Weekend reading: Choose time

What caught my eye this week.

The idea of trading money for time underpins early retirement, although it’s not often put that way.

We can debate safe withdrawal rates, passive portfolios, and whether investment trusts have a role to play in creating a retirement income.

But the day you leave work and never intend to go back – however you got to that point – there’s no argument. You’re by definition turning down the chance to make more money.

You are swapping money for time.

There are excellent reasons to quit work ASAP. Nobody lolling on their death bed ever wished they’d spent a few more years at the office and all that.

Personally, I see downsides, too, especially to very early retirement. As a result I expect to keep doing some work indefinitely.

But you don’t have to go totally cold turkey to swap money for time.

More flexible working – especially from home – can kill your commute and give you the freedom to work around you, instead of an employer. Or you can try to work fewer hours at a conventional job.

Either way the pay-off is a double whammy, because they don’t tax free time.

In contrast early retirement back loads all the extra time into one initially distant but eventually never-ending block. It’s a slog to get there, but in theory a coast thereafter.

For some, it’s nirvana. For others it can lead to boredom, ill-health, social isolation, and a life more ordinary if it cuts down your options.

For the latter reasons, for me financial freedom is the better part of FIRE.¹ But wherever your own heart takes you, think about the value of time.

As Harvard Business School professor and happiness researcher Ashley Whillans noted this month:

Over and over, I find that prioritizing time over money increases happiness.

Despite this, most people continue striving to make more money.

For example, in one survey, only 48% of respondents reported that they would rather have more time than more money.

Even the majority of people who were most pressed for time – parents with full-time jobs and young children at home – shared this preference for money over time. […]

Research shows that once people make more than enough to meet their basic needs, additional money does not reliably promote greater happiness.

Yet over and over, our choices do not reflect this reality.

True, plenty of people strive to survive. Work isn’t optional for them.

But many regular Monevator readers do have choices – or at least they can create them.

Not everything that’s valuable shows up in a net worth spreadsheet. Far from it!

Time to choose.

From Monevator

Apple Card, fintech, and the future of good money habits – Monevator

From the archive-ator: The Devil’s Financial Dictionary: An ABC for passive investors – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!²

First house price fall in England since 2012 – BBC

Investors face ‘unacceptable’ delays to switch platforms [Search result] – FT

UK households spend above their income for longest period since 1980s – Guardian

Why investors are worried about the yield curve [Search result] – FT

Mobile eWallet usage surging around the world – ThisIsMoney

Households’ stark net borrowing position has been partly financed by non-secured loans – ONS

Products and services

Five ‘favourite’ cash ISA options – ThisIsMoney

Ways to own gold: Raising the bar into a safe haven [Search result] – FT

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

One in 14 used cars for sale have had their mileage tampered with – ThisIsMoney

Moneyfarm offering up to £600 cashback if you open its ‘Brexit ISA’ with £20,000 – ThisIsMoney

Investing platform Willis Owen retrospectively identifies top performing funds [I’d also point out active investing is a zero-sum game, so you can also safely ignore the comments about when active funds do better than passives et cetera]  – ThisIsMoney

Comment and opinion

When everything declines at once – Morningstar

The myth of average returns – The Evidence-based Investor

Nothing is safe – Of Dollars and Data

You probably don’t want another ‘generational buying opportunity’ – Bona Fide Wealth

Better than golf – Humble Dollar

Pension Calculator: How much money do you need to retire? – The Humble Penny

Never confuse luck with smart investing – Bloomberg

Different kinds of information – Morgan Housel

Will Nutmeg’s crowdfunding plans cut the mustard? [Search result] – FT

Five years into the slog and not bored yet – Quietly Saving

Pensions, doctors, and the NHS crisis caused by the tapered annual allowance – Young FI Guy

The 4% rule is dead? No it’s not! – MoneyMaven

How to increase the odds of owning the few stocks that drive returns [PDF] – Vanguard

What went wrong at Interserve? – UK Value Investor

Five personalities who can boost the value of your professional network – Financial Samurai

Brexit

MPs reject all possible Brexit solutions. What now? [Excellent videos] – TLDR

The obscene moral spectacle of Theresa May’s resignation – Politics.co.uk

Brexit: What the fuck is going on? [Video, week old but still relevant] – YouTube

The humbling of Britain – The New Statesman

Game of Thrones, hamsters, and other things that didn’t last as long as Brexit – BBC

When even the BBC turns to swearing [Video] – YouTube

Theresa May and Jeremy Corbyn have never been less appealing – YouGov via Twitter

Kindle book bargains

How Women Rise: Break the 12 Habits Holding You Back by Sally Helgesen – £0.99 on Kindle

The Talent Code: Greatness isn’t Born. It’s Grown by Daniel Coyle – £0.99 on Kindle

The Complete Guide to Property Investment by Rob Dix – £0.99 on Kindle

Winners and How They Succeed by Alistair Campbell – £1.99 on Kindle

Off our beat

Man stole $122m from Facebook and Google by sending them random bills – Boing Boing

How Moneyball ruined baseball – MarketWatch

Life After Facebook: The second act of billionaire co-founder Eduardo Saverin – Forbes

How to share a bed and be happy – Guardian

And finally…

“The two greatest enemies of the equity fund investor are expenses and emotions.”
– John C. Bogle, The Little Book of Common Sense Investing

Like these links? Subscribe to get them every Friday!

1. Financial Independence Retire Early.
2. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator https://monevator.com/choose-time/

Apple Card, fintech, and the future of good money habits

This will date me even more than my nostalgia for Bruce Willis in Moonlighting, but I’m old enough to remember when choosing how to run your financial life meant picking the current account that offered the best freebies.

Branded piggy bank, Young Person’s Railcard, or copy of Now That’s What I Call Music: 17?

Talk about choice paralysis.

As for the banks themselves, there was even less to tell between them. One offered a slightly less ruinous overdraft, another might pay you a few quid on any money it hadn’t nudged you into spending. Once cash machine withdrawal fees were ditched in the 1990s, the banks became interchangeable in most people’s eyes – even if we seldom changed between them.

