of hit and run jobs many are small, and paperwork bores me. The taxman doesn’t tax betting income because it’s usually anti-income and people would offset it against tax from real income.

    The fact that a taxpayer has a system by which they place their bets, or that they are sufficiently successful to earn a living by gambling does not make their activities a trade.

    HMRC

    As far as how it works, I’m not going to try and describe that. Too many others who know more about it have done that – take a look at oddsmonkey for how and why.

    Why matched betting isn’t gambling

    The key thing that makes matched betting not the same as gambling is that you back one side and lay the other, so the risk is cancelled out. Screw that up and it’s betting. Ask TFS about the Winner offer 😉 It’s actually TFS who started my foray into this underworld, because he had the cojones to narrate how he had screwed up. Everybody else is saying it’s money for old rope, so my bullshit detector was always going off. Mind you, TFS has a little of the gambler in him anyway, as I’m sure I saw gambling costs as a line item in one of his monthly summaries. And TFS is a fellow who dreamed of becoming a professional gambler. I was about to pollute his comment stream with a cynical comment as to ‘professional gambler, WTF is that?’. But them I thought I ought to really hit up Google in case I was about to display my ignorance, and it turns out that professional gambler is a thing. These are people who do effectively arbitrage odds, theoretically through a superior analysis of the event being betted on. I suspect very Few are chosen from the Many 😉 Matched betting isn’t professional gambling either.

    The weird world of gambling and casinos.

    “The music businessgambling world is a cruel and shallow money trench, a long plastic hallway where thieves and pimps run free, and good men die like dogs. There’s also a negative side.”

    Hunter S Thompson could have been talking about online gambling

    I’ve never been in a betting shop and I hate sports, deeply, on all levels. I just don’t give a damn. The whole betting scene is garish as hell, it’s like a wall-to-wall caricature of Donald Trump in the way it appeals to the inner monkey in us.It’s like going to Las Vegas, you kinda feel a little bit dirty on the inside and outside after you’ve tangled with this sort of trash

    But using Oddsmonkey it’s easy enough to sidestep a lot of that, going straight through to the particular page wanted. I found it was worth paying them the £16 a month simply to shorten the whole process, obviously you need to be making a lot more than that for there to be any point. In the beginning, with signup offers it’s easy to do that, although I suspect making a profit will get a lot harder later on, and at some point it will fall below the can’t be arsed threshold for me, which appears to be higher than for most other people at this. The Ermine is a lazy devil when it comes to pointless makework, which is what this boils down to. There’s also the wider issue that the annual dividends on my ISA are more than I’ll probably extract from matched betting signup offers in a year, and I get that for sitting on my backside and the dividends will keep coming year after year.

    Why it won’t last

    Fundamentally, matched betting is extractive, it creates no value. I presume the bookies are busy working on Bayesian systems to spot customer matched betting patterns, and restricting their accounts. Because of the dreadfully onerous know your customer rules in the UK you can’t just spin up new accounts to dodge that. I’d give matched betting five years tops before it’s stamped out. It’s possible that they make so much money on normal punters they don’t really bother, but the fact that bookies limit some matched better’s accounts indicates they perceive a problem.

    What it could do for you

    If you’re prepared to sit behind your computer most of the evenings and particularly weekends, then you seem to be able to extract about £15,000 p.a. Go look at Early Retirement Guy‘s alter ego, MatchedBettingGuy for a fellow who has hit this hard.

    What it may do for me

    I’ve extracted a couple of hundred. But then I’m lazy, and I don’t really need the money. I confess to a buzz at extracting money from bookies, and it reminds me a little bit of playing computer games – but the last time I did that was in the late 1980s on an Atari 800. I stopped that for the same reason I struggle with MB – it was fun but a pointless waste of time – and I made that call on computer games when I was in my 20s ;). Some part of me despises the valueless waste of my time with matched betting, I’m not improving myself or adding any value to the world doing this. I’ve probably trashed my credit rating for a while, but then one of the delights of being FI is I don’t need to borrow money from anyone. I have no idea of how people continue once they’ve burned through the new customer offers, because getting a decent return from existing customer offers seems really hard work. So maybe an Ermine hit and run on the bookies of Britain will be good for about a thousand pounds in all. Which is worth having I suppose, but I’m very clearly missing something compared to ERG.

    Keep your nose clean and keep this stuff off your main computer

    Remember Hunter s Thompson. This is an ugly industry feeding off human weakness; you don’t want it anywhere near normal life.

    I use a separate gmail account, and a computer booted off a Linux liveCD so it’s new-born every restart. Although I don’t see most ads due to adblock plus I don’t really want the Big G to spam me senseless. And whatever your main bank account is, where your salary and mortgage get paid, well, it would be wise not to use that IMO 😉

     

    2 Nov 2016, 4:37pm
    living intentionally personal finance
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  • Sick of the daily grind but can’t wait for FI? Try a new angle from Andy at Liberate Life

    Many of us in the financial independence/retire early space want to get financial independence because we want freedom from the Man taking over all our time. However, attaining financial independence takes a long time and it’s a tough slog. Retirement Investing Today has reached the finish line in his early forties after nine years of this. RIT even asks himself is he an outlier, I would say he is. I am less of one, but I went three years with no holidays and working hard and spending as little as possible to get out in my early fifties. What you have to go through to get to being able to retire early isn’t fun before, though it is afterwards 😉

    It also concerned me that a lot of the narrative on here isn’t very widely applicable to people starting their working lives now – after all I started work thirty-five years ago. I think Andy has a lot to offer this cohort, because while work has changed, it isn’t all adverse change, and some of his ideas may help play that hand better in the modern world. Andy challenged me in the narrowness of my vision regarding work – his persistence in the face of a curmudgeonly and stuck in it’s-ways Ermine can be seen in this comment thread

    Getting to financial independence is about earning and saving, and it pays to get that right, both in terms of earning as much as you can and saving as much of that as you can, but I’d say that more than half the battle is getting control of your headspace, knowing what you are doing and why. The younger Ermine was called out as a spendthrift wastrel and compared to many in the PF scene he was, although he avoided the general category error that is consumer debt which dooms many to a life of wage-slavery.

    Andy is offering a different take on this. More choices open up when you separate the requirement for independence from financial independence and retirement

    Andy has looked at the financial independence/retire early (FI/RE) scene with fresh eyes, and he observes a lot of independence can be had before financial independence. He is an inspiring example of someone in the FI community who isn’t working in finance 1 in London, but is getting freedom of self-determination and control of how he spends his days. Andy is in his early thirties and lives with his charming wife and two delightful young children in the beautiful surroundings of Devon near Dartmoor.

    Andy from liberate.life with the rolling Devon countryside in the background

    Andy from liberate.life with the rolling Devon countryside in the background

    In particular, he is of the view that many of us miss the point in focusing on the distant goal of financial independence. You can get a lot of independence and a lot of resilience from The Man by looking at working and earning a living in a wider way.

    So I decided to find out more, and visited him down in Devon, on the way to looking at some prehistoric stones on Dartmoor. The rest of this post is an interview with Andy about some of his ideas on life and work.

    An Ermine interview with Andy from Liberate.life on how he separates independence from financial independence.

    The title of Andy’s site says it all – his aim is to liberate life from the limitations of working for The Man on one side, while at the same time not deferring all gratification until he is as grizzled as an Ermine, because his kids will have become adults by then and he’d have missed them growing up.

    Changing your thinking patterns is never easy, and a lot of how we think about money and work was set quite early on. In the interview I ask Andy about his vision of what a good life is, and he talks about how mastery of his destiny is important to him and what he has changed to get closer to that, and his different take on financial independence.

    More ideas from Andy on how to liberate your life

    Andy’s website liberate.life is both about the how and why, but he offers more targeted way to help you make the changes:

    a free email six-part course on how to quit the rat-race in 18 months*

    one on one coaching* on how to become more entrepreneurial, and how to test new business ideas so they show whether they are likely to succeed sooner rather than later.

    Andy can help you liberate your life with his one-on-one course, if you are open to new ways of thinking, and have the talent and drive to make changes. He is open about the scale of the challenge and the rewards. Andy’s approach is to steadfastly challenge limiting beliefs about work and earning, so you can use your ability to add value to other people to the full. Hell, he has even got the grizzled Ermine to think about doing some kind of paid work, just for the fun of it 2

    He’s even more persistent in delivering the message in person. Resistance is futile – the world of work has changed, and agility and lateral thinking in the face of change are what helps get ahead now IMO.

    What did I learn from Andy?

    I should acknowledge I haven’t done his course, but we did talk for a long time. I’m not his target audience because it is too late for me. I had to solve the financial independence conundrum on my own. And yet it’s clear that both my limited history and the nature of leaving the workforce left large regions of limiting beliefs:

    Limiting belief 1: A view that selling is a sleazy occupation and I have never done it and have no place in it

    This is as a result of my limited experience- I have only ever worked for four companies, and three out of the four were very big firms. I was far removed from the front line. Selling is an essential part of making any enterprise work, and my concept of sales and marketing was a combination of Arthur Daley, Spanish boiler-room telephone sales scams and used car vendors.

    Now if I look back at my career I have sold ideas and strategies to people, but if we ignore that as lost along with the career, I then looked at designs and services I have sold to people outside my main job. And discovered that because I had always conceptualised sales as the spoken word, I had ignored sales I had made through the written word – a few thousand pounds on articles (ignored because I have been reading journalists decrying the death of print for years), and also a few pieces of equipment sold because people had chased me down to buy equipment after I have published technical articles on new opportunities and techniques.

    In particular, because outside work I generally influenced through the written and not the spoken word I missed that I had already been selling through widening influence in the way of writing technical articles, even if I did make my customers chase me down and articulate their requirements as a request.  I am clearly of the Ralph Waldo Emerson mousetrap school of thought here 😉 If I wanted to take this further I would carry on in that line, using influence by contributing original articles to special-interest organisations and getting sales from that. I had missed seeing all of this because selling is done verbally in my beliefs. It is theoretically possible that using social media I could expand this, although I don’t have to. I use Google to publicise my articles 3, and by choosing to specialise in niche areas it works for me. I don’t SEO or all that malarkey – write decent stuff about technology I am interested in and choose small pools. Decent writing matters. I’m never going to win the Booker prize, I am wordy and not always focused. But in these small pools I am competing with engineers, not with Shakespeare, JK Rowling or even Dan Brown. ’nuff said.

    Limiting belief 2: Quite serious blind spots regarding working and earning

    These came around because of the way I reached FI, running away from something rather than towards it. You shouldn’t do that generally in life, and I was saved from the boredom that afflicts many who retire to get away by the return of an inquiring mind. That exit left marks from the experience that work hurt a lot at a particular time of weakness, and this was generalised. In fact it was the absence of control that hurt, if I had been in a position to turn round to the boss who tried to shaft me and say

    “Quite frankly, if that’s how you feel then you can f**k right off and stick your performance management where the sun doesn’t shine, if you want to do things in such a stupid way then be my guest and find some other sucker to cover for your failure to look ahead”

    I probably would have felt fine and dandy about the whole thing. Obviously I would then still be working, arguably wasting precious time of my life to earn money I didn’t need so it’s perhaps best that it happened that way.

