What caught my eye this week.

The question of ‘enough’ is a perennial one in the circles this blog moves in.

Seriously! We can barely check into a Personal Finance and Investing Blogger Cult Meeting before a heated debate breaks out over how much is enough given sustainable withdrawal rates, official inflation versus lifestyle inflation, ‘one more year’ syndrome – or even whose round it is.

(The argument that buying a round of drinks will tack three months onto a future retirement date is an entry-level Jedi mind trick for the likes of us).

Enough already

In the latest outing for one of the most popular-but-vague words in finance, Ashby Daniels at Retirement Field Guide deployed ‘enough’ towards finding wider contentment, writing:

Enough is a term that has very little quantitative definition, but much subjective definition.

Often, we can’t tie a specific number to enough, but we know when we are there. It’s subtle and yet definitive. It just hangs there waiting to be acknowledged or ignored.

But the important point is that we know it exists. It’s just a matter of whether we want to pay attention to our inner voice or ignore it completely.

Here’s a funny example that backs up Daniels’ point.

Long-time readers will know I’ve an on-off fascination and struggle with Bitcoin, and cryptocurrency more generally.

Back in December 2017 I um-ed and ah-ed about whether Bitcoin was in a bubble – and whether it was even a real financial asset.

A lot of digital data has flowed under the bridge since then, but the future of crypto is not what I’m thinking of in this post today.

Rather, it’s about what I did next.

You see I decided I wanted to own a bitcoin.

I could always see a possible future for bitcoin, especially as a store of value, and every day it survives the case is reinforced.

And I see owning Bitcoin as like making an investment into the part-ownership of a digital payment solution of the future.

But I have absolutely no idea how to value the stake accurately – and nor does anybody else as far I can tell.¹

So I decided I would own one bitcoin. There will only ever be 21 million of the made-up blighters, and 18 million of them are already out in the wild (or lost). Owning one out of 21 million seemed meaningful if the boldest predictions came true, but it wouldn’t kill me if the price crashed again.

This was a regret minimization approach to ‘enough Bitcoin’.

I’m not bitter

I built up to owning my notionally-shiny single bitcoin in fractional dribs and drabs during the second half of 2019 and early 2020, through more than half-a-dozen buys at much lower prices than today.

So of course when the Bitcoin price took off later this year, I was miffed that I hadn’t bought two, five, or even 10 or more bitcoins.

But I was more relieved that at least – at last – I owned one of them!

And when the price of the ephemeral asset fell $2,000 in 24 hours this week, I was a little surprised to lose a meaningful wodge of paper digital wealth so quickly.

However since I only owned one bitcoin, the impact of the dive was lost in the noise of my overall portfolio.

My conclusion? I have enough Bitcoin!

[continue reading…]

1. Note I’ve bolded the word ‘accurately’. I have heard all the arguments about the cost of hashing or comparisons with the total value of gold or the number of millionaires in the world, and so on. They can’t all be precisely right… [↩]

Note: Exchange rates between different currencies fluctuate all the time, and the currency pairs used below are purely illustrative from the time of writing. Today’s numbers aren’t relevant to understanding currency risk.

One area where investors and even experts get themselves into a muddle is currency risk – specifically when it comes to the currency that a fund is priced or denominated in.

Currency risk itself is pretty straightforward. It will be familiar to anyone who has ever been on holiday or who owns a property abroad.

Let’s say you’re a British resident who’s headed to the U.S. for a vacation in three months. You decide to take some dollars with you, and you opt to convert a whopping £1,000 into dollars because you’ve heard you’ll need to tip big to avoid a riot.

You’re also very old-fashioned, so you want to get this sorted out three months in advance.

Ignoring transaction costs¹ and at the time of writing in 2013:

• At a rate of £1:$1.60, your £1,000 buys you $1,600 dollars

Let’s suppose that before your holiday, the pound strengthens so that £1 now buys $2. But you’ve already changed your money, at the old rubbish rate!

• At the new rate of £1:$2, your $1,600 is now worth (1,600/2) = £800

Ouch!