This bland monopoly invited disruption. It took a while for technology to make that possible, but the past few years has seen a wave of competition.

Young people increasingly wave their phones to pay for things or flash luminescent credit cards that double as flirting tools at the bar. They manage their finances using friendly apps that slide into their direct messages when there’s a service outage. They round up their loose change for a rainy day, and see their spending across town visualised as a heat map. In the US the super-popular Venmo service even turns your spending activity into a news feed that you can share with your friends.

Fintech (that’s short for ‘financial technology’) has exploded, and all this is not even to mention a slightly earlier round of innovation, such as PayPal and the peer-to-peer lenders like Ratesetter.

A list of the UK-based new wave alone sounds like the line-up of a music festival where you’re too out-of-touch to know the bands – Revolut, Monzo, Squirrel, Chip, GoHenry, Dozens, Plum, Yolt, Loot, Exo, Divido, TransferWise, Bean, Tide and many more.¹

This list is far from complete. And while London is undoubtedly a hotbed for fintech innovation, there are hordes more doing the same thing around the world.

Now I suspect there’s already a vast range of reactions to this post from the Monevator faithful.

Some of you are old hands at shuffling digital versions of your credit cards or – like my ex, which startled me when I first saw it – paying for almost everything with your phone.

Others were feeling pretty hip because you just used a contactless card for the first time.²

The point is the financial future is here – if unevenly distributed –  and there’s zero chance of the rate of change slowing.

Apple plays its card

It’s not only two guys in a WeWork office who are trying to shake up financial services, either.

The world’s occasionally most valuable company, Apple, just unveiled Apple Card, a fee-free credit card that’s linked to Apple Pay and backed by Goldman Sachs.

Due to launch in the US this summer, the tech giant’s card will pay 2% cashback on purchases made with Apple Pay, rising to 3% at the Apple Store or via its (expanding) subscription services.

There will also be a shiny titanium physical card, for those all-important at-the-bar props. You laugh, but when marketing to a generation that routinely uploads photos of their breakfast, this stuff matters.

Vanity will come at a price, however, as cashback with the physical card will only be 1%.

And incredibly it won’t even have a contactless chip in it.

Apple shares rose on the news of Apple Card (alongside much else) and Visa shares fell, but this may prove misguided. Most of these services run on Visa and MasterCard’s underlying networks, after all.

I think it’s the fintechs who should be most scared, given screenshots like this:

Automatic categorization of spending and maps displaying where you dropped your dough?

This sort of thing was fintech’s domain. They’re going to find it hard to run ahead of Apple and its billions.

Old money

Figuring out the future of fintechs is tricky, then. But divining the fate of existing financial service companies is equally non-trivial.

Take the banks. They’ve been written off by fintechs as lumbering dinosaurs ripe for the devouring.

Perhaps, but in that case start-ups such as those I mentioned earlier – and mobile-first challenger banks like Starling, Tandem, and Atom – have so far proven to be little more than mosquitoes. They might suck a little blood, but for all their buzz the big banks still hold most of the public’s cash and debts on their books.

Preoccupied perhaps by the effort needed just to meet banking regulations, the challenger banks haven’t so far matched the innovation of financial platforms like Monzo, let alone what’s promised by newer entrants.

The challengers are also yet to attract truly landscape-altering amounts of money.

Meanwhile the fintechs have unveiled endless features – from bots that query your spending to tools that help you shuffle your loose change into savings or freeze your cards with a tap on your phone – but they manage mere pennies, relatively speaking.

Happily a fintech is cheaper to run than a big bank. There’s none of the branches, for starters, and Eastern European tech teams can do much of the heavy lifting. Yet most if not all are still unprofitable, not least because of the marketing cost of winning new customers.

As for the big retail banks, they already have roughly all the money. In this sense they’ve already won!

But big bank business models are based on providing expensive loans (when not ripping us off more directly, with say the £35bn PPI scandal), which makes it hard for them to embrace more customer-friendly solutions. They have thousands of costly bank branches to manage down in the face of political opposition. And they have a massive ‘tech debt’, running on legacy systems that might still in places use frameworks devised in the 1950s.

This combination of having most of the money and seeing little need to innovate – especially as it’s so bloody difficult for incumbents – has meant the big banks have mostly sat out the fintech Cambrian explosion.

But I believe 2019 is the year this changes, thanks to open banking.

To oversimplify, open banking is a government-regulated push for banks to make possible the sharing of their customers’ data through a software layer that other banks and third-parties can hook into.

At first the banks seemed to be treating open banking as yet another compliance box to be ticked, but my sense is there’s now a bit of “one for all and all for one” in the air.

Last year HSBC was one of the first major banks to embrace open banking. Its Money Connected enables you to see your savings, loans, and mortgages held with other banks. (Essentially what the fintecherati call a ‘wrap platform’, which have long been popular in places like Australia).

This year I’ve had emails from Lloyds, Natwest, and others talking up similar – and related – services.

Santander, for example, has teamed with MoneyBox to enable its customers to round up transaction amounts and automatically pop the difference into a savings account.

This is just the beginning. No sensible bank will offer up its own data without trying to gobble up and make use of the data of its rivals. So now it’s begun they’ll all be at it.

Fintech will eat itself

This must be frightening for the fintech leaders (though I’ve yet to hear any admit it).

If the big incumbent banks copy all the neat tricks of the newcomers, it’s hard to see why customers will bother moving their money. A pink credit card will only get you so far.

In fact I’ve long expected the first phase of the fintech revolution will end with a massive roll-up by the big banks.

Something similar happened 20 years ago, when lots of high interest savings accounts popped up on the Internet and looked set to siphon away the big banks’ cash deposits. But ultimately their business models floundered, despite lower overheads, and they were snapped up by the established giants.

Seeing the same fate for the fintechs is not quite guaranteed. For a start, rolling them up is more technically challenging.