    So I ended up with the feeling that the whole principle of selling some of my human capital for money ends up as pain, as opposed to the specific example at that specific time did. I inferred the general from the particular, and you shouldn’t really do that from one data point, it’s bad epistemology.

    I am sure there are other limiting beliefs, but I’ll vouch for Andy’s tenacity in hauling those out.

    So there you go, particularly for younger cohorts for whom the journey to FI looks very long and hard. As the man says – Sick of the daily grind but can’t wait for FI? Take a look.

    *Disclosure – Andy contributes to the Ermine’s beer fund for signups through here, but this won’t cost you any extra. I never promote something I don’t see real value in, I scrapped Google Ads from Simple Living In Suffolk years ago when they flashed offers of Wonga et al to unsuspecting readers. Having met him, Andy seems to play a pretty straight bat, judge for yourself.

    Notes:

    1. I have nothing against people working in finance in London. But you’re a breed apart because of the pay levels, and the rest of us need hope and inspiration too 😉
    2. Note: I am interested in the research field and it benefits people I care about. I am not The Returned 😉
    3. this blog is an exception, I don’t really know how people find this, though I am glad you do, and I tip my hat to fellow bloggers who I believe are the main route
    19 Oct 2016, 12:40pm
    personal finance:
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  • Investing in…the State Pension?

    One for early retirees older than 40, really, the known unknowns are too great when you’re younger, but otherwise it could be an offer of an annuity at an unbeatable rate of more than 100%. Try getting that on the open market!

    I’ve never really taken UK State pension into account in my financial planning, for two reasons. One is that it never seemed to be near enough, and I always assumed it was going to be means-tested, and the second is that I have sufficient private pension. I’ve also been contracted out for 2/3 of my working life, which means I would get less anyway.

    Over the 30-40 years of an adult working life, you will go through many fads and phases of the State pension, you will see at least 8 government administrations, well, assuming that the logical conclusion of Brexit isn’t a one-party state at some point. Each of them will fiddle. As a result I filed the SP in the ‘too hard to think about and not very relevant to me’ department.

    Now someone pitching for financial independence and retiring early is likely to have a shortened working life, I had 30 years of proper working, ie rolling up at a place of work and getting paid for my trouble. When I started work you had to have 40 years of working life to earn a full State Pension, elementary arithmetic showed me that leaving university at 21 and retiring on a typical white collar pension scheme retirement age of 60 was going to leave me a little short, and I compounded the issue my taking a year out to do an MSc in the late 1980s 1. As it was there were no other periods of unemployment until my career ended at 52. Fortunately for me they changed the rules in 2006 I think so I only needed 30 years. I was chuffed, because 52-21-1 makes 30 years so I was home and dry.

    Then they changed it again in 2016 so I needed to get 35 years, and now I am SOL because not only am I 5 years short, a sixth of the total, but I was also contracted out and there were dark mutterings that this will cost me a lot. Looks like my original suspicion this will be means-tested on money-grabbed out was right.

    I’d already gone through the pain of getting a national insurance record statement from HMRC, which involved filling in forms and sending them off up North somewhere and waiting an interminable period before a computer printout landed on my doorstep through the post. I read this Torygraph article bitching about how it was all too hard and thought I would actually go read the PDF written by the ex pensions czar Steve Webb, because he always struck me as a sensible sort of fellow except for a brain fart when he invited pensioners to go get a Lamborghini.

    That'll be a nice Lamborghini, and to hell with the money

    That’ll be a nice Lamborghini, and to hell with the money

    He now works for Royal London insurance because ,well, nobody voted Lib Dem in the last election and he was one of them. Turns out he has written a pretty coherent guide, and it appears that the Telegraph was shit-for-brains when they wrote their article, or collectively feeling the after effects of a particularly excessive office party. In particular, their “Topping up your state pension guide” is the dog’s bollocks, written by none other than Steve Webb. I can only presume the Torygraph journos are arts/PPE grads who are scared by  flowcharts ;).

    It’s so good I’ve saved a local copy of it here because when I go through my older posts featuring external links, it is clear that Jakob Nielsen was on the wrong side of history in his 1998 “Fighting Linkrot” article. That’s battle was comprehensively lost, we all know what happened, the good guys lost and were trampled into the ground.

    You can now get your NI and State Pension forecast online

    Something that I learned from Steve was that you can go here

    http://www.tax.service.gov.uk/check-your-state-pension

    and go get your own SP forecast. It helps if you already have a HMRC ID like from self assessment, and you want a copy of your passport nearby, but it went okay for me, and you get much more detail on your NI payment history than the old system. It turns out an Ermine’s NI record, if I had stopped contributing in April last year, is good for a State Pension of  £141 p.w, which is about £7300 a year.

    Now at a SWR of 4% that is effectively a bond portfolio of £182500. It has different risks to a bond portfolio – it has political risk rather than market risk. That’s not so bad if it is part of your portfolio, as opposed to nearly all of your retirement savings, however, because diversification of risk is a good thing. Its nature, however, is well suited to underpinning market risk, and bond investing in boring. I personally hold no bond assets whatsoever, but this is because I have a deferred defined benefit pension due in four years, and this covers the same sort of risk. I also have far, far more equity savings in my ISA than my SIPP, because I don’t want to pay tax on my savings, so I am running that SIPP into the ground ahead of my pension.

    The State Pension offers an early retiree a great annuity rate

    For two possible reasons – if they are an early retiree they probably don’t have 35 years of NI contributions, that’s the whole point of early retirement, and moreover they may have been contracted out. It is the second reason that makes it worth me contributing another three years of NI contributions, because that will wipe out my contracted out deficit, and I will reach the upper ceiling of £155.65 a week, ~£8191 a year. The obvious question here is ‘is it worth it’. That nice fellow Steve has done the dirty work for you here. You can choose to sit on your early retired chuff and pay voluntary Class 3 NI contributions, at ~£730 a year (it depends which years you are buying, I am assuming in my case these are years going forwards, though I could pay a little less to buy out years 2013 and 2014). which buys me ~£207 a year according to Steve.

    A far better way, however, is for an Ermine to be self-employed for three years and to pay his Class 2 ~£150 a year NICS. An ermine obviously doesn’t want to pay tax, so I work at a very low level, nominal minimum wage for 1 day a week. However, I don’t spend a day a week doing that – I hired the magic of PERL to extract the records from a bank account to inject into Quicken for that job, where the previous lot used to type in all the transactions. Because I don’t need to pay PERL any wages, my earning rate goes up from NMW, but I go a lot more part-time to compensate 😉 The pay rate is still pretty piss poor compared to The Firm, but it beats NMW by a long chalk, and I don’t pay tax on it 2  😉

    Now paying £150 to get £207 a year for say 10-20 years 12 years in the future sounds like a bloody good deal to me. I paid my £150 with alacrity and good heart this April for the year 2015/16. Technically Steve Webb is right and I should refuse to pay for 8 years and then pay up all at the end, because for all I know I could cark it tomorrow or sometime in the next 12 years go and do a Jim and go back to work because I miss the metrics and performance management shite so terribly that I need it back in my life. But sod it, I am going to pay my £150 early for peace of mind. And next year and the year after that.

    There aren’t many places you can go buy a deferred to 67 inflation-linked annuity returning 138%. Normally you are looking at 3% and have to have one foot in the grave to get a better rate. Even if you can’t find a way to look self-employed and go the Class 3 NICs route you’re looking at an annuity paying 28%. A top rate, risk and asset-class diversification and backed by Her Majesty’s Government. You owe it to yourself to at least ask the question of whether you can do this 😉

    force majeure

    There’s always going to be the tin-foil hat brigade that say that these promises aren’t worth the steam off their piss and will be repudiated. I am/was one of them, but in the end it’s down to Stephen Covey’s Circle of influence versus circle of concern. Personally I prefer the other statement of the same conundrum –

    For sure, the government may repudiate the State Pension, tax the crap out of it, the buccaneering Brexiteers may destroy the value of the pound so much that a pound buys you half a peanut in 20 years or there may be a war of all against all. Any or all these things may come to pass. I’ve got a lot more chilled than when  I was working, shit happens but not usually all the shit happens. There’s somebody offering me a taxable inflation-linked income of £890*0.8 3 for a one-off cost of £600 spread over four years, and over there there are people offering me the same £891 as an annuity for about £23,000. I’ll take the government up on their kind offer and to hell with the downside. I can afford to lose £600 for those odds.

    Notes:

    1. Looking at my NI record I see that either my younger self bought the extra NI when I went back to work, or for some reason doing an MSc on a Manpower Services Commission grant meant I got NI credits for that year. I didn’t get NI credits while doing my undergraduate degree
    2. because I am careful to only have income below the personal allowance, rather than I am keeping it all in the British Virgin Islands with Mossack Fonseca
    3. 20% tax
    11 Oct 2016, 11:56am
    personal finance rant reflections
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  • to live different you must do different

    The Ermine has been using some of that extra time you get in retirement to go travelling, after a jaunt round Salisbury Plain with the archaeologists working for  military 1 and then on to Dartmoor, when I met up with Andy from liberate.life to talk about the modern workplace. Andy is a driven and hardworking chap so he’s already written the post by the time I get round to writing this, so I will stick with this picture of Haytor on Dartmoor, which is near his neck of the woods.

    a fine rock and worthy fo a moderate scramble to get up to

    a fine rock and worthy of a moderate scramble to get up to

    where we had lunch. Lots of stuff discussed, because he has a different take on the world of work.Very different to mine, particularly how to approach it.

    Occasionally a younger fellow has managed to use their initiative to find out how to contact the Ermine by email, along the general lines of all that work philosophy’s all very well, but how does it apply to me? And it’s saddened me that I’ve never had much of an answer to that. My story is a tale that started in a different era, and while many of the tools of the trade are the same, many things are tougher now, while conversely some specific opportunities are much greater now. After that discussion, perhaps there is a way to mitigate some of the adverse changes, of which more in a future post.

    We humans are storytellers, but we often narrate the story of our lives in other people’s words

    Let’s face it, we call that culture – Romeo and Juliet stand proxy for infatuated lovers even after 400 years. Less inspiringly the Kardashians stand for sucess, and  Donald Trump for alpha maleness, froth and scum float to the top as well as the cream.

    All the world's a stage, and this is one of the 'alpha male' castings. I don't get it either.

    We aren’t fussy about where we get our stories – all the world’s a stage, and this is one of the ‘alpha male’ cast of characters. I don’t get it either, but he does it for a lot of people.

    We borrow from stories and weave the threads into the image of our ideal lives. The story of how work and life fit together comes from many places – it comes from how we saw people do that growing up 2. A lot of it comes from advertising, where clever people tell us stories to try and get us to spend money on things and services. Take a look at Ad Age 3‘s top 15 campaigns of the 21st century, and the way they talk:

    Some of these ad campaigns are here because they changed the way consumers thought about the world around them

    Their words turned into your stories… The lead quote was a corker

    “Historians and archaeologists will one day discover that the ads of our time are the richest and most faithful daily reflections any society ever made of its whole range of activities.”