It could have gone the other way, too, of course.

Currency risk has upside as much as downside.

Currency risk and the underlying assets

Converting holiday money is straightforward – and exactly the same thing happens when you make overseas investments.

Let’s say that rather than going on holiday, you do what I’d do – being a tightwad – and invested £1,000 into a tracker fund that follows the US market instead.

All the stocks in the tracker fund are based in the US, listed on the US markets, and priced in dollars as you’d expect. Your US tracker fund is therefore buying a bunch of US dollar denominated assets.

At a £1:$1.60 exchange rate:

• Your £1,000 investment buys $1,600 of dollar assets²

Three months later, the exchange rate is £1:$2. If the US stock market has not changed over the period, you’d log on to your broker and see:

• Your investment is now worth $1,600/2 = £800

Of course it’s more likely the market would also have moved over three months, as well as the exchange rate. If the US market had gone up 10%, your investment would be worth £880. If it had fallen 10%, you’d be looking at a princely £720.

In fact, it’s usually stock market moves not currency moves that will dominate your returns.

(Also, currency fluctuations usually – though not always – happen more slowly than in my example, which I dialed to ‘high’ to make my point.)

Fund denominations don’t matter

Safari, so-goody, as Christopher Biggins used to say in a kid’s TV program that has me showing my age.

Where people get confused is when they buy a fund that is denominated in a currency other than that of the underlying investment.

A typical example would be a UK-traded ETF that tracks the Japanese market, but is denominated (/priced) in euros.

The mistake people make is they think they are exposed to multiple currency risks – in this case the euro as well as the Japanese yen.

This is wrong – you are only exposed to the underlying asset’s currency.

Lots of people make this slip. For example, when I wrote this article Morningstar had an article up (since removed) about fund denominations that stated:

…unless, of course, you really know what you’re doing when it comes to forex and, for example, you want to take a bet that emerging market currencies will appreciate against the euro, that the euro will appreciate against sterling, and that these events will converge in time for when you choose to sell your shares.

The implication of this quote is that a UK investor who buys an emerging market fund that’s denominated in euros faces a double-whammy of two currency risks – the pound versus the euro, as well as versus the emerging market currencies.

That’s incorrect.

As a UK investor you’re only exposed to emerging market currency risk in buying the euro-denominated fund. The exchange rate between the pound and the euro is irrelevant.

Currency risk: The science bit

I’ll show why it’s the underlying asset currency that matters in two different ways.

First I’ll use a bit of algebra, and then we’ll go through a real-life example.

Algebra first.

Let’s say you are a UK investor who has rather oddly decided to buy a euro-denominated ETF that holds only UK shares.³

The Euro-priced ETF holds UK-listed assets – BP, Tesco, Lloyds, and so on – that are denominated in sterling.

(1) The quoted price of the ETF in euros:

= Value of UK holdings * (pound/euro exchange rate)

Now let’s say you log into your UK fund platform to find out what your ETF investment is worth today in pounds – your native currency.

Clearly its £ value is equal to the value of the ETF in euros, adjusted for the euro/pound exchange rate.

(2) In other words, the value of the ETF in £:

= Price of ETF in euros * (Euro/pound exchange rate)

Now we can substitute (1) into equation (2) to give us the value in pounds as:

= Price of ETF in euros * (Euro/pound rate)

= (1) * (Euro/pound rate)

= (Value of UK holdings * (Pound/euro rate)) * (Euro/Pound rate)

= Value of UK holdings * (Exchange rates cancel out)⁴

= Value of UK holdings

In other words, as a UK investor who is investing pounds, this fund of UK assets is worth its value in pounds, regardless of whether it’s priced / denominated in euros, yen, or Malaysian ringgits.

What about if you were a UK investor buying a euro-priced ETF that invested in the Japanese stock market?

Here the underlying assets are Japanese, so the exchange rate that matters for a UK investor is the pound/yen exchange rate.