It might seem that buying a fintech would be an easy way to bolt bells-and-whistles onto an old bank’s customer offering, but the nightmare task of stitching the underlying technologies together could make it too much hassle. (Think of the car crash at RBS when it attempt to spin-off Williams & Glyn or the tech meltdown at TSB, for instance.)

Some of the fintechs were founded on the premise that new technology could do things old tech simply couldn’t do.

There’s also the question of what’s really to be gained by the big banks. The start-ups have attracted only small amounts of money so far, and I think there’s uncertainty even where they’ve done a better job at gaining customer numbers. The likes of Monzo and Revolut boast millions of users, but those customers are obviously more footloose – and probably less profitable – than those of us continuing to stick with the accounts we opened as students 30 years ago. Flighty millennials might not be worth paying up for.

Then again, perhaps this fintech revolution really is just that, and we should throw out our old notions of four or five big companies keeping most of our money in their vaults. Maybe the fintechs will continue to leach away assets from the big banks. In the meantime consolidation could be more fintech eats fintech as they strive to turn a profit.

Either way, I believe we can expect big bank accounts to morph to look more like what’s hitherto been offered by the fintechs.

Perhaps the greatest prizes will therefore go to any start-ups that can change the fundamentals of consumer finance – deeply altering our behaviour, say, or running ultra-lean businesses that are able to make us money faster than their deep-pocketed rivals can outspend them – as opposed to the apps with the cutest gimmicks.

Can fintech afford to be a force for good?

One way or another, fintech-style offerings will soon be ubiquitous. Through consolidation or disruption, I expect to see a crowded shelf of viable services competing to manage your money – whether hailing from banks, tech firms, start-up app developers, or your local coffee shop.

This presents a bit of career-risk for us financial bloggers. Many fintechs seek to automate good financial hygiene, from budgeting and saving money for a rainy day to putting your surplus cash into cheap index-tracking ETFs.

They could make good financial habits into a commodity.

Well, that’s the dream. There are competing incentives that suggest the revolution’s aim to do good could run into roadblocks – not least the need to make money.

At a recent event for one fintech raising funding, Dozens, the likeable CEO said he didn’t expect his company to ever provide loans except for sensible purposes like mortgages. All well and good but not particularly profitable. This CEO argues that being built from the ground-up as a super-lean customer-focused company will enable it to forego usurious cash cows such as high-fee credit cards. It is the equivalent of the line from Amazon’s Jeff Bezos, who warned “your margin is my opportunity”.

However if other start-ups turn borrowing money into a fun game, say, and get rich on the proceeds, then more noble-minded firms could lose out to their less scrupulous rivals’ marketing budgets.

We’re therefore likely to see all these services wrestle with doing right by the customer – if only because they have to, because fintech makes managing money so much more transparent – while finding a way to squeeze a profit from us.

Already we’ve seen fintechs drop fee-free foreign cash handling after reaching scale, for example. And big banks have been cutting teaser rates since the beginning of time.

Finally, many of these new services aim to make spending money frictionless – something eagerly embraced by retailers looking to prize us from our savings. What we gain in smart text alerts and automatically investing our loose change, we might lose when airily waving our phones around in a late night out on the town.

Watch this space

So perhaps there will be a future for personal financial advice. As our financial lives get ever more complicated – even if helped by apps that promise to make things easier – there will be landmines and booby traps galore.

I believe that within five to ten years everyone will manage their finances – or at least monitor their finances – using software and systems that only a nerd-dragon would have at their disposal today.

But money and investing will remain a fraught subject, because so much of it turns on our emotions and human frailties – and because the desire for companies to part us from our hoard is at the heart of capitalism.

Boring monolithic banking and money blogging 1.0 is dead!

Long live sexy banking and money blogging 2.0!

For the record I’m a shareholder in several of the fintech firms I’ve mentioned. I’m also considering a small investment in Dozens, which is currently raising money on Seedrs. While we’re at it I also own shares in PayPal, Square, Apple, and a couple of the big UK banks. And breathe! Let me tell you about complicated…

1. Note: See my disclosure comment at the end of this article.
2. I’m not joking. I’ve been told by industry types that contactless payment usage plummets outside of London, where we’ve all been trained to accept it by London transport.

from Monevator https://monevator.com/fintech-and-money-habits/

Five smart ways to handle a sudden windfall

Life can be an exciting and unpredictable thing. One minute, you are going about your normal daily routine and the next minute, everything can have changed forever. Very often, this can be a positive thing as the life-changing event that comes along can improve your circumstances. One great example of this is getting a sudden financial windfall.

Suddenly getting a large amount of money can happen in a number of ways. Maybe your lottery numbers finally came up and you scooped millions in a jackpot win, or maybe your rich old uncle left you a significant windfall in his will when he passed on. Whatever the exact situation, you can sometimes find a lot of money coming your way out of the blue.

Make sure to handle your new-found wealth properly

Many people assume that coming into money in this way will answer all their problems and make life perfect. While this is entirely possible, it will only happen if you are prepared to deal with all that the windfall brings. Having lots of money can actually feel a little scary as well as exciting! The key is to think ahead to how you will manage it. This is essential so that you do not waste it or get ripped off while also allowing you to enjoy it to the full.

How can you manage your finances to make the most of any windfall?

• Use an asset management firm – top of the agenda for most normal people will be talking to a professional asset management firm. This will ensure that you get expert advice on how to invest your money and make it work for you to earn more into the future. Most normal people will not have the knowledge or investment skills to do this alone and make the right calls.

Al Masah Capital is one of the best around globally and has been helping its clients manage their wealth and assets since 2010. Since then, it has built up a strong reputation for delivering honest advice, performance and value to its customers. With a range of low to high-risk portfolios to consider and various assets classes such as funds and bonds, Al Masah Capital is a wise move for any investor.

• Do nothing! – as well as finding professional help in terms of investing your windfall, there are a few other tips to help make it a little easier. The first thing is to do nothing at all! This may sound strange advice, but it will help you to avoid rushing into bad decisions. Take a little time to think about what you will do with the windfall and how you will divide it up to be used. Giving yourself this thinking time will make it less stressful and ensure that you use it rationally.

