Back in the mists of time (aka 2007) I planned Monevator to be as much about entrepreneurship as investing. That faded as we honed our niche, but I’m still delighted when I find a business success story in our ranks. Valiant has commented on Monevator for years, but I’d never guessed his background. It’s heartening to hear how achievement in the cutthroat world of business can dovetail with a commitment to passive investing, even with sums running into the millions. Enjoy!
A place by the FIRE
Hello! How do you feel as you take stock of your financial life today?
Rationally, I can see that I’m better-placed than 99% of people, and I’m very fortunate. I’ve worked crazily hard but I’ve also been the right person in the right place and should be financially secure for life.
But the same thought that’s driven me throughout my working life – fear of ending up living in a cardboard box – means that I’m never really content.
I tell my wife that if only I could win the lottery I would be truly content. She says I absolutely would not!
So you’re married… Children?
Yes, I’m in my early sixties and my wife is a year or so younger. We’ve two adult children. One is married and lives in London, not currently working. The other is single and lives and works in IT in Manchester.
Where do you live and what’s it like there?
We live in a small, rural village in Somerset. It’s very quiet, with quite an elderly population. We’re still amongst the younger ones. Wealthy incomers like us have driven prices up so not too many younger local families can afford to live here.
The nearest town is eight miles away and the broadband is rubbish, but overall we like it.
We also have an apartment on the river in South-West London, close to where my in-laws live.
When do you consider you achieved Financial Independence and why?
I left my last permanent job in the 1980s, aged 27, and have never had a ‘proper’ job since. I worked as an IT contractor for some years, then started my own businesses.
By the time I was in my mid-50s I’d paid off the mortgages on both my family home and a holiday home, had plenty of savings, and owned a company generating a million a year in earnings. So I was probably already financially independent by then. But then in 2016 a global IT company bought my firm for many – though not tens of – millions and I was surely set for life.
What about Retired Early?
After I got the final tranche of money for the business sale – at the end of a two-year earn-out – I did stop working full-time.
I now work as a non-exec director to some small companies in the cloud computing sector. That takes up two to three days per month. I don’t really do it for the money – just the interest.
My wife runs a holiday let which I help out with. I’m also the treasurer for a couple of charities.
Assets: super secure
What is your current net worth?
Including SIPPs, ISAs, other equities, cash, and properties, between us we are perhaps worth £9m.
How does that divvy up? Any debts?
We own three houses outright, one of which we run as a holiday let.
Between us we have two SIPPs with a value of £2.1m. ISAs holding about £1.8m. We also have dealing accounts holding equity and gilts with a value of £560,000, Finally, cash savings of £1.2m.
We lent each child about £350,000 some years ago to buy a starter home. I put a lien on each so it probably counts as a loan. We will probably soon write these liens off and make them gifts.
What’s your main residence like? Do you own or rent it?
We own it. It’s a three-bedroom house which we had built to our own specifications, having demolished the existing one on the plot ourselves. It’s got great views, is of modern design and very energy-efficient, but otherwise it’s fairly modest.
From a financial point of view, it’s a folly. It cost about twice as much to buy the plot and demolish the old house and build the new one as the house would probably sell for. (Although we largely did the demolition ourselves with a sledgehammer and a quad bike. I’ve never been fitter than that autumn!)
Folly or not, it should do us until we die or need care.
Do you consider your home an asset, an investment, or something else?
It’s somewhere to live. We’ll be here until we die or have to go into a care home…is the plan.
Earning: entrepreneurial adventures
Tell us a bit more about your career.
I worked for a year at a defence establishment before university – in the late 1970s before it was fashionable to take a gap year – and I got into computing there.
I did a very scientific degree but when I left I fancied a change. So I worked for a couple of years selling exhibition space for conferences, then organising conferences myself and selling attendance to them.
After that I took an IT job in the mid-1980s, stayed in it for three years, and then moved to Australia for a while where I started IT contracting. I did that for a few years before starting a series of IT service firms. I eventually rode the wave of cloud computing.
What was your annual income?
At its peak, in the years before the sale of the last business, I was earning hundreds of thousands a year. When it became apparent that we would soon get bought I cut back on the drawings to boost the cash position of the business.
How did your career and salary progress over the years – and to what extent was pursuing financial independence part of your plans?
By the mid-1990s I was earning £2,000 a week as an IT contractor. I just saved as much as I could! I was convinced my good fortune would soon come crashing down, and the current contract would be my last.
In reality, aside from a few months after first moving to Australia, I was never out of work. But it never occurred to me that the good times would continue. I never truly believed that I was financially secure until the last business was sold and I achieved the earn-out.
Did you