    Marshall McLuhan

    Your life has been designed, and not particularly by you. Most readers of PF blogs 4 are earning more than the median wage (~£27,000, FTE) – I hazard that this is the point where the fight switches from earning more to spending less, and the spending has a lot of the narrative written by people paid to make you spend more. Sometimes it’s good to see the extreme point to understand yourself – take a look at the phenomena of superyachts, which as PhD researcher Emma Spence has discovered, is basically all about consumerist willy waving writ large. You, dear reader, have to make do with with more house than you need and an iPhone. Nobody needed an iPhone 20 years ago, now everyone is walking around with £500 worth of easily pinched/broken hardware on their person…

    That is one tasteless ugly piece of kit, non? And this is the attractive side. Apparently something to do with Philippe Starck, he of the elegant lemon squeezer. Where’s a Viking longboat or Jonny Ive when you need ’em eh?

    What you consume is often the most egregious version of others writing the script, other parts of life have elements of this. I got to nearly 50 without realising that I actually had agency over how old I was when I retired. I hadn’t realised this was under my control, FFS – I took the age of 60, the normal retirement age at The Firm, and accepted that without bothering any brain cells with asking why this was so.

    Some of the things we can do are constrained by what other people do. The price of housing, for instance, given an endless supply of credit, will tend to find a level where the cost of servicing a loan can be managed by two people working full-time, because that’s what most people in that market are doing. Low interest rates and low inflation won’t help to pay off the loan over a working life, because it makes all the numbers bigger. For some odd reason we think low interest rates make houses more affordable. It just makes them dearer.

    Most people don’t get to financial independence under their own steam. To be different you have to do different.

    Many people’s idea of financial independence is getting the State pension, roughly when they are 67-70. They effectively outsource the job, although whether that gives a decent standard of living very much depends on whether they are paying rent and/or have other sources of non-work income on retirement. That’s the default setting, both in terms of time and in terms of money.

    There are two major areas you can do different to your peers. You can earn more, and you can spend less. The greatest win to be had is, of course, targeting both. Retirement Investing Today is an example of what you can do here. Unfortunately you immediately have a major problem when you want to swim against the tide, and that is that humans are social animals. If you are going to do different then spending less is going to make you look poor to your peer group. And most people just hate that feeling.

    Earning more is the obvious other way to go, then. You need to have the talent and the luck, but even if you have those, you tend to take a hit along the spending axis. This is because your work peer group becomes more spendy as they earn more. In practice the axes of spend less and earn more aren’t orthogonal and mutually independent. There’s probably no real way round it, in the accumulation phase you are likely to look on the poor side to your colleagues. I guess this is what seems to makes it easier for introverts to chase FI  – one of the few cases where this trait is an advantage.

    Not so easy after all. How about spend less? Fight consumerism by targeting the base of the fire.

    1610_advertising

    You’re changing the story there – in this case the story pumped out by the advertisers of what a good life looks like. After all, good ads changed the way consumers thought about the world around them. I presume this was in the direction of spending more and consuming more, because otherwise, what’s the point? I’m quite taken with the poetic description from Brandalism in this piece of agitprop 😉

    Advertising shits in your head – but, first, its torrential, golden flow stains your magazines, your phone, your computer, your newspapers and your streets. Advertising shits all over and dominates our culture. It is a visceral, powerful form of pollution that not only affects our common public and cultural spaces, but also our deeply private intimate spaces. Advertisers want your ‘brain time’ – to shit in your head without your knowledge.

    It’s why I run Adblock Plus and Ghostery, both set to 11 – kill ’em all. Destroying advertising as much as possible makes life simpler and more pleasant. It is a shame that at the inception of the Internet, we failed to craft a decent payment model, so advertising and the surveillance model became the original sin of the Internet, but there we go.

    I don’t have a beef with real people recommending real things they have trialled, it is the automated stuff like Google Ads that is the problem – anonymised mind-spam sold to the highest bidder. A while ago I went to a meeting in Leeds where I discovered how people think about blogvertising. A very few of you 5 will see I have an Amazon box on here – all of those are books I’ve read or things I’ve mentioned on here. I was running Google ads, but never saw them, because that’s what AdBlock Plus does for me 😉 When I realised I was running ads for Wonga and consolidating loans, because that’s what personal finance is about to most people I pulled it. Not because I thought any of my readers were going to be swayed to the dark side and toddle off to their local Money Shop to buy some overpriced money at extortionate rates, but because I didn’t want to be part of the problem.

    There are three non-spending areas that cause a lot of hurt for British consumers below 45

    Consumer spending causes a lot of trouble, because it’s a never-ending tactical battle fought one little piece at a time. But three strategic changes have caused a lot of damage to the personal finances of people starting out now. Let’s take a look at these

    University, and the apparent dearth on non-university alternatives

    When I started university in the late 1970s, fewer than 10% of school leavers entered university. It was much easier to fail exams in those days, because they were norm-referenced. It isn’t entirely clear to me what you have to do to fail exams now, because we have lost the cojones to tell some young people, and more specifically their parents, that they simply aren’t up to the mark academically.

    In itself that’s not so bad, but because so many more people go to university, the old system where the taxpayer fronted the cost in the hope of getting more tax revenue in the future from the higher earnings became unaffordable. Even if everything else were the same, it would cost five times higher proportionally 6 to take 50% of school leavers through university than 10% was in the 1970s.

    When you flood a market with five times the product, you also devalue it. When I started work, having a degree was a serviceable proxy to indicate I was in the upper 10% of academic ability, and for jobs that suit that sort of thing (engineering, science, research, for me) that was relevant. When nearly 50% of people go to university a degree tells you roughly they are of average brightness or above. Knowing someone is average or more is useful, but probably not something you’d pay £60k for over a working life.

    There appears to be no control of numbers going to university in the UK, it’s all about the money, which is a shocking abdication of political will IMO. Contrast this with the situation in Germany where numbers are controlled in some cases. Yes, it goes against the free-market-money-is-all mantra, but it’s also a damn sight cheaper to go to university in Germany. In fact it seems a damn sight cheaper to go to university just about anywhere in the EU other than England and Wales. Shame this option is probably only good for the next couple of years for British wannabe graduates, who are SOL afterwards 7 🙁

    The fundamental problem with university in the UK is the product is getting astronomically expensive at the same time as it is being devalued. University has become an unaffordable luxury. Unlike Germany Britain is also not particularly improving the non-university options, much noise is made of apprenticeships but it is often simply a mask for cheap unskilled labour. The trends in the world of work are running away from unskilled labour. An apprenticeship where the apprentice learns something about a craft is good, but is only good if the craft is likely to remain one done by people in the future at decent rates of pay.

    Housing

    In Britain we used to build social housing but we sold that off to the then council tenants to buy votes. I seem to recall Thatcher expressly forbade allowing councils to use right-to-buy revenues to build more housing. As a result less than a fifth of social housing flogged off cheaply is replaced, I am surprised it’s that high. We used to have credit controls up until 1980-ish but removed those, because the free market always delivers the correct solution, even when it is banks incentivised to lend money to people who have no capital but need to buy an essential good. So we have high house prices and richer banks. It’s not just the banks, anybody with capital, from banks to people who buy up houses and then rent them out to people without any capital at exorbitant rates and no real duty of care to make the joint habitable. So we now have high house prices, richer banks and richer BTL investors. Well, at least somebody is winning I suppose…

    As an example of just how out of touch the government is on this, Gavin Barwell, the Housing Minister, no less, delivers himself of the Marie Antoinette-esque recommendation that people should leave their housing equity to their grandchildren, FFS. That is so deeply fucked up it’s not even wrong. We’ve seen this movie before. When you go and see National Trust stately homes

    concentrating inherited wealth led us to stately homes and a tiny part of the population owning nearly everything

    concentrating inherited wealth led us to stately homes and a tiny part of the population owning nearly everything

    you are looking at what happens in a world where inherited wealth accumulates across the generations, combined with a world where the return on labour was very poor. It took a couple of world wars and a lot of technological progress to break that up. Even then, the aristocracy, sharp blighters that they are, simply requested an inheritance tax exemption on agricultural land, got it, and this is why most of Britain by area  is still in the hands of a few hundred family estates who were gifted the land by William the Conk more than a thousand years ago. Obviously they don’t drive the tractors themselves – they get contract and tenant farmers to do the dirty work, kill our birds, pollute the drinking water, flood our towns and cities and then claim subsidies for the activity for shits and giggles  because they can.

    What should happen IMO is a total escheat of all property on death 8. Those damn grandchildren didn’t work for it, and if they aren’t to get their throats cut by the massed and desperate hordes of people who weren’t born with a silver spoon in their mouths in the accommodation dystopia being created, then the current trajectory of ever-increasing housing costs needs to be shifted. I was able to save enough money through my working life to buy a house from a standing start. That’s getting harder and harder to do as more and more funny money chases property, but no, Gavin and George Osborne, more inherited housing wealth is part of the problem, not the answer. Unless you are actually going to go out and kill all the poor people who are dirtying up your nice world.

    The world of work is changing

    The accelerating trends in automation and globalisation, are part of a general shift of power from labour to capital that has been going on for the last 20 years. In a double whammy for poorer First World residents, globalisation is amplifying the shift of low-skilled jobs that can be moved to cheaper labour forces. While this is undoubtedly good for business and capital, if you were part of that unskilled labour force in the UK you get so see your jobs go. The last 20 years have seen a tremendous fall in poverty and inequality, but that’s worldwide. Let’s hear it from Tim Worstall – right-wing nutjob and apologist for unfettered free-marketology sans compassion for poor saps less clever than he is, riffing off this paper written by Ayn Rand Chari and Penlan. Take it away, Tim:

    According to a World Bank Study, in the three decades between 1981 and 2010, the rate of extreme poverty in the developing world (subsisting on less than $1.25 per day) has gone down from more than one out of every two citizens to roughly one out of every five, all while the population of the developing world increased by 59 percent.8 This reduction in extreme poverty represents the single greatest decrease in material human deprivation in history.

    That’s a pretty good outcome from an economic policy and it’s why I support the process of globalization quite as much as I do. Absolute poverty, that peasant destitution, is something I regard as an abhorrence. Killing it off through economic growth I thus regard as not just desirable but a moral duty.

    OK, but there’s a problem with this, as the paper points out. For some policies will be good for one set of poor people, those absolutely poor out in the Great Big World, yet bad for another set of the poor, those who are the poor in the already rich societies. And this globalization and free trade mixture is exactly one of those policies that has this effect. Rising inequality in the rich nations is a logical result of adding those couple of billion low wage workers to the global economy. We could predict it would happen, theory tells us it should happen and it has happened: no one should be surprised about that.

    I’ve made clear around here a number of times that I both understand this point and also think that it’s a perfectly fair price to be paying. Yes, of course, that’s easy enough for me to say as I’ve not got to pay it. […] But that the relatively lowly paid in the rich countries stand still for a bit while the absolutely poor of the world climb the economic ladder to the joys of three squares a day, yes, I think that a price well worth us all paying.