To see this, we can modify my equation above to take the value of the ETF in pounds to be:

= Value of Japanese holdings * (Pound/euro rate) * (Euro/Yen rate)

= Value of Japanese holdings * (Pound/Yen rate)

Again, the pricing currency (here it’s euros) is irrelevant and vanishes from the equation. The euro introduces no extra currency risk.

Note: Some funds hold a lot of cash, which may introduce an additional currency risk. If for example you own a European-based investment trust that invests in Japanese equities but that holds 10% of its assets as cash in euros, then as a UK investor you do face currency risk on those euros, as well as on the much larger exposure to the Japanese yen. Cash held by ETFs and trackers is usual trivial, however, and can be disregarded.

Currency risk in the real-world

Let’s really drive the point home with a real-world worked example.

Imagine the Japanese tracking ETF mentioned above comes in two denominations – the original euro-denominated ETF that we looked at above, and another one denominated in pounds sterling.

As a UK investor, you’d be naturally drawn to the ETF denominated in pounds. But in theory it makes no difference which one you buy⁵.

Let’s look at the pound denominated Japanese tracking ETF first, using real data from Google Finance for historical stock market levels and exchange rates.

It’s 6 Jan 2012 and you decide to invest £1,000 into this Japan-tracking ETF.

At the time of your investment:

The Japanese stock market is at 8,390

£1 buys 119.5 yen⁶

You invest £1,000, which means you invested in yen terms:

1,000*119.5 = 119,500 yen

On 4 January 2013 you decide to cash out. Over that time the Japanese stock market rose to 10,688 – a gain of 27.4%.

So your investment in local yen terms is:

= 119,500 yen plus the 27.4% gain

= 152,243 yen

We now have to convert back into pounds. Turning again to Google Finance, I see that on 4 January 2013:

£1 buys 141.6 yen

So your investment is worth in pounds:

= 152,243 / 141.6

= £1,075

Notice that although the local market went up 27.4%, you’ve only gained 7.5% in pounds. That’s because the pound strengthened against the yen, which meant your yen bought fewer pounds when converted back into sterling. This is true currency risk in action.

Hopefully that was pretty easy to follow. But what if you’d bought the euro-denominated ETF?

Trickier to work out, as we need to know a couple more exchange rates.

On 6 January 2012:

One pound bought 1.21 euros

One euro bought 98.6 yen

So – deep breath! – you again invest £1,000:

£1,000 = 1,210 euros

1,210 euros = 119,472 yen

As we saw, the Japanese market rose 27.4% over the year.

This time your investment in local terms:

= 119,472 yen plus a 27.4% gain

= 152,208 yen

Checking on Google Finance, I see on 4 January 2013:

One pound bought 1.23 euros

One euro bought 115.2 yen

So converting back:

152,208 yen = 1,321 euros

1,321 euros = £1,075

Magic! Again you have ended up with £1,075, despite the fact you invested via a euro-denominated ETF.

The exchange rate changes between the pound and the euro have disappeared from the equations. It is the exchange rate between your currency and the currency of the investment – in this case the yen – that matters, and determines your currency risk.

Why this happens: Related currency pairs are perfectly inter-connected, which is what enables the denominating currency to ‘disappear’ above. If this wasn’t the case, then you could profit when currency exchange rates got out of kilter. For example, you might be able to convert pounds into yen, and then convert those yen into euros, and then convert those euros back into your original currency, pounds, for a profit. You can’t do this because the currency markets are extremely liquid, deep, and efficient, and any miniscule opportunities like this are immediately arbitraged away.

Currency risks and rewards

Don’t be surprised if you see people saying something different to the above. They’re wrong and I’m right, as the worked example I plodded through above proves, even if you weren’t convinced by my elegant algebra.

Check the figures with Google Finance if you don’t believe me! And see this similar example that uses the Thai baht.

The takeaway should be clear:

• Currency risk is determined by the local currency of your foreign asset.

• Even if you buy a vehicle that is priced in your own currency, such as a UK investor buying a UK-listed ETF that’s denominated in pounds, if the fund invests in overseas stocks then you’re exposed to the currency risk of the underlying assets.