• Pay off debts and taxes first – once you are ready to start using your new stash of cash, paying off debt should be high on your list of priorities. Living debt-free is the ideal that we should all be striving for, and a windfall can make this a reality. As well as paying off debts such as loans or credit card bills, make sure to set some aside to pay any taxes associated with your windfall. This could be something like inheritance tax if it is money left to you in a will.

• Set some aside in an emergency fund – while investing some of your money is wise so that you earn more moving forward, do not invest it all. It is sensible to set some aside in a bank savings account for emergencies and those times when you need quick access to cash. If you have it all tied up in long-term investments, then you are in a bad situation if you need liquid cash fast.

• Put money into a pension scheme – one very good way to use your new-found wealth is planning for your retirement. For most people, this will involve opening up a pension plan to put money into if you do not have one or paying extra into a current one if allowed. This will help you enjoy your life when you retire and have plenty to live on.

Make sure to treat yourself

As well as all of the above, it is also vital to treat yourself and your family a bit! While you do not want to go crazy, a nice holiday or new car will make sure that you actually have fun with your new windfall. Just do not get carried away and spend it all. If you have recently come into money and need help, then the above are great tips on how to handle it for the best.

from Finance Girl http://www.financegirl.co.uk/five-smart-ways-to-handle-a-sudden-windfall/

How to increase your freelance writing earnings

Being a freelance writer looks great on paper, but it can be tough to make it pay. The perks are numerous – you’re doing something you love, working from home and in your own time. But progressing beyond low-paid piecework can be difficult. How do you make the transition from undervalued content provider to in-demand writer, able to pick and choose clients, or be sought after for publication in your own right?

Start a blog

Blogging serves multiple purposes. First of all, it’s a public showcase for your work. By posting articles on a variety of subjects, or different kinds of stories and poems (whatever it is that you create), you’re putting together a varied portfolio that potential clients all over the world can view for free. It’s also something that you can link to whenever anyone asks to see your work. Anyone who remembers the pre-internet days of sending writing samples to editors in the post, accompanied by an SAE, will know that’s not something to take for granted.

If you’re trying to establish yourself as an expert or specialist in a particular field, a blog is the best way to go about it. If you’re good, you’ll gain followers and credibility and get your name known. A blog is also a great way to stay in practice and to always have an outlet, even when you’re not getting commissions. And perhaps most importantly, a blog can be directly monetised thorough advertising, sponsorship or affiliate marketing.

Take care of business

Many writers don’t look after the business side of their affairs as well as they could and may end up paying more tax than they should, or not claiming legitimate expenses. Umbrella companies are tax compliant and offer help with collecting expenses and processing payments. A company such as Crystal Choice offers unbiased advice and recommendations on the best solution for your particular situation. Writers who do contract work should definitely consider looking into this as an alternative to setting up as a limited company.

Find your niche

You need to find that ‘thing’ that you can write about better than anyone else. It should be something that you’re knowledgeable and enthusiastic about and that you have good reason to suspect other people are interested in. The trick is to find the balance between a market that has legs and one that is over-subscribed. For instance, you know that people like romance movies. You also like romance movies. However, if there are already hundreds of people blogging about romance movies then you may need to specialise elsewhere.

Do something different

While you do need to study the market and find your niche, you’ll only be noticed if you can bring something fresh and original to the table. Remember that great writers write from the heart. If you’re just doing it for the money, it will show in your work. It’s all about striking the right balance, so keep one eye on the bottom line and the other on the stars.

from Finance Girl http://www.financegirl.co.uk/how-to-increase-your-freelance-writing-earnings/

Weekend reading: Oops, bonds did it again

What caught my eye this week.

The 10-year UK government bond yield has fallen back to barely 1%. Indeed yields are down again everywhere, as Bloomberg reports:

Bond yields around the world are tumbling to multi-year lows as the global shift by central banks to a more accommodative stance has put the kibosh on the oft-predicted but still-unrealized end of the long bull run in government debt.

Among the superlatives hit this week:

– Japan’s 10-year yield slid to its lowest since 2016 on Friday
– New Zealand’s equivalent slipped below 2 percent for the first time earlier in the day
– Yields on benchmark Treasuries have dropped this week to the lowest in more than a year
– Those in Australia are just three basis points from a record low
– The global stock of negative-yielding debt hit the highest since mid-2017

A quick way to be called a moron by people who know more than they understand over the past 5-10 years has been to suggest that bonds still have a place in most portfolios. A wealth-destroying crash was “obviously” imminent, you see.

But markets often move in the way that surprises commonplace assumptions, and that’s certainly been true of bonds.

(Click to enlarge)

Source: Bloomberg

This low yield era almost certainly won’t last forever. However a bit of humility is in order from all of us (including me!) about the timing of any long-lasting reversal.

Of course this is exactly why most people are best off investing passively and getting on with other things in life. (If you want to try to outsmart the unthinkable, there’s always Brexit.)

Have a great weekend! (Hope to see some of you on the march. )

From Monevator

Why the 4% rule doesn’t work – Monevator

From the archive-ator: Wealth preservation strategies of the rich – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!¹

40-year mortgages are becoming the norm – Moneyfacts

UK interest rates on hold amid Brexit impasse – BBC

Government borrowing falls to fresh 17-year low after surge in tax receipts – City AM

Regulator in spotlight over mini bond scandal [Search result] – FT

Just 112 retirement interest-only mortgages have been sold in first year – ThisIsMoney

Employment growth fastest for women aged 65+, but it’s not always a positive – Guardian

Tech investors are asking for #MeToo clauses in start-up deals [Search result] – FT

The start-up that looks into the future for the Next Big Thing – ThisIsMoney

Want kids? It’ll cost you [US but relevant] – The Basis Point [with a h/t to Abnormal Returns]

Products and services

Coventry BS axes the top cash ISA deal – but Nationwide launches a 1.4% ‘loyalty’ rate – ThisIsMoney