    Delightfully technocratic, Tim, and for all I know you’re right, it is indeed tough to fault the logic from a strictly rational/intellectual POV, the reason I can be sanguine about it is that while not as rich as Tim I am still on the right side of that inequality divide. You’re a clever cookie, Tim, the the sleight of hand is that price well worth us all paying. Seems a bit rough that it is just the poor who get to pay the price, Tim, might have been a bit more helpful if you’d like to chip in and  help out. As it is you only have to weep crocodile tears and wring your hands, because that’s conveniently precluded by the Ayn Randian logic. The UK poor aren’t standing still, they are going backwards – unskilled jobs are shit and getting shittier, for the simple reason that the value of unskilled work is falling. The second part of Tim’s article is a load of rationalising about why you can’t do ‘owt about that because if you redistribute towards your locally poor you shaft the globally poor- to wit

    It’s entirely possible that we could have some policy or other that makes our own, rich world , poor better off. But which at the same time makes the absolutely poor of the world worse off. And if we did have such a policy, and we were also concerned about the poor, then we shouldn’t have that policy. Even though it benefits our poor they’re not in fact all of the poor. And given where our poor are in the global income distribution then they’re almost certainly not the poor that we should be worrying about.

    He uses the specific examples of agricultural subsidies 9 in the US to show how this works, and the EU has its own version of this. 10 I can’t fault his logic, but I would pay money to watch him try and develop that line of thinking with some of the people in the UK who have been at the losing end on globalisation. A government isn’t voted in by the people of the world, but by the people of a specific area. The Brexit vote was an example of regional pushback. Trump is another. Poor people find it deeply offensive when rich people tell them their standard of living has to fall to help some bunch of poorer people elsewhere while the rich swan off and don’t take any hit themselves.

    This process of requiring more skills is drifting up towards what used to be known as middle class jobs, because it’s now automation that is coming for some of those jobs. When I considered learning something about accounting to become more competent and doing the books for a business, I came to the conclusion, supported widely in the comments, that it wouldn’t make sense to invest in training for something that is likely to disappear or be outsourceable. This is a microcosm of the wider ‘should I invest in university problem’, which is part of the topic of Poppy Noor’s little rant here, though I do think she needs a dose of  ‘if you want to live free, your utopia is irrelevant‘ to get her to be effective about changing her lot in life rather than be right about how it isn’t right.

    Being right about how things aren’t right makes for a deep and satisfying rant, but the chat with Andy on Haytor left me wondering how a 25 year younger Ermine would tackle the changed world. It would need to be different from the way that served me okay.

     

    Notes:

    1. It’s seriously unwise to go for a looky-loo on that bit of Salisbury Plain without the military’s help 😉
    2. which of course puts it about 30 years behind the times we actually try to live it in
    3. I am tickled that they don’t like people using ad-blockers. Reconnaissance behind enemy lines is always a tough game
    4. This is a total guess, but you’re not going to be worrying about financial independence and retiring early much lower down the scale. You’ll be worrying about making next month’s rent
    5. those that aren’t running adblockers, and if not, why not?
    6. I am making the handwaving assumption that the increase in population is roughly tracked by the increase in taxpayers
    7. It wasn’t me wot did it despite being an old git, I was a Remainer
    8. I’d generalise that further but the great thing about land is you can’t hide it in overseas tax havens
    9. Agricultural subsides subsidise the rich landowners in the UK, I don’t know enough about the US situation to know if it’s different, though I’d say CAFOs, and subsidised high-fructose corn syrup are indicative of a different sort of pathology than consumers sponsoring the aristocracy
    10. One of the tragedies of Brexit is that a big potential win from it, canning agricultural subsides, was nixed early on
    27 Sep 2016, 12:27pm
    living intentionally personal finance:
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    36 comments

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  • Archives

  • Earning and working are different things in a post FI world

    Before they are financially independent, most people work to earn the money to buy the stuff they need and want, it’s how 21st century capitalism is meant to work at the moment. It gives rise to the term ‘work’ – something that you have to do otherwise bad shit happens, like you end up with all your stuff thrown out on the pavement.

    1609_evicted

    Because it’s something you have to do for many years, many of us get Stockholm syndrome with work. Inveterate story-tellers that humans are, we tell ourselves that work is innately a Good thing and lends meaning to our lives. Let’s take a fine example of this from someone who I’m generally in agreement with, other than in this aspect of life:

    But I believe almost everyone will benefit from having an ongoing economic relationship with society while they can – even if only for a day or two a week.

    Monevator

    I’m the poster child for disputing this paradigm. I consider it a limiting belief, and have taken pot-shots at the Calvinist work ethic every so often on here. The beauty of financial independence, however, is that you get to have the choice of whether to work or not. Over at SHMD, Jim has decided that he missed work, so he went and got himself a job, even though he doesn’t need the money.

    Now I have never missed work, ever since I handed in the tools of an office-worker’s trade way back in June 2012. There is, however, a general psychological principle

    Everything that irritates us about others can lead us to an understanding of ourselves

    Carl Jung, MDR

    I would generalise that to everything that irritates us… I don’t think it’s particularly personal in this case. If Monevator and Jim and 99% of the rest of the FI world want to work till they drop, good luck to them. It’s just the concept that work is an inherent good that gets my goat. As a society, we are going to have very serious trouble and mental distress with this meme if the robots and globalisation really do take half our professional jobs in the coming years, unless we have a social revolution that probably involves bending some of the axioms currently underpinning society. Hopefully one of them will be work = meaning 😉

    I realize today that nothing in the world is more distasteful to a man than to take the path that leads to himself.

    Hermann Hesse , Demian

    In order to live intentionally, therefore, I need to separate the beliefs coloured by past experience from my current experience, and my temperament had the past experiences not happened. Otherwise I will live in an imaginary prison, boundaries that once had value but have no more.

    What does the word Work mean to me

    It means a lack of freedom, it means grind, it means being trapped. It means earning money, it means selling my time for money, it means restrictions on my time. It means doing stupid shit like justifying my existence, it means filling in time sheets that have no bearing on reality, paperwork just because. Because humans are devils with their recency bias, this litany of woe is because the most recent experience was largely negative. But for 27 years out of my 30 it also meant the opportunity to travel, to do good interesting stuff and to build capital across my working life as I slowly exchanged human capital for financial and social capital. If I were to allocate the experience of my years evenly, then only 10% were bad, maybe 12% if I add in the six months I was unemployed between graduating into Thatcher’s first recession in the 1980s and starting work.

    So it’s easy to see the limiting belief. Work = pain, and I need get as far away from that as possible. Even in 2009 I intellectually knew that was an extreme view, but one that because of where I was in my working life I could get away with. The power of the intensity of feeling galvanised me to clobber wasteful spend and save and take the necessary risks with extreme prejudice, and reach FI 8 years early.

    What I did not realise was that simplification also distorts

    and it is the distortion that clouds much of my thinking when it comes to the topic of making money

    I think the word ‘work’ has picked up some unnecessary bad connotations […], especially as we’ve transitioned out of the years when ‘the recipe’ (grammar school -> degree -> job for 40 years -> pay your dues -> final salary pension scheme) still worked.

    liberate.life in this comment on here

    I was that grammar school guy, son of a maintenance fitter, who went to university, got a degree, then worked only four real jobs 1, have a final salary pension scheme. It worked for me. I was able to retire early because I saved roughly half the notional capital behind my FSP, but having the FSP effectively gives me a massive bond-like holding, which means my risk tolerance with stock market investments is insane, because the FSP will keep the wolf from my door.

    Liberate.life is the counterfactual to my experience – younger and more dynamic, but electronics engineering is the field the younger Ermine worked in. And yet he is yin to my yang – he can sell, and freelances, and as I read this it looks like the antithesis of everything I know about work. It’s like looking in the mirror and seeing half the image right way up and half of the reflection upside down. I’m damned if I know which half is off but I suspect it’s mine 😉

    So it was time to investigate the subject of work and money deeper. For a long time the obvious issue, that I associate work with pain, simplified things too much

    I associate specialisation with success with work

    For 25 years I was working in a big company, and in a big company hierarchy. Big companies tend to narrow people down into specialisms in engineering, because they have enough people that they can do that. I pursued some technical interests after leaving work, and have some of this on a blog, when I read it back it is a whole load of random bits and pieces on all sorts of subjects as I flit from one are of interest to another. Mine is worse on that front than your typical engineer’s blog, they at least tend to have a reasonable common thread for a few posts. As someone who is financially independent I can afford to pursue my whims, but if I were looking for staff and I saw that sort of character, I would think Jack of all trades and master of none, and file the CV in the round filing cabinet on the floor.

    I haven’t even stayed with electronics and software, a few weeks ago I offered to fix a generator on a no fix no fee basis. I was pretty sure that Google was going to be my friend, the world is full of Honda GX small single cylinder 4-stroke petrol engines and Google is full of people who are describing faults and getting hints on how to fix them. The fault was the engine would run for about 20 seconds and the die. Google told me this was likely a blocked breather vent in the fuel cap, which I confirmed by unscrewing the fuel cap as the engine was about to conk out. Whereupon it ran fine 2 😉

    TFS identified this sort of mentality as a ‘scanner’ but twenty-five years of working in big companies has taught me to identify it as ‘dilettante’. Apparently it is more tolerated in today’s world of work, a kinder term for that sort is multipotentialite. It is more tuned to today’s world in some ways, because better communications means provided you can search well, you can gain the benefits of other people’s experiences by covering masses of ground. You just couldn’t do that before the Web, you couldn’t find enough different people to talk to, and it would have taken ages anyway. Multiple tabs were made for that sort of approach to finding stuff out – cover masses of ground, fast.

    lots of tabs is the way to search - untill you run low on memory

    lots of tabs is the way to search – until you run low on memory

    So I have uncovered some unhelpful associations, and indeed at some level I despise that generalist tendency because for 25 years that wasn’t how to have success at work. It is possible I played against type for a quarter of a century because I prized security and stability and did not know how to manage money over more than a monthly basis. I always needed an answer to the Micawber question, and a regular income made that possible. I struggled with that while running several years from savings, in hindsight I didn’t spend enough. The generalist tendency occasionally caused me grief at work and probably slowed my rise up the greasy pole, on the other hand even in a big company you need people who can cross domains. It tended to work well in good times but be awkward in bad times.

    But since I have the drains up I may as well keep on digging at these unvoiced assumptions…

     I associate a steady stream with income – I am virtually blind to feeling uneven income is income

    I can’t really relate to income that comes in unevenly in dribs and drabs, because for 30 years income arrived in roughly the same amount each month, apart from overtime (in the early days) and bonuses (in the last couple of decades). It’s still a little bit of a mystery to me how a string of lousy £50 here, £100 there dividends in my ISA adds up to a good few thousands of pounds of income when rolled up over the year. I was able to jump over the uneven lumps ≠ income in the ISA because there are so many of these minor transactions I can think of this statistically. Many people work really hard to make their dividend income spread evenly across the year, this sort of happened naturally for me, although slightly peaking in Q1 and Q3. You can have 20 companies working for you in a HYP, but I would defy anybody to work 20 part-time jobs or even have 20 streams of income, that sort of diversification is hard to have with many income streams.

    At a gut level I don’t really consider the sort of hit and run one-off jobs like the generator as income. For sure, Quicken adds them up for me so I can declare this, as long as I keep my pension + earnings below the personal allowance I am chilled. Last year I was able to toss a lot more than the usual £3600 in my SIPP because these things added up to a fair bit more than that. But it doesn’t feel like income, because it is unreliable and lumpy.