Despite the scary name, currency risk isn’t necessarily a bad thing, as you can win as well as lose. Also it’s another kind of diversification and so in some ways it can reduce risk.

With that said, there’s a strong argument that you’re not really being compensated with higher returns when you take on currency risk and so you should avoid it where you can.

This is a huge topic for another day. Broadly speaking, currency risk is less of a concern when investing in overseas stock markets but something you’d ideally avoid when investing in overseas government bonds. (For much more detail, see this long paper by Vanguard).

You can avoid currency risk in any asset class by using the appropriate currency-hedged ETFs. This may increase your costs, however.

You definitely need to think about your home currency when allocating for the long-term. If you’re going to be a UK pensioner, it would be madness to have all your assets in Japan. One day you’ll need to spend pounds in the shops and you don’t want to be completely at the mercy of the prevailing pound/yen exchange rate when you retire.

Most UK pensioners would have a large stock of UK government bonds, however, or perhaps an annuity or other sterling-based asset. And of course putting all your money in Japan is the antithesis of passive investing as we explain it around here, which is based on global diversification.

As a product of a well-constructed long-term portfolio, currency risk is not something to be afraid of.

1. The costs of exchanging money at airport booths and so on are massive in the real world, and you should explore all the different ways to pay abroad, such as the newer Fintech solutions – but that’s another article. [↩]
2. Again ignoring any transaction costs. [↩]
3. An ETF targeted at European investors, in other words. [↩]
4. One small caveat is there may be money changing charges made by the fund or charged by your broker when converting from one currency to another racked up along the way. But that is a separate issue. [↩]
5. As throughout this article I’m ignoring small currency related transaction costs that are a different issue [↩]
6. I am going to ignore small rounding errors throughout for clarity. [↩]

My greatest fear about FIRE¹ is that it doesn’t work. That FIRE doesn’t make me happy. It turns out to be a mirage. The dream dissolves and, in a desperate attempt to retrace my steps, I go back to my old job. The lifer who walks back into his cell.

To me, this is swallowing the blue pill.

There’s a wave of doubt that’s rippled through a patch of the UK Financial Independence community that I frequent. See bloggers such as Finimus, Indeedably, Simple Living In Suffolk.²

Every time one of these FIRE-ees announces their return to work, I think of another soldier falling to cannon-fire amid the thinning ranks of a Napoleonic line. 

I take it personally, I suppose. Why? Because if it happened to them, it can happen to me.

I’ve banked a lot on FIRE being ‘the answer’.

Let me level with you:

• I’m riddled with doubt about how this will go. 

• I will consider it a profound personal failure If I return to my old line of work because I can’t find anything better to do with myself. 

I’m nervous about making this work because the stakes are high. 

What’s up for grabs is living a life doing things that matter to me and those I love.

As opposed to pouring my energy into hitting corporate targets that loom over everything like a dark star.

When the FIRE goes out

What goes wrong when the FIRE dream dies?

• Boredom – life is too quiet, challenge disappears, domestic tasks don’t translate into self-worth, leisure without measure is like eating junk food 24/7. 

• Lack of social contact – everyone’s at work, there’s a loss of comradeship, isolation sets in. 

• Status anxiety – it’s too soon to be out of the action. There’s a sense of being sidelined, no longer needed, being a disappointment to oneself, the community and those judgy types who ask, “And what do you do?” 

• You’re meant to be happy – but what if you’re not happy after FIRE? “If this is bliss then I might as well be paid to be miserable” seems to be the way the thinking goes.

I don’t think falling into these existential tar pits is inevitable, but I am definitely vulnerable. 

Here’s how I plan to keep the FIRE burning

I’ll need some stress – not the chronic stress I experience at work, but I’ll need a challenge in my life that makes me experience discomfort. This will mean setting myself a task that I won’t already know how to achieve, or be innately good at. It’ll involve learning new skills. It’ll mean committing to the task (perhaps publicly), so that if I pull out then I’ll think less of myself. 