Peer-to-peer pressure: Do the risks outweigh the rewards? [Search result] – FT

Persimmon homebuyers can withhold 1.5% of property value until faults are fixed – Guardian

Shop loyalty cards ranked and rated – ThisIsMoney

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

HgCapital Trust: A [costly!] tech-heavy private equity investment trust – IT Investor

One investor’s hunt for green investments arrives at iShares’ Clean Energy ETF – DIY Investor

…more on this theme: Clean, green, but will it offer investment returns? [Search result] – FT

How to use a floorplan to check the valuation of a potential house purchase – ThisIsMoney

Castles for sale [Gallery] – Guardian

Comment and opinion

Is your strategy to have a bunch of money? Or is it to not need a bunch of money? – IBJ

The market won’t provide high returns just because you need them – A Wealth of Common Sense

New video explaining evidence-based investing in a nutshell – The Evidence-based Investor

We ignore the index providers’ power at our peril [Search result] – FT

There’s no such thing as ‘the number’ [He concludes the same as me] – Rad Reads

We all make mistakes – Of Dollars and Data

Head games – Humble Dollar

Death, taxes, and a few other things that are inevitable – Morgan Housel

Get rich with recycling – The Escape Artist

Twitter thread on simplicity versus complexity by an investing great – Jim O’Shaughnessy

Valuation is a better guide to future returns than hemlines – The Value Perspective

The trials and tribulations of ISAs, platforms, anti-money laundering – and Brexit! – S.L.I.S.

Angel investors are being squeezed out by institutional seed financiers – Tomasz Tunguz

Your home may be an investment, but don’t expect it to fund your financial goals… – Abnormal Returns

…more on the same research that found similar returns from housing and equities – Bloomberg

A commendably deep dive into a failing stock pick in the UK restaurant sector – Maynard Paton

What is ‘fair value’ for an equity, and why is it so misunderstood? – Jason Voss via LinkedIn

Brexit

“Has anyone learnt? Has former Brexit secretary David Davis worked out that his plan to leave the EU while retaining “the exact same benefits” as staying the single market, was a little ambitious? Or that the Germans actually care more about the integrity of the EU than about selling Brits BMWs? Has Michael Gove finally noticed that we did not after all “hold all the cards” the day after we voted to leave? Has anyone worked out that frictionless trade is quite complicated, and that the dreary Brussels machinery does a good job for us?” – FT [Search result]

May’s appeal falls flat as EU seizes control of Brexit date – Guardian

If on balance you’d rather not Brexit, sign the petition to revoke Article 50… – UK Government

…it has hit surpassed three million names at the time of writing… – Independent

…and email verification means the e-signatures are genuine – BBC

Top Tory donor: Form unity government to solve the Brexit crisis – Guardian

When will Brexiters accept they were conned? – Byline Times

Kindle book bargains

How Women Rise: Break the 12 Habits Holding You Back by Sally Helgesen – £0.99 on Kindle

Narconomics: How To Run a Drug Cartel by Tom Wainwright – £1.99 on Kindle

The Complete Guide to Property Investment by Rob Dix – £0.99 on Kindle

Winners and How They Succeed by Alistair Campbell – £1.99 on Kindle

Off our beat

‘Lewis Hamilton of pigeons’ sold for world record €1.25m – Guardian

Instagram is the Internet’s new home for hate – The Atlantic

And finally…

“Investors are simply throwing away wealth.”
– Tim Hale, Smarter Investing

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1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator https://monevator.com/weekend-reading-oops-bonds-did-it-again/

Why the 4% rule doesn’t work

The 4% rule went viral because it was billed as simple and safe (*coughs a noise that rhymes with bullwhip*).

Unfortunately, the 4% rule is not safe.

Nor is it simple, once you put the nuance back.

The story is seductive – that you can withdraw 4% a year from your portfolio and never run out of money.

This is often known as a safe withdrawal rate (SWR). Unfortunately the 4% version is about as reliable as that other withdrawal method you’ve heard of.

Got a portfolio of £1 million? The 4% rule claims you can safely withdraw £40,000 in year one, adjust that amount by inflation in year two, and so on, every year until the happy hereafter.

The 4% rule also gives us the rule of 25. Want to live the life of Reilly on £40,000 a year?

£40,000 x 25 = £1 million

That’s the sum you need to amass before you can hit the beach.

Simple as that. At a stroke of the calculator anyone grappling with a defined contribution pension can treat it like it’s one of those turnkey defined benefit, gold-plated jobs!

If only.

The 4% rule: the things they forgot to tell you

Where to begin?

The 4% rule doesn’t include taxes. The £40,000 figure above is gross income. You’ll need to live on less after tax.

Worse: the investment growth assumptions that underwrite the rule assume no capital gains, dividend or interest taxes. If your investments aren’t completely shielded from tax then you’ll need to lower your SWR.

The 4% rule doesn’t include investment costs. Fund charges and platform fees chip away at your annual returns and leech the SWR. Financial planner and researcher Michael Kitces explains that the answer isn’t as simple as deducting your portfolio’s total OCF from the SWR either.

(Another thing to note: the 4% rule reinvests dividends. If yours are spent or taxed then fuhgeddaboudit.)

The 4% rule applies to 30-year retirements. If you live longer than 30 years then the failure rate creeps up unless your SWR goes down.

Financial planner William Bengen, who coined the 4% rule, recommended a 3% SWR to see you through 50 years or more.

The 4% rule uses US historical returns. Bengen’s original portfolio comprised:

• 50% US equities
• 50% US intermediate government bonds.

Bengen then used historical annual returns from 1926 onwards to discover that an initial withdrawal of 4% would have enabled retirees to live out the next 30 years on a constant, inflation-adjusted income, without running out of money, come hell or Great Depression.