    I associate earning money with work

    and worse than that, I associate earning money with selling my time for money. So these one-off jobs don’t feel like work which is good, but they don’t feel like earning money either, which is bad. I don’t trust them, so I just bung the result into SIPP and live off the steady income from the SIPP, because I can’t budget with variable lumpy amounts. By a curious twist of fate a retiree older than 55 can put all their earnings into a SIPP in one year and get it bumped up by 20% to extract the next year, provided they don’t draw more than the personal allowance. I’ve only got another few years worth of that before my main pension shoves me well into the normal tax bracket, but I may as well enjoy the windfall while it’s there.

    And yet together with the income from the ISA these odd jobs will start to add up to about the national minimum wage. It was not so long ago that I was chuffed that the dividend income from the ISA matched what I would have got from jumping through the hoops to get JSA (£71p.w so ~ 3700 p.a.) and yet the rate of increase of the ISA income per year is creeping up 3. I don’t draw an income from the ISA because I don’t need to – I want to pump that up as much as I can before I enter the regular BR tax bracket in a few years, since it is tax-free income.

    I have lived in a big-company bubble for 25 years and it has limited my vision

    I owe liberate.life some beers for widening my search. Because the similarities of the engineering skillset (naturally separated by 25 years or so due to the age difference) and yet pretty much everything else looking like a counterfactual, he’s shown me a set of limiting beliefs I was unaware of. More surprisingly to me, they aren’t particularly due to the trauma of the nutty performance management usage and abusage I took in 2009. That does exist, and has it’s own consequences. The idea of following Jim SHMD’s path and selling my time to an employer to draw a salary brings me out in hives. I’m not gonna go there, and I don’t need to.

    But unassociated with that, my concept of making money was massively narrowed by my experience of working life, the unchallenged assumptions of that grammar school kid who followed the default track. Now that I am grizzled of fur and sufficiently past the finish line that I have options all the way up to and including doing nothing, I can zoom out and ask myself the question – is there a better way?

    Perhaps I should turn the telescope round and ask myself what do I want out of earning money. I have identified a project where I could use a bit more money. It doesn’t directly change my own lifestyle, so my greatest fear of earning more through selling my skills doesn’t apply – that fear is that I would earn money, inflate my lifestyle with Consumer Crap™, get locked into it and lose the delightful freedom of FI. I am happy with what I will have, my lifestyle will inflate somewhat anyway as my income increases once my main pension starts. I don’t need to earn more money to raise my lifestyle. Although once I believed that I screwed up discharging my mortgage early which meant I took an income suckout for the last four years, now I am on the other side I’m not so sure that I regret taking the suckout over the convalescence period. but that’s easy to say from the other side of the mountain. I got a significant ‘pay rise’ this when my DC pension started in June and will get a massive ‘pay rise’ when my non-deferred pension starts in a few years. Breaking the link between making money and my own lifestyle gives me detachment which can distance me from the suffering normally associated with ‘work’.  It is one aspect of the freedom to that financial independence is about, once you have spent the time integrating the freedom from.

    So what do I want from off-piste opportunities to make money?

    It is a subset of asking

    I think I would feel truly fulfilled if I spent most of my days…

    a subset for the simple reason that I have command of my time, being FI. I will do other things that fulfil me, this does not need to replace my use of time, but it needs to add, or at the very least not take away.

    1. I want to earn through doing something that is congenial
    2. and interesting
    3. has some originality or novelty
    4. creative in some way 4
    5. with decent people who aren’t dickheads in general 5.
    6. that helps people or causes that I know or care about personally
    7. that is specifically something I bring to the party from skills, temperament or talent if any
    8. I want to spend less than a day a week on this, but I favour that being in all-or-nothing chunks with long gaps in between. Part of this is that I am limited by the tax system, I don’t want to work for the government 20-40% of my time. I have done my share of that over the last 30 years.
    9. I don’t what to sell my time for money. Obviously doing something creative takes time, but I don’t want it in the form of billable hours, more billable results
    10. I don’t want to ever see performance management. An engineer’s work speaks for itself, should that be the field I use
    11. I don’t want regular or ongoing time commitments. Hit and run jobs are what I  want, get in, do, then get out
    12. I don’t want to carry a smartphone all the time
    13. I am happy with no fix no fee and no guarantee of regular work – but if you aren’t there regularly for me there’s no guarantee I will be there for you 😉 and yes, that is sort of at odds with 9
    14. I prefer to sell Mind, not Stuff. Stuff gives warehousing and cashflow problems, and regulation is a bitch. It’s not hard and fast though.
    15. I do not want to be derivative or routine. I don’t want to be a replaceable work unit. No chuntering out ebooks or matched betting which seem common fave side hustles in the PF scene. I am rich enough not to have to do this, and old enough to know my time is limited.
    16. no franchising, if I am not original enough to make a decent return then I will just walk away

    and if I do do this, I want to earn a lot more than the minimum wage for the time I do spend on it. Unless it really is so much fun that I don’t mind, but I’m not building that assumption in from the off. I am not volunteering. I don’t do that, particularly the sort of staffing job. I have done one-off data analysis and design stuff for the RSPB, but not under the usual volunteer x hours a week, it was task-oriented.

    Unfortunately the logical conclusion is freelancing or contracting. I have no experience of that at all, zero track record, no domain knowledge, I am an introvert and can’t sell. So I have never done this in a big way although I did have a multimedia/web design company on the side in the early days of the WWW mid 90s to early 2000s. But selling was my weak point and when the major customer changed technology I folded the company. I read this and think ‘bloody hell, I can’t do any of that’.

    Not only that, but it appears that small companies are where the most likely chances of success are. I have worked for a small company, a 10-15 man band, but it was at the very beginning of my career 34 years ago. Small companies are like the past – they are a foreign country; they do things differently there.

    The Ermin place of work at my first company. The duff sensor heads are lined up on the back wall. I don't have a good explanation for the can of wifebeater on the bench, perhaps were were celebrating a big Egypt order. 'elf 'n'safety would shut this joint down i na jiffy. We used to wash PCBs in boiling Arklone, a CFC with the instruction 'don't fall down, else you'll stay down'. The vapour was heavier than air.

    The Ermine place of work at my first company. The duff sensor heads are lined up on the back wall. I don’t have a good explanation for the can of wifebeater on the bench, perhaps we were celebrating a big Egypt order that came in around this time. ‘Elf ‘n’safety would shut this joint down in a jiffy nowadays. We used to wash PCBs in an open tank of boiling Arklone, a CFC with the instruction ‘don’t fall down, else you’ll stay down’. The vapour was heavier than air.

    I had some bizarre engineering experiences in small firms, two stick in my mind. In my first company, the design engineer swore blind that a virtual earth amplifier had a high input impedance. Now at 22 I didn’t know a lot, particularly when to keep schtum and STFU, and I had been testing these blasted things which used to want to take off and oscillate more often than not. That’s bad in an optical sensor. But I did know that a virtual earth was a low impedance input. So when there was much head scratching in a meeting as to why we have more duds than good ‘uns I go and pipe up “but a virtual earth is a low impedance – the clue is in the name”. I was dead right, and the clue is indeed in the name, but there was a deathly silence and the assembled multitude digested the unwelcome fact that the lead designer had goofed, as pointed out by the rawest recruit. Seemed a good idea to move on from there after a year…

    The second was when I was the lead engineer on a project at The Firm, and we had contracted some clever fellows in the Cambridge Fens. These guys had minds like planets, and I had told them the average TV sound in expected typical audio levels of 0.7Vrms. For some reason they decided they only needed a peak to peak level of 1V, sadly convention has it that the peak to peak amplitude in this case is 0.7×(2×√2) or nearly 2V. The passage of time had gentled the Ermine’s needle-sharp teeth and I had learned that it pays to nudge people to coming to the conclusion that perhaps a mistake had crept in somewhere. But I confess I had to look it up in a textbook after a meeting where one of these guys a lot brighter than me was declaiming that the signal was entirely correctly 1V, he really believed that. They were awesome at digital stuff, could pull their set-top box code apart and have it have it changed in a few hours. In a bigger company somebody else would have been in charge of all that fuzzy analogue stuff and this challenge to basic engineering fundamentals wouldn’t have happened, particularly in front of the customer 😉 Small companies have much more of a heady mix of absolute brilliance and the occasional absence of fundamentals, in my limited experience of them.

    For many reasons I would be a fish out of water trying to apply what’s left of my skills in this different world. I have no knowledge of the terrain, and I don’t know if my passport is good for the country. To my advantage I don’t have to succeed, though of course that may work against me too, perhaps I will not have sufficient fire. It’s not looking good, but I have one key advantage. I am not desperate – I am financially independent. Even at the moment the amount in my current account slowly creeps up month on month and I need to toss it into the Nationwide every so often to win 5%. As a result my risk profile is very different from normal, I can screw up a few times and let it go.

    There are other odd wrinkles, take this perfectly reasonable recommendation

    To free yourself from the grind, be defined by your strengths

    I can see that might work when each piece of work is won anew, ie there is no history, it’s obvious to play to your strengths. But in my career I achieved many wins by fighting down weaknesses – it is this which turned an introverted young Ermine into someone who could speak in public and lead international teams. Even in the specific realm of personal finance I had to fight down the common get rich quick belief that trading is the way to make money with stocks, and come to understand that the noisiness of the information, the abnormally high likelihood of infrequent outliers and the high frictional costs mean that often the less you do 6 the better your long-term performance.

    So there are many hurdles and mindset-shifts before I could turn freelancing for small companies into something workable. And surprisingly, none of them are particularly associated with the issues that finished my big company career. Why consider this route? Because the one thing I know I don’t want to do again is a regular job. I don’t have the time, there are all sorts of bad associations, and it’s not what I want to do with my life. Because that was the only way I knew of making money, I accepted I was never going to make money from my human capital again.

    People have occasionally challenged that assumption. But it took time for the noise and hum from the crash-landing of my career to die down, and for me to see an opportunity that wouldn’t lock me into a consumption lifestyle, so that I could see the remaining limiting beliefs. Whether it will amount to aught is unknown at the moment.

    Andy’s liberate.life is a different take on financial independence, with less emphasis on the financial and more on the independence

    In the personal finance sphere our weapon of choice is  of course personal finance, it is the Law of the Instrument. If all you have is a hammer, everything looks like a nail. It’s written in the term financial independence, hell, what other sort is there? Well, given the assumption we are talking about living in a First world consumer economy in the 21st century, that is.

    We are aiming to save enough money to not have to work. RIT is the poster child for doing this relatively young, but his journey to FI was a pretty harsh ride. I’ve never earned anywhere near the amount of money I guess RIT earns, but I’ve never taken that sort of punishing schedule for years on end either. In my case, because I was naturally closer to the end of my working life, I could get away with focusing on the financial route to independence. You can become more independent, in terms of choice on how you spend your time, without becoming financially independent. The model I and most people follow, working for a company to get nearly all your income, is one of the least independent ways to get the financial capital you need to live life in a Western consumer economy.

    Andy at liberate.life is a new kid on the PF block. Although it doesn’t apply to me, he challenges the principle that financial independence is an indivisible unit. His site is well worth a look if you are in this position

    You made it! You’re financially comfortable. Your car is new enough to not break down all the time. You live in a nice house. If you have kids, they’re well dressed. People hold you in high regard and by society’s standards, you are a success.