Community – if I spend all day with myself then I’m going to go nuts. I need to be of use to other people. To focus on their needs and not my own for a while.

It’s important to keep one’s expectations in check here. This isn’t about solving world hunger. If you can change one person’s life for the better then it’s worth it. Though you may never know the difference you’ve made.

FIRE gives me the chance to find a deeper sense of community than ever before.  

Physical – I’ve worked in an office all my adult life. Air-conditioning, monitor tan, sitting for eight hours or more a day. I’ve stayed relatively fit but, god, the balance is all wrong. I want to be active for hours at a time, not an hour a day.

I want to chop wood, walk, cycle, dig, take up a martial art.³ It’s use it or lose it time for me, and operating purely in the knowledge economy means losing it. 

Nature – I need to spend more time feeling the elements on my skin. I want more woods, water, heat and cold, dawns and dusks. 

New skill – it’s time to try something I’ve never taken on before, something I’m curious about. Perhaps it’s something I wasn’t particularly good at in the past: maths or a foreign language. Perhaps the skill-challenge can tick my nature and physicality boxes, such as growing my own food or learning survival skills.

As long as I stretch myself then this will deliver my stress-dose, too, because I’m a sucker for imposter syndrome. 

A project – this will add structure to my week, giving it a backbone that everything else can hang from. Writing for Monevator and trying to make more of it in cahoots with The Investor is an obvious example. Renovating the house with Mrs Accumulator is another. 

A project needs to be absorbing enough to soak up the hours. It needs to give me a sense of building towards something and having made progress each week. 

Later on I can research / dabble in new projects as I understand more about who I am in my FIRE incarnation. Could I get involved with the green economy? Tree-planting? Rewilding? 

Fun and relaxation – there has to be time for just aimlessly arsing about. No goal, no growth. Just time that’s mine to fritter away. As long as this is rationed like a toddler’s screen-time, then I shouldn’t turn into a Doritos-munching, couch-blob sitting in his pants all day long. 

Family – Yep, they’re gonna get more of me. Unlucky!

Ideally the above becomes a self-supporting system of goals and behaviours that keeps me right side up as I adapt to a life of FIRE. 

The overarching goal is to chisel out a better version of myself. Someone I’m happy to be, regardless of what anyone else thinks. 

That’s going to require experimentation and likely stumbling down roads I didn’t expect to take.

FIRE alarm

None of this conflicts with the false FIRE belief that purity depends on whether you’re paid or not.

It does conflict with the false mainstream belief that retirement means doing ‘nothing’. 

It’s impossible for healthy humans to do nothing.  And I’m fine with being paid to do something I want to do. 

The key difference between the next phase of my life and the last is I won’t do anything just for the money, or to polish the CV, or to ‘fit in’. 

I think it will take at least two years to adapt to my new life. Every major change in direction I’ve taken has been followed by a massive crisis of faith. Like an earthquake followed by a tsunami.

I’ve wanted to cut and run but have always held on. Breaking through the pain barrier has always been worth it eventually, but it may feel tougher with FIRE because theoretically everything’s meant to be rainbows and unicorns from here.

Life isn’t like that, which is something I need to remember when doubt gnaws at my mind like it’s a chew-toy.

Take it steady,

The Accumulator

P.S. Here is a list to help you think about the things you really want to do. I can’t remember where I got this from, but it’s so good I’m just going to share it as is:

• What can we do together?
• What do you enjoy / value?
• What did you enjoy as a child?
• How would you like to make a difference?
• How would you like to serve others, what’s the best way you serve others?
• What would you like to be really good at?
• What could you do for hours and never tire of?
• What makes you happy / would make you happier?
• What talent or skill could be built on?
• What challenge excites you?
• What have you never gotten around to doing? 

Hopefully someone else recognises this list and we can credit the original source. If you have a link to the original then please share it in the comments!

1. Financial Independence Retire Early. [↩]
2. And before them, will-they won’t-they return to workers like RIT, YFG, SHMD. [↩]
3. I dabbled with Tai Chi in my twenties but it got squeezed out amid everything else. [↩]