That’s nice, but remember the US enjoyed super-powered investment returns during the period studied. Other developed countries did not fair so well. Retirement researcher Wade Pfau calculates:

• The UK’s SWR as 3.36%
• Germany’s as 1.01%
• Japan’s as 0.27%.
• Even the global portfolio only made 3.45%

Apply the 4% rule to Japan and your money ran out one third of the time. In the worst case, your money evaporated in just three years!

Pfau and others even doubt that Americans can rely on future returns being so kind.

Known safe withdrawal rates will fall if a future sequence of returns is worse than anything currently stinking up the historical record.

What can you do with that information? Well, some researchers have worked on the link between current asset valuations and SWR. You’re advised to choose a more conservative SWR when valuations are high, while you can live a little when valuations are low.

Incidentally, the 4% rule even fails in the US when you use a different dataset. Many retirement researchers argue that the sample sizes are too small anyway.

The 4% rule applies to a specific asset allocation. Change the 50-50 US equities and intermediate government bonds split and you’re playing a different game. Bond heavy portfolios (say over 65% bonds) have historically sustained lower SWRs, especially over longer time horizons.

Sticking with allocation, UK investors shouldn’t use US SWRs – but you should appreciate that UK SWRs aren’t appropriate either if you’ve got a globally diversified portfolio.

Bengen and others have shown that diversifying into certain risk factors can improve your SWR. What about other assets such as REITs or gold? Will they improve your chances? The future is uncertain.

The 4% rule’s definition of success is probably not yours. Some SWR studies apply a sneaky ‘success’ rate. They count a SWR as sustainable if it only failed 5% or 10% of the time. The famed Trinity study did this. I think this is acceptable, but you may not. Either way it’s not ‘safe’.

Failure itself is defined as people running out of money before they run out of time. You spent your last dollar as you expired on the final stroke of midnight, December 31st, on the 30th year of your retirement? You’re a success baby!

This definition of failure keeps things simple but it’s not realistic. Most people aren’t oblivious to plummeting portfolios. They won’t fling themselves off the cliff edge like an Olympic lemming. Many will slow down their spending before it becomes unsustainable. People also cut spending in scenarios where the situation looks dire but hindsight tells us things ultimately worked out just fine.

Sadly, you don’t know which it is at the time. People cutback early because they can’t predict if they are history in the making, or whether they’re living through just another close shave for the 4% rule. In other words, living the rule can be pretty scary without a Plan B.

The 4% rule is inflexible. What if you need to spend more than your SWR allows? I don’t mean you have the occasional bad year. I mean something changes that proves your original income estimate to be off-base. Maybe you have unforeseen health costs, or a newly dependent family member. Perhaps there’s no obvious lifestyle creep but your personal inflation rate constantly outstrips headline inflation. Within five to ten years you’re spending way more than planned.

A high SWR like 4% gives you little room for manoeuvre when high spending meets poor returns. Everybody needs a more flexible plan than the basic 4% package suggests.

What if you spend too little? The selling point of a SWR is that it’s supposed to survive the nightmare scenarios. If life turns out better for you – and most of the time it does – then you could have spent more before you were gonged off. All the other caveats notwithstanding, Kitces shows that the 4% rule typically does leave large sums of spare lolly on the table.

Now that’s a good problem to have, especially for your heirs. Whereas, if you definitely want to leave something for your heirs, well, that’s not the 4% rule’s bag. It assumes capital depletion is A-OK. If it’s not then you’re into the expensive world of capital preservation.

So, you can spend too much or too little! Which is it? Well, naive application of the 4% rule can lead to either. It’s a rule of thumb not a strategy.

None of this is meant to impugn Bengen’s original research. It was groundbreaking and he clearly flagged his assumptions back in 1994. The 4% rule has taken on a life of its own, whereas Bengen’s work was only meant to be part of the puzzle. What’s often missed is the advances made in retirement research since.

You can devise a strategy from the wider body of knowledge – we’ll have more on this in the future, but see McClung for starters.

Step one is understanding that living off your money is as much art as science. And step two is knowing that the 4% rule does not work as popularly advertised.

Take it steady,

The Accumulator

Bonus appendix: 4% rule maths

Year 1 income: Withdraw 4% of your starting portfolio value.

500,000 x 0.04 = £20,000 annual income

Year 2 income: Adjust last year’s income by year 1’s inflation rate (e.g. 3%):

£20,000 x 1.03 = £20,600

The 4% SWR only applies to your first withdrawal. Every year after you withdraw the same income as year 1, adjusted for inflation, regardless of the percentage that removes from your portfolio.

Year 3 income: Adjust last year’s income by year 2’s inflation rate (e.g. 2%):

£20,600 x 1.02 = £21,012

And so on. Until the end. Which this is. At least it feels like it.

from Monevator https://monevator.com/why-the-4-rule-doesnt-work/

Weekend reading: Thicker than The Thick of It

Warning: Brexit before the links. As ever, please feel free to skip if it’ll make you cross.

What happens when a farce turns into farce? Is there a negation, and then rationality reigns?

If so we’re not there yet with Brexit.

Government ministers voting and whipping against their own motions – and still losing. Brexiteers in Parliament voting down Brexit, while those outside deny the contradictions of their own marketing that make it impossible for MPs to “deliver what the people voted for”.

See this tweet for a taste of the antics.

Meanwhile we have Labour sitting on its hands for an (admittedly ill-timed) vote calling for a second referendum – a referendum that is supposedly Labour party policy.

As Theresa May’s undead deal returns for a third showing next week, the leader of the opposition – who has been screwing with us for two and a half years – is now doing the same to a corpse.

I visited College Green in Westminister this week to hang out with the hardcore Leavers and Remainers. It felt like history in the making. Thing is, when history is still being made you don’t know where it’s going.

Were all our national meltdowns – 1066, Henry VIII, Cromwell, Dunkirk, Suez – quite so lunatic? History repeats itself – first as farce, and later as Monty Python. Or perhaps the Tour De France.

I’m reminded of an addict who can’t quit. You watch through your fingers as they are confronted again and again by their terrible life choices. Everyone outside can see the thrill is gone, grim reality reigns, and that they’re just making themselves sick. But given a chance to make a new choice, they spurn it and stumble on.