    So why the hell does your life feel like such a grind? At one point, you were young and full of optimism but now you just follow the routine, day in, day out. You don’t have any passion for what you do any more. You do it because you have to. You’ve got bills to pay.  You can’t see a way out of this before the sweet release of retirement at 60-something… and then you’ll be too old and worn out to live out the dreams you’ve always had anyway.

    Now since I am not a million years off 60 I would dispute

    and then you’ll be too old and worn out to live out the dreams you’ve always had anyway.

    Bollocks to that, mate, remember that statistically happiness is U-shaped across the life cycle in many Western societies, so some of this is part of the human condition. But that proviso aside, he’s offering a freebie course in how to get FI 7, and if you want to pick his brains specifically 1:1 interactivity is there if you pay him for his time.

    In many ways getting to FI is a matter of asking the right questions as much as finding the right answers. The right questions can lift limiting beliefs into the light of conciousness. You don’t have to fight limiting beliefs if you don’t want to or need to. I’m not going to bother fighting the belief that working for an employer has become a soul-destroying issue of gamesmanship and playing the game with meaningless metrics that strip out the joy of solving problems sometimes otherwise known as work, because I don’t need to. It’s probably not universally true, even for me now.

    But now I have found a potential application for deploying the residual vestiges of human capital I may still have which won’t lock me into lifestyle inflation and consumer crap, it is worth challenging some of the limiting beliefs about making money other than just using my financial capital. And without a doubt, Andy helped me ask some of those questions, and I have found that the default answers were often wrong, inconsistent and incomplete.

    So if you feel you have made it but want a way out go read some of his work, if only to ask yourself some awkward questions. You may not like the answers but they can serve you well.

    Notes:

    1. excluding casual crap before leaving university – kitchen portering, repairing radios and TVs and odd-jobbing
    2. Obviously you shouldn’t run an engine with the fuel cap open because petrol vapour is inflammable and invisible so don’t try this at home.
    3. in fairness that was written nearly six years ago when the best you could put into an ISA was about 10k p.a. Some of the win in getting to three times that was the fact Osborne turbocharged this to time and a half, the time honoured magic of Saving Hard at work rather than any particulalry sharp investing chops
    4. it doesn’t have to be engineering – for the past few years I have been makingsome money from photography and from sound recording. But trends in the wider economy are running away from those sorts of things
    5. Everybody s a dickhead sometimes, it’s part of the human condition, and that’s OK. Persistent dickheadery is what I want to avoid
    6. inaction on its own is not enough although Robert Kirby’s The Coffee Can Portfolio made a good case it was, inaction is necessary but not sufficient IMO
    7. for the sake of full disclosure I have done neither
    19 Aug 2016, 7:40pm
    personal finance
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  • Telegraph to wannabe FI/RE new parents – you must be kidding!

    The Telegraph’s Money Makeover is a rich seam of entertainment for a grizzled mustelid observing the triumph of hope over experience in the human condition. It seems to be an endless tribute to wannabe buy-to-letters wanting to retire on a woefully small portfolio, thirty-somethings with a tenuous understanding of just how much money you need to have to retire before midlife and the oddball doctor with a massive salary, none of which ever seemed to stick to the sides. I could generalise many of the tribulations as “if you are asking whether Buy-to-Let will solve all your problems, the fact you are asking the question tells you the answer is no”. As a respite from this folly, this week we have a paragon of financial rectitude who is debt-free by 37, but there’s still no pot of gold at the end of his rainbow.

    Consider this plangent photo of domestic bliss and unachievable dreams, a comely couple and two preschool rugrats with their associated plastic paraphernalia.

    with two young sons, JM wants to retire as soon as possible to spend more time at home.

    with two young sons, JM wants to retire as soon as possible to spend more time at home.

    Our man has done an awful lot of things right in the search for early retirement. He appears debt-free in the true sense – paid down his mortgage on a Cambridge semi at £300k, which is a very respectable achievement at 37 1. But he’s done two things wrong for his dreams of early retirement, and they’re in the foreground of the picture.

    I’m not saying that having children means you can’t retire early, but JM has a fairly pedestrian job for early retirement ambitions, and kids will seriously hamper his ability to reduce his outgoings, which is the other route to early retirement – being able to sustainably reduce your spend. Which is pretty much what the Torygraph had to say to him. To wit:

    JM is doing well in retirement provision but the challenge for him will be getting enough funds to enable him to retire early and provide for his family.

    followed by the coup-de-grace

    I would sound a note of caution, as one parent to another: children tend to get more expensive as they get older. 

    The other lot aren’t that much more encouraging

    Mr Massey’s primary goal of retiring early to spend more time with his family is unrealistic given his current financial planning route.

    and

    should concentrate the bulk of his pension savings into shares-based investments as, realistically, retirement is at least 18 years away.

    A quick tappety tap on the Ermine abacus tells me that 37+18=55. As for spending more time with the fruit of his loins, in 18 years time they will have just come of age. He’s not gonna do it before then  unless he does something very different.  Having children is going to be a big project for anybody- if we say JM is exceptionally frugal and gets his two for the £230,000 they say it costs to raise one child, then clearly in 20 years time his pension pot will be down that much 2, or at a 4% SWR down about £9000 p.a.. That’s not the sort of thing that early retirement dreams are made of. Of course some people with children  can retire early. But you’ll usually find they were in a different class of earnings to JM – The Escape Artist for instance, worked in the City. He probably earned a little bit more than JM, who doesn’t even pay higher-rate tax, which makes paying a fixed sum into a SIPP much less painful than for basic rate taxpayers.

    There are other minor aspects of JM’s carry-on which could make it less of a stretch. Let us take this oxymoronic statement

    He takes risks where he understands them and has £17,000 in a stocks and shares Isa invested in Greggs, BP, Poundland and Tesco – companies he is “familiar with”.

    Mr Massey is satisfied with his investments so far, although Tesco has delivered some losses.

    He said: “Everyone always goes to Tesco – I thought how could the shares fall? Well, they did.”

    JM, you got frickin’ soaked on Tesco. I’m not particularly having a larf, so did I. I didn’t buy them from a careful consideration of the company, but figured if I paid less than Warren Buffet I would be okay. Turns out this was one of the few occasions when WB didn’t know what he was doing. So I got soaked too. I didn’t understand the risk, and nor did you. The big difference between us, bud, is that Tesco is less than 1% of my portfolio, whereas it’s probably more than a fifth of yours. I also realised within three years of starting along the high yield portfolio route that the global imbalance 3 was probably hazardous to my long-term wealth and started to shore it up all round with diversifying index funds, focusing on ex-UK to specifically fight that bias. So go do yourself a favour and listen to Lars Krojer and sharpen up your act. Once my contributory investing career is over 4 I may choose to listen to Lars, so save myself a hunk of time I could be spending on more interesting things to do.

    So, JM, you had your two precious little bundles of joy because of all the warm feeling, extra meaning and richness that they add to your life. Good things are worth paying for, and life is full of choices. That particular choice means you won’t get to put your feet up at 55. For God’s sake don’t suddenly decide that your special snowflakes need private education, else you’ll be retiring about never on that salary. Now of course you could go out and get a much better paid job working for The Man, but pushing 40 is leaving it a little bit late to do that. Colour me a heartless bastard but “trust and grant manager at a charity” sounds like a) you’re milking it b) there aren’t that many opportunities for progression and most of them will be dead men’s shoes, the charity sector is notorious for crap pay 5 and c) you are just one re-org or restructuring away from redundancy. So better hope nothing goes wrong in the next 18 years, eh?

    There are things you could do to make yourself better off in retirement. But you ain’t getting to retire early. Paying your mortgage off was a grand achievement and hats off to you, but paradoxically it was probably a bad move for retiring early. I cocked this up too. At historically low interest rates, you could have carried that sucker for longer and pumped more of your salary in pensions, getting a 20-32% lift and getting longer for it to appreciate, while paying 3% on the money. The 20% uplift plus the ~4% real return on equities make that a win even if you get to  put your 25% pension commencement lump sum into clearing the mortgage in 20 years. Think of it as tax-free mortgage saving. Of course mortgage rates will go up over two decades but you will also be paying it off slowly so you’ll take less of a hit, and inflation will erode the principal anyway.

    So listen to the drunk telling the traveller how to get to the city with your unrealistic dreams of early retirement.

    If you want to get to there, you don’t start from here.

    I am curious that none of the advisers asked this fellow whether his question was wrong. It often pays in life to try and make sure you ask the right question, because once you have framed that you’ve eliminated some of the options. Surely if he wanted to spend more time with his family, perhaps the question should be ‘ Can I afford to go part-time for 10 years and see my family grow up’ rather than “Can I retire early”. He still won’t get to retire early, but perhaps he gets something else of value. His wife has clearly jumped to this option, and by reducing the £700 a month childcare bill he would reduce the financial hit and get to see more of his children rather than more of the office.

    Notes:

    1. a cynical Ermine wonders exactly how he has managed to pay off £300,000 on a household income of £77k within’ say, 10 years. One assumes the untimely demise of a rich aunt may be a factor
    2. a DINK couple usually spends more on other things, so the difference may be less
    3. that imbalance is less bad for me because many of the FTSE100 firms I have in my HYP make their money partly overseas. Greggs and Poundland seem pretty domestic, looks like JM invests in what he sees on the High Street. From what I see on the High Street I would actively run miles from any firms with a High Street presence, the Internet is eating their lunch. Tesco is in fact my only such firm
    4. I am reasonably convinced by Lars’ argument you can’t long-term sector pick and beat the market, though I am less convinced that if you only have a few years to get into the market that valuation/when you get into it is irrelevant. I happened to be very lucky in starting in 2009, though of course the effects of the GFC on my job was the reason why I started then.
    5. until you get to the executive levels where anything goes
    19 Jul 2016, 3:11pm
    housing personal finance:
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  • Residential property investment success with Castle Trust

    Every Briton loves residential property, because ever since 1993, every man and his dog has been able to clean up with buying UK residential property. What’s not to like – no capital gains tax, banks lend you shedloads of money to buy an asset you otherwise couldn’t afford and no marked to market margin calls. Hell, they’ll even lend you money to buy other people’s houses, which is why we have middle class parents with buy to lets wringing their hands that their precious offspring can’t get a foot on the housing ladder and rent into their 30s.

    Three years ago Cameron decided to add fuel to this fire buy lending more money to people that couldn’t afford to buy houses, called help to buy. This pissed me off so much that I decided it was time to get in on the action. I didn’t want to buy a house for other people,  because I distrust the British property market more than Bernie Madoff because of what it did to me early in my working life, when I stupidly bought a house on five times my annual pay, albeit with a 20% deposit.

    It’s really hard to describe how much that buggers you up financially. Put it like this, my shareholding net worth is considerably more than my housing net worth. The latter I built up painstakingly from that early start across 20 years (until I discharged my mortgage). The shares I started in 2009 – okay so I was at the peak of my earning power and particularly keen to amassing capital, but nevertheless, accumulating housing wealth was a slow horrible grind for me, I was underwater for ten years.

    Since Cameron was giving out free money I decided that I may as well put my hand out for some of it, So I went with a Castle Trust Housa. I only went with £1000, because I was about to pass through a few years of lean times living off capital and investment returns, so most of my spare capital went into stock market investment. As a term lump investment with no income this was exactly what I didn’t need, but I did it for the principle. I didn’t incur any dealing costs or liquidation costs. and they have now sent me this letter

    housaOccasionally, in the three years since taking this out I’ve suggested it as something to consider for people saving for a house deposit bemoaning that the deposit gets overtaken by rising house prices. It makes sense to invest the deposit in something tracking the asset class, and while the Halifax house price index will never track the prices of the house you want to buy in a particular part of the country (particularly if it’s London), I was drawn to the Housa precisely because it was an index product.

    It was very illiquid – there was no secondary market for Housas, so if you needed the money within the three years (or five years) then you were simply SOL. There was obviously provider risk, Castle Trust used the Housa money to advance mortgages, a delightfully simple principle reminding me of the halcyon days before everything became financialised, you know, where real people clubbed together to help other real people raise the cash to buy a house. We used to call them building societies before they lost their soul to abandoned credit controls under Thatcherism, financial deregulation and greedy carpetbaggers.

    I wasn’t depriving some poor first-time buyer from buying a house 1 by front-running them and renting it back to them as a buy to let. So all in all an easy win. The 30% win is neither here nor there on this amount – perhaps I should have borrowed money to up my stake, but it is the first time I have managed an unequivocal profit on UK residential housing, unlike 99% of my fellow countrymen.

    It’s a shame this low-cost way of investing in the house price index has gone

    Castle Trust clearly want to get rid of this index product – they will only pay it out, not roll it over, and what they are offering now is nowhere near as attractive or even useful as a house price hedge. They are now offering basically fixed-rate corporate bonds on their mortgage business. The Housa was also secured on their business and I recall it made me uncomfortable at the time, but I was happy to take the haircut if the house price index fell, which would automatically ease the pressure on the company if people started defaulting. What made the Housa attractive was it had no carrying costs, purely the risk from the index and the provider risk, and since it was secured on the asset class underlying the index I felt okay about that. I won’t touch their alternatives.

    The problems for house buyers deposits are still that a sequence of Housa bonds or equivalent doesn’t really match how you want to use a deposit – you save over the years and then want to commit the entire deposit to the house purchase, at some unknown date.  You’d have to stop saving into housas three years before you buy, the flexibility is dire compared to a liquid alternative you can dripfeed into –

    Spread Betting

    You used to be able to spreadbet the Halifax house price index with IG Index, but the carrying cost of spreadbets is surprisingly high at 2.5%, pretty much the same long or short. You get the advantage of liquidity, unlike the Housa, but you pay that cost and a spread. On the other hand leverage is easy with spreadbetting. I don’t know if I were a young person trying to track deposit whether I would be tempted by leverage. The old head on my shoulders now looks at that and just seems despondency, desperate costs and massive tail risks, but on the other hand it would offer someone the chance to gear up if they feared prices escalating away from them.

    Part of the trouble with house prices is the cycles are slow, so all these annual costs can rack up and kill you because the underlying volatility and gains are too low. They look huge because a house is such a large purchase, Moneyweek had an interesting article on why spreadbetting sucks on house prices. It brings home just how much of a shame it is that Castle-Trust’s carry-cost-free alternative has gone.

    A young person will be more dynamic and risk-taking than me, and they have the advantage of having nothing to their name, so if their spreadbet goes titsup they have the option of walking away from their debts by declaring bankruptcy. I’m not advocating the idea, but faced with years of saving and falling behind, I can see an attraction is taking the risk if they are prepared to go through six tough years if prices fall. I considered walking away from massive negative equity in 1990 and going to work in Europe 2

    Low interest rates are no kindness to new house buyers

    It is a shame that we have no financial products that can help the young save in a deposit that at least tracks house prices. The very low interest rates now have decoupled savings from house prices with the pernicious rise of people talking about affordability – ie how much can you borrow at current interest rates assuming this will hold for the next 25 years. You amass equity very slowly at high income multiples, so you are exposed to the risk of negative equity for much longer in your working life than previous generations, and low inflation doesn’t help erode the real value of the principal. True, they had to suck up higher interest rates than now 3 but that has a silver lining – it incentivises overpaying, because that delivers a real win even on small amounts. The maths that make affordability good at low interest rates and high income multiples also make paying down the capital harder (because it’s a bigger proportion of your pay) and less worthwhile, you’re effectively renting the money from a bank, and much closer to the renting situation generally, even if you think of it as ‘owning’ the house.

    Even if we did have suitable financial products it’s no competition with buying a house on a mortgage, and you can’t live in your house price index bet either, though at least you don’t pay capital gains on it, should you have any.

    UK housing is a harsh mistress in a downturn

    …but she’s put on a lovely face for nigh on 25 years, tracking and soaking up the massive expansion of credit. So I’m inordinately chuffed with my £300 won from this most toxic of markets for me. True, Brexit seems to have done me several orders of magnitude more good in the numbers attached to the shareholdings I bought, which is just as well as I want some compensation for the damage my buccaneering countrymen have done to my financial future. And I am staying well out of the UK residential housing market in future – even if Castle Trust had offered me a roll-over I’d have walked away.

    Winter is coming to Britain. People are going to lose their jobs, and a good part of the reason for Brexit is that globalisation is making the lower part of the jobs market more and more crap, to the extent that middle-income families are getting 30% of their income from welfare. These are not people that will be able to afford to spend more and more of their non-income on housing, particularly if inflation and interest rates rise. If there’s one market I want out of, it’s UK residential housing, and now I’m out I’ll stay out until it has its Minsky moment.

    Notes:

    1. Castle Trust do lend to landlords too, so I could have been shafting the young by proxy
    2. I appreciate the poignance of that now, but heck, I was a Bremainer, so it wasn’t me that hurt this option for twentysomethings
    3. I paid 6.5% for most of my time and 15% just after buying the house (from a start of 7.5% in 1989)
    1 Jul 2016, 12:18pm
    economy personal finance:
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  • Those stock market rises you’re seeing ain’t real, guys

    I am surprised at the nonchalance in the UK personal finance scene about the fall in the pound as a result of the Brexit vote. I am not making a long-term prognosis about whether or not Brexit is a good thing, but what is incontrovertible is that it has led to a sudden drop in the pound relative to other currencies. To avoid the vicissitudes of other countries’ fortunes I am using IMF Special Drawing Rights to compare the pound with. Let’s have a definition

    The value of the SDR is currently based on a basket of four major currencies: the U.S. dollar, euro, the Japanese yen, and pound sterling. The basket will be expanded to include the Chinese renminbi (RMB) as the fifth currency, effective October 1, 2016.

    Since the SDRs include the pound, a fall in the pound slightly devalues the SDRs, so the picture looks slightly better than it really is for a drop in the pound 😉 If you don’t trust those cheese-eating varmints at the IMF you can see the same effect in the good ole United States Dollar down below.

    A fall in the pound relative to other currencies makes us poorer than the rest of the world. We have to exchange more pounds for foreign goods – these foreign goods include most of the food we eat and the fuel we heat our homes with and put in our cars, it’s not academic. Because of lags in the distribution of goods this shows up as higher prices over time, typically over a year. I was a Remain voter so my view is that this change is a strategic impairment of the pound. This is my opinion – it is perfectly possible that the pound will rise over the coming year as the myriad delights of Brexit make themselves manifest in a cornucopia of joy. In that case my thesis is entirely wrong, and it will all come good. If you believe, nay, if you know that to be the case then save yourself the trouble and stop reading this pusillanimous piffle right now.

    Let’s have a fact check – has Brexit made the pound fall?

    1607_xdrytd

    how many IMF SDRs (ticker XDR) for a pound

    I think that’s a yes, so far. Probably about 10% this year. It’s not the only time, we all got a hell of a lot poorer following the financial crisis. Stands to reason, we make jack shit 1 and sell financial services, and the GFC was, well, a global financial crisis. And that’s what most of the services are, I guess.

    We don't really make anything any more. Source is linked to image (fig 8)

    We don’t really make anything any more. Data source is linked to image (fig 8)

    So we took it straight between the eyes

    the 10 year story

    the 10 year story

    Does it matter?

    Well, Britain imports most of its food and fuel, while we focus on being clever whizzes at financial services, Ricardian advantage to the fore, eh. So you get to pay more for that food and fuel compared to people in other countries. However, there have been deflationary effects on these – the oil price has dropped since the GFC for instance. So let’s narrow this to does it matter to investors?

    Well, yeah. Let’s take a look at the price of VWRL in pounds. Hmm, that’s not so bad, it actually went up after Brexit. I managed to buy some in the confusion, so I am feeling chipper, look at me, ain’t I clever?

    VWRL in the GBP I have got

    VWRL in the GBP I have got

    Now if I were an American and had done that after the initial drop, I would be feeling different. Not bad, but no turbo boosters from the falling pound.

    VWRL in the USD I haven't got

    VWRL in the USD I haven’t got

    So the fall in the pound has made foreign assets dearer for me compared to if I were not buying with pounds. While that makes me think whoopee-do when I look at my ISA screen and I think hey, I am a fantastic investor. Not only did I stay the course through Brexit and even buy, I am up on the deal because all the numbers are going up, it also means something else.

    I have lost my compass

    I have lost my main navigational instrument, and my ISA allowance has just fallen by 10% in real terms compared to the rest of the world. So have my tax allowances, and for those rich enough to worry about such things, so has your Lifetime allowance.

    Now one of the cogent arguments against this mattering is

    Some commentators seem to think that there’s both a perfect level for sterling and that they know what it is. I didn’t hear wailing when sterling fell from over $1.70 in 2014 to under $1.50 in 2015. If it ends up at c$1.40 after the current turmoil, so what? No need to sacrifice our first born to Cthulhu just yet.

    Well, I was wailing earlier in the year 😉 There is something up with me, I am much more nervous about the pound than most other people. It scared me in 2009 as I was shovelling money into foreign assets in my AVCs while Mervyn King was printing money and devaluing the pound. So let’s take a butcher’s hook at the GBP against USD (unfortunately I couldn’t find one for IMF SDRs going out that far)

    GBP against USD

    GBP against USD

    This is not a continuous story of success, or even random noise against a mean, and it’s a headwind against UK investment – even against the Euro we are 20% down over the same period. If I’d held exactly the same portfolio as an American investor over those 12 years, I would pat myself on the back because my numbers on my screen would have risen 40% up on his. And I would be lying to myself. The truth lies somewhere in between, and we normally just don’t see that.

    So I’m not saying I know what the perfect level of sterling is. Devaluation of the currency is how governments charge us for the taxes we aren’t prepared to pay for the services we demand, though this last hit can’t be blamed on the government. So while I don’t know what the level should be, I do know that it’s headed in the wrong direction, has been for years, and I’m getting poorer relative to the rest of the world if I hold cash in GBP. We will notice that in higher inflation in the years to come, particularly if the oil price continues to rise in USD. Of course Donald Trump may help us with that in November, though I suspect we may have other problems then.

    It is true that long term adjustments to exchange rates are A Good Thing. It allowed the Greeks to pay themselves more and more and feel good about that while the Drachma depreciated so tourists could still afford to go there and their rice filled vine leaves were cheaper in British supermarkets in Pounds. And then they joined the Euro. Basically floating exchange rates allow you to be lazy bastards collectively relative to the rest of the world and get away with it. If somebody asks you to take a pay cut of 10% there’s hell to pay and rioting on the streets. If you get the same pay and you currency drops by 10% then there’s the same fiscal result but no rioting. Stopping that happening is the original sin behind the Euro, but that’s a fight for a different day. I am still of the opinion that the Euro will blow one day, and we may be glad of our Brexiteering spirit as blood and guts rain down in the aftermath.