Brexit. Just say no, kids.

The investing angle? See my previous table. Hard no-deal Brexit has become less likely, but so has a second referendum and no Brexit. We’re coalescing around a middle, which is probably where we should be given the result of the referendum.

Everyone’s not a winner!

From Monevator

Good books to help you stay the course to financial independence – Monevator

Tax efficient saving for children and grandchildren with JISAs and SIPPs – Monevator

From the archive-ator: 10 lessons learned from accidentally starting a business – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!¹

FCA plans to ban or cap exit fees – Guardian

AJ Bell and Hargreaves hail wider reach of exit fee ban – Portfolio Advisor

Brexit shambles “damaging confidence in the housing market”, says RICS… – ThisIsMoney

…as the Chancellor offers £3bn fix for Britain’s “broken housing market” – Guardian

…while we’re at it, the fastest double-your-money years for UK property [Search result] – FT

Meet the billionaire behind Wish, the world’s most downloaded e-commerce app – Forbes

Philip Hammond’s Spring Statement at-a-glance – Guardian

Rates to stay ultra-low, and five other forecasts from the Spring Statement – ThisIsMoney

Products and services

Understanding and navigating ETFs’ premiums and discounts – Morningstar

The problem with wealth managers like St James’ Place – The Evidence-based Investor

Yorkshire offers 2.01% five-year fixed rate mortgage with a 15% deposit [Beware fees] – ThisIsMoney

Ratesetter will pay you £100 [and me a cash bonus] if you invest £1,000 for a year – Ratesetter

Are solar panels still a good investment? – ThisIsMoney

A review of the six leading technology investment trusts – IT Investor

Homes in areas of outstanding natural beauty [Gallery] – Guardian

Comment and opinion

Compounding boredom is simple, but not easy – Tony Isola

Brexit, Game of Thrones, and the Investment Platforms Market Study – the lang cat

Nothing happens, and then everything happens – Of Dollars and Data

Is it worth being a famous fund manager anymore? – A Wealth of Common Sense

Top tips for getting your partner on the journey to financial freedom – Mrs YFG

Why great expectations lead to small investment returns – The Value Perspective

Case study: An indie chick escapes – The Escape Artist

Put away the birthday candles. The US bull market began in 2013, not 2009 – Bloomberg

Untangling luck and skill in investing [Research] – Flirting with Models

GARP Investing: Golden or garbage? – Enterprising Investor

The case for selling Centrica shares – UK Value Investor

Inspiring video special

We all need a break. I’ve swapped this week’s Brexit links for this inspiring video from a man who earned a lot, saved most of it, then buggered off in his 30s to roam the world on a boat:

(3652 Days, this is especially for you. Get over that hump!)

Kindle book bargains

Narconomics: How To Run a Drug Cartel by Tom Wainwright – £1.99 on Kindle

The Complete Guide to Property Investment by Rob Dix – £0.99 on Kindle

Winners and How They Succeed by Alistair Campbell – £1.99 on Kindle

The $100 Startup by Chris Guillebeau – £0.99 on Kindle

Off our beat

How the modern office is killing our creativity [Search result] – FT

The mind behind Minority Report is giving PowerPoint an overhaul – WIRED

Low-cost 3D printed homes are coming – Fast Company

The surprising secret of web headlines – Seth’s Blog

What kind of person fakes their voice? – The Cut

Old money: The curse of the invisible women [Search result] – FT

California is blooming – Quartzy

And finally…

“I had been breastfed for the first six months of my life. Did my mother not realize I was a vegan? Did she even care? Either way, this was abuse.”
– Tatiana McGrath, Woke: A Guide to Social Justice

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1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”.

from Monevator https://monevator.com/weekend-reading-thicker-than-the-thick-of-it/

Tax efficient saving for children and grandchildren with JISAs and SIPPs

I am at that age where children start magically appearing in my friends’ and families’ lives.

And while I wait in vain for anyone to ask for football tips or fashion advice for the next generation, their parents – and grandparents – often ask me how they can provide financial help for their youngest loved ones.

It’s great to start saving and investing for a child as soon as possible. In fact as a sad cool accountant, I feel it’s the best gift you can give them! (Barring a copy of My First Guide To Double-Entry Bookkeeping – the illustrated edition, naturally).

Of course all the standard personal finance advice still applies – and make sure you can afford any support you give others.

Much of this will come down to personal circumstances, but something everyone needs to think about is which investment platform you choose. (More on that in a bit!)

Two platforms and three factors

There are two types of easy-to-set-up tax efficient vehicles aimed at kids:

• Junior ISAs (JISAs)
• Self-invested Personal Pension (SIPPs).

To decide which option is best, we can boil the choice down to three factors: control, efficiency, and access.

• Control – How much control you can exercise over the money that you give once it’s left your wallet? (On a sliding scale from “It’s theirs now, let’s pray they don’t go to Ibiza” to “Well, technically it’s your money little Jonathan / Gemima, but…”).

• Efficiency – How much bang for your buck do you can get from gifting money? (Spoiler alert: It can be a lot).

• Access – How and when is the money accessible?

The best choice for you will depend on how you feel towards each of these factors.

JISA

The 2018/19 limit for a JISA is £4,260. As with a standard ISA, no tax is payable on any interest or gains made within the JISA wrapper.

The JISA option is open to anyone under 18, who is resident in UK and who doesn’t have a Child Trust Fund (CTF).¹

Just like regular ISAs there are two types of JISA: Cash and Stocks & Shares. We’ll focus on the Stocks & Shares flavour. (After all this is an investing website – at least when The Investor isn’t raging about Brexit!)

How to JISA

A parent or guardian opens and manages the JISA account. It must be a parent or guardian – it can’t be a grandparent, for example.

What you will require to open the account varies. But you will at least need to ID the parent (also called the Registered Contact). You may also have to provide the parent’s birth certificate or National Insurance or passport number. The process is straightforward and takes about five minutes.

Note that while a parent opens and manages the account, money in a JISA is – legally speaking – the child’s money. The child ‘takes back control’ (!) aged 16. And they can start to withdraw money from age 18, at which point the JISA converts into a regular ISA.

It’s easy to put money into a JISA. You typically go to the provider’s website and enter the relevant account and payment details.

Anybody can put money in like this – you don’t need the account holder to do it for you (though it might be best to let them know!)

However only the parent / registered contact can change the account (from say a Cash ISA to a Stocks and Shares ISA) or switch provider or edit account details.

Most providers offer you the option to fund the JISA with lump sums. Some providers such as AJ Bell Youinvest have no minimum lump sum.

You can also make regular contributions. From my research, The Share Centre has the lowest minimum monthly contribution rate at £10 per month.

Factors to consider when choosing a Junior ISA:

Think about:

• Control – Once the money is in the JISA account, it’s the child’s. The parent manages it (not anyone else) but at age 18 the child can blow it all on craft beers and glamping (*shudder*).

• Efficiency – The ISA wrapper means there’s no tax on income or capital gains. Up to 18 years of compounded and globally diversified investing should lead to some nice juicy gains (assuming Kanye West doesn’t make it to the Oval Office). Particularly for grandparents, JISAs are an effective way to pass down money and avoid inheritance tax. Monthly contributions made out of income are exempt from inheritance tax.

• Access – The money is locked in until the child is aged 18, and accessible thereafter. This makes a JISA suitable for saving for a house deposit, first car, university costs, or a wedding.

In choosing a JISA provider think about:

• Cash or shares? With a Stocks & Shares ISA there is the potential for greater returns, at the risk of capital loss. (But with a planning horizon of as long as 18 years, time is on your side in the stock market.)

• These can vary significantly between providers. Most providers JISAs have the same charges as their regular ISAs. See the Monevator comparison table.

• Consider whether transfers in are allowed, and if there are charges from transfers out.²

• Range of investments. Some providers only offer a limited range of investible funds or investments. Identify your investment goals and then find a provider to meet those aims.

Junior SIPP

The alternative to a JISA is a Junior SIPP.

You can contribute money into a child’s pension from any age. It’s never too soon to get that Warren Buffett snowball rolling…

(You can contribute into anyone’s SIPP, incidentally – whether they’re an adult or a child. Though it’d be a bit weird to contribute to a stranger’s pension!)

For a non-tax payer – like those lazy work-shy toddlers – you can contribute up to £3,600 gross per year (that is including tax relief).

Remember that the contributor cannot claim tax-relief. Only the recipient can.

The mechanics are otherwise very similar to a JISA. Again, the parent will manage the account for children under the age of 16. Family and friends can add money to a Junior SIPP in much the same way as a JISA.

Also like JISAs, investments in SIPPs are free from income and capital gain taxes. (That is, until the money comes to be withdrawn. Income taken from a pension may be taxable, depending on personal circumstances.)

Contributions into a SIPP are usually free from inheritance tax, providing they are contributions out of income. Everyone has a £3,000 per year annual exemption. That is, you can gift £3,000 a year and it’s free of inheritance tax.

Again, both lump sums and regular savings can be used to fund the account.

On the downside, SIPP money is only accessible from age 55. This threshold is set to rise to 57 in 2028. It might go up further in the future.

Decision factors when taking the SIPP route

When choosing a Junior SIPP think about:

• Control – It’s the child’s money, but unlike with a JISA they can’t access it until they’re much older. Hopefully the child will have ‘matured’ by their 50s. (Though maybe that means less chance of strippers but more chance of Lambos?)

• Efficiency – As with a JISA, a SIPP is income tax and capital gains tax efficient. Contributing into somebody else’s pension is particularly helpful if you’re at risk of breaching the Pension Lifetime Allowance. It can also result in one of the highest ‘tax savings’ that I’m aware of – if the child is a 40% taxpayer then the family can net a 90% tax saving. (See the bonus appendix below for the maths.)

• Access – The big downside. Money in a SIPP isn’t accessible until your 50s. That may represent a very long wait. This makes a Junior SIPP a suitable option for retirement wealth building, but not for living costs or big events.

• Your Pension Lifetime Allowance. One reason you might choose to go for a Junior SIPP instead of a JISA is if you are getting close to the Lifetime Allowance. This might make diverting your pension contributions to somebody else more tax efficient for you, if it’s an option.³

Choosing a SIPP provider is very similar to choosing a JISA, except that in addition to the usual broker platforms there are also personal pension providers that offer low-cost, low-contribution options, at the expense of a narrower investment selection.

Why not have both?

If you can afford it – and you love the children that much – you could go for both a JISA and a SIPP and contribute to each to maximise the respective benefits.

Either way, any money given to children that has a chance to compound for at least 18 years – and multiples of that in a SIPP – should be very gratefully received.

But as we cautioned at the start, make sure your planning takes into account your own retirement provisions and other financial commitments, too.

Read all The Detail Man’s posts on Monevator, and check out his own blog at Young FI Guy where he talks about life as a financially free twenty-something.

Bonus appendix: Worked example of (crazy high) 90% tax relief

Parent puts £3,000 into child’s SIPP (using £3,000 annual IHT exemption)

Saving 40% x £3,000 = £1,200 in IHT relief

The child receives £3,000 plus £750 relief at source

Calculated as £3,000 x 25% = £750 tax relief

If the child is a 40% tax rate payer, they can claim a further 20% through self-assessment:

£3,000 x 25% = £750 tax relief

That gives total tax relief of: £2,700 (£1,200 + £750 + £750) on a gift of £3,000. Equivalent to 90% tax relief!

1. CTFs were killed off back in January 2011. Since April 2015 you can transfer a CTF to a JISA.
2. The FCA is currently looking at abolishing transfer out charges and several providers are supporting this initiative.
3. Some employers will allow you to do this, though it is far from common.

from Monevator https://monevator.com/tax-efficient-saving-for-children-and-grandchildren-with-jisas-and-sipps/