    Those stock market rises you’re seeing ain’t real, guys

    And being less productive is what we have all just voted for, but I am surprised at the simplicity of UK investors so being chuffed at their portfolios going up. Now of course that’s a win on having sat on the cash, or worse still, having sold and then rebuying, but do the thought experiment. Say you bought your portfolio with pounds the night of the Referendum. For some reason it bounces, so you issue the same purchase order now. And it’s dearer, so you get to pay more money for the same portfolio. That is Not a Good Thing. When that happens to the price of food, petrol, Starbucks lattes, wine and German cars that won’t be a good thing either.

    Which is why I wince when people celebrate on the rise in the stock market. It’s not real. Indeed, my portfolio is the highest it’s even been. My pension will be worth less, the cash I hold is worth less, yes I am richer in the ISA but poorer is so many other areas. Oh and I am stuck on an island with these guys.

    1607_stuck

    Deep joy. I’m putting a hold on the champagne.

    Notes:

    1. we actually manufacture more in real terms value than we did in the heyday of manufacturing in the 1970s, but do it with far fewer people
    27 Jun 2016, 10:16pm
    economy personal finance
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  • Brexit damage limitation

    We have decided to quit the EU. It was a democratic decision with a gap of over a million between the sides, so it’s pretty clearly what the majority wanted. Unlike many Remainers and a large part of the London/finance set that make up the PF blog community, I have sympathy for the part of the Leave community who say their wages and jobs pushed down by the free movement of people after the A8 accession of countries that were much poorer than the UK. I believe their choice is not in their long and medium term interests nor in mine, but I can see where they came from.

    The little Englanders and harkers back to Empire I have little time for. Let’s hear it from Boris Johnson on this

    We used to run the biggest empire the world has ever seen, and with a much smaller domestic population and a relatively tiny Civil Service. Are we really unable to do trade deals?

    We used to run the biggest empire in the world because we industrialised first and had the edge on being able to clobber other places into submission. Things have changed in 100 years peeps. The modern predilection for everyone’s a winner would have no truck with the entrance exams for the Empire Civil Service.

    I want to preserve my capital against the own goal that is Brexit. I may have sympathy with many of the people who voted Leave, but I don’t want to sponsor their decision any more than I have to.

    You wouldn’t start from here (after the Brexit result)

    as the classic joke says. Fortunately I am not coming from a standing start. I started a while ago. In 2009 my HYP was largely FTSE100 based, I’m fortunate in not having great exposure to banks because I can’t value them and only a small exposure to property/housebuilders because UK property scares the bejesus out of me. But I didn’t like the geographical bias and started to shore it up with an outer circle of index funds in emerging markets, Dev world exUK and more recently VWRL world equity trackers. I was aiming for focusing less on finance and more on Life, because I was dealt a good hand by Osborne in being able to use my DC pension savings to front-run my main pension.

    My main problem is that I hold sterling assets. And the big problem is that sterling will become increasingly worthless as trade and foreign investment falls. We’ve already taken a massive hit in the financial crash. I am particularly exposed to this as people still working may see their wages rise with future inflation, where as my networth is the accumulation of previous earnings. On the other hand I have advantages – redundancy is not a threat to me and I don’t owe anyone any money.

    XDRs are a basket of currencies, against the £

    XDRs are IMF Special drawing rights,  a basket of foreign currencies, against the £. I use XDRs because individual currency pairs just show relative changes, XDRs are the luminiferous aether of forex which gets us away from all this relativism…

    Okay so a lot of it (more than half) are foreign assets denominated in sterling, so the fall in the pound will merely give me a false impression I am a great investor by raising the numbers on the screen  rather than make me fundamentally poorer in these assets, but in the end my pension is in Sterling which is most of my effective networth. Unlike some I don’t consider my house in my networth so I am neutral on that and I don’t own any rental property, so if house prices fall I don’t feel that is a bad thing.

    price of gold in pounds

    price of an ounce of gold in pounds

    Oh and I bought a lot of gold last year, because the ermine is a skittish creature and the 2015 valuations of the UK stock market and the US stock market, together with the infinitesimal chance of Brexit 1 scared me, and people thought gold was trash, witness the GBP/XAU chart. OK so I sold some of it before the referendum to half-split the profits which was a bad move in hindsight, but I still took a profit, and I will hang on to the ballast of the rest for a while. Unfortunately I also hold a lot of cash because I have only recently crystallised my SIPP. My dear fellow countrymen have made me 25% poorer in real terms last week, this will come through in the price of imported goods like food and fuel and pretty much anything I do if I stick a paw outside this sceptred isle.

    1606_wilson

    Harold Wilson was quite right in my schooldays when he said the pound in your pocket will stay the same. It’s what you can get with that pound which changes, so I really need to do something about that cash. I have already started with some of it into VWRL, and will drip feed some of the rest as I extract it below the tax threshold into VWRL. I will accept the risk of a market crash in five years time when I will have run the SIPP flat; I will start coming out of the market in four years time and if I take a hit on the SIPP I will start to take income from the proceeds of the ISA. And if it all turns into tears in falling rain, well, that’s just the way things pan out.

    I owe Monevator a few beers – my original HYP was heavily UK based with big fish from the FTSE100. But his diversification articles were compelling, and I shored the UK core up with Devworld Ex UK and emerging market index funds. In the HYP I was fortunate enough not to have a predilection for banks (how do you value a bank?) or house-builders, though my REITs look like sick puppies 2. For some perverse reason my ISA ended up on the week 3 though it took a hit early Friday. But I have bought more gold and more VWRL. The obvious choice is in many ways Lifestrategy100 but the GBP version is too UK biased, hence a favouring to VWRL. World equities are tanking too, but the pound is tanking faster.

    I’m interested in ideas though, what if anything do readers think as a way of losing less capital through the troubled times to come? Or is it as simple as sometimes you have to stick your head between your knees and kiss your ass goodbye… This one is big, and it’s bad.

    Notes:

    1. as perceived at the time, but you should always bet a bit against your prejudices
    2. It’s not like these bad guys are underwater yet, but it’s getting that way
    3. denominated in the increasingly worthless pounds
    24 Jun 2016, 11:12am
    personal finance:
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  • Dude – where are my shares? Brexit across-the-board ISA fail

    An ermine wakes to a new world and it appears I was on the losing side. The good thing is that at least the outcome of the Brexit referendum is clear; a four point lead isn’t handsome but it’s not a knife-edge. So I thought I’d open a bleary eye and perhaps buy some shares with my increasingly worthless pounds. At least I am not afraid of redundancy in the shitstorm to come, and it’s an ill wind and all that. So I whip out my TD ISA, and consider buying, to discover that my six-figure ISA has been looted – evaporated into thin air, pffft – just like that. The robbers only left a little smattering of cash, I ought to be able to buy a bag of peanuts with it on the world markets in a couple of months 😉

    TD ISA FAIL

    TD ISA FAIL

    Bummer. So I yomp over to my Hargeaves Lansdown SIPP, and observe some shocking spreads, see if I can buy. I don’t actually want to buy in a crystallised SIPP cos of tax, but hey, any port in a storm?

    HL - computer says NO

    HL – computer says NO. I’m not actually sure I wanted to buy VMID at that price but it was the first code I could remember and I’ve never bought in HL before.

    We’ll see later on in the day, eh? Update at 10am – TD have given me my shares back. I am amazed at the fightback – I have lost a whopping 3% which is neither here nor there for the market mayhem promised. I mean, for God’s sake, does nobody remember January? The VUKE I bought then is still 5% up, FFS. This could, of course, be because the pound is going down the toilet so fast that the weight of the foreign assets I hold are lifting the numerical picture. This is then an optical illusion – my fellow countrymen have probably made me 25% poorer in real terms. Thanks guys.

    Now that I can trade I bought some VWRL. There’s a race going on here – the little matter of Brexit seems to have frightened the global horses more than I had expected, which makes it cheaper. As you can see it in USD

    VWRL in the USD I haven't got

    VWRL in the USD I haven’t got

    So I bought some in the GBP I have

    VWRL in the GBP I have got

    VWRL in the GBP I have got

    where you can see the pound falling faster than the assets. But to be honest I can’t actually see Brexit being such a huge deal for the rest of the world in the grand scheme of things, and if it’s good enough for Lars Kroijer it’s good enough for me. Yes, I paid more than I would have done yesterday, but then I thought Remain would win. Though I hold a lot of gold just in case 😉

    About the other passengers on the Brexit bus, there’s more of them that I thought…

    UKIP poster for leave says something to me, and I am not sure I like it

    UKIP poster for leave says something to me, and I am not sure it’s a good sign…

    The worst thing about the result is the thought of cocks like Farage and Boris running the country. Still, the will of the people has spoken, a primal scream against globalisation and austerity as well as a FU to the EU. Let’s hope the good people of the British hinterland who voted leave feel a bit more chipper about their jobs and public finances in a year’s time, eh. There were many good arguments to be made on both sides. One of the greatest wins of Leave would be the proletariat not having to support the landed gentry through farming subsides any more, but sadly that was promised away. It seems a curious own goal – the CAP is about 40% of EU spend and ceasing this redistribution of wealth from the poor to the rich would seem an obvious win 😉

    I didn’t like the people on the Leave bus, and it turns out the represent the slight majority of my fellow countrymen. I will investigate if I can get German citizenship by jus sanguinis – sadly it is through the maternal line so although it will help me I am not automatically entitled as it would be had my Dad been German. I was able to easily pass the citizenship test from my general knowledge of the principles of a democracy and a decent guessing of the German character, but my German is not good enough at the moment. I am in no hurry to cease being British, but I would like to see if I can get dual nationality and become a citizen of the EU. Some of the ugliness of the Leave side, in particular the potent racism and xenophobia, makes me a little bit scared about the Britain I will grow old in. I would like to have the option of somewhere to run to 1 should some of the heart of darkness I have seen recently begin to rise – neither of my parents was British by birth. When my mother came to Britain in the late 1950s, she had some trepidation, because of course only a decade before Britain and Germany had been at all-out war. She found 1950s Britain was a kind and tolerant country, and while there was the odd piece of hostility it was far outweighed by the gracious and kind welcome she encountered. I hope this is still part of our national character, because it was not overly apparent in the referendum campaign on either side. In general while there have been remarkable increases in tolerance and acceptance of differing lifestyles in the 60 years since she came, tribalism and incivility seem on the rise in a lot of areas.

    But perhaps I am seeing through a glass darkly; I didn’t get what I voted for. Britain is still a rich country with stupendous natural beauty and I believe a basically decent people. Perhaps they showed more wisdom – after all, I viewed this referendum as running against the tide of history, I would be surprised if in 20 years the EU were the monolithic mass it is now. I would be very surprised if the Euro were still used by as many countries as it is now, indeed if it still existed at all. I am not omniscient – there is heart of darkness enough in Europe, perhaps I will grow to be fond of the English Channel again from the vantage point of Das Inselreich.

     

     

    Notes:

    1. It’s always good to have options, I’m not giving a view on what will happen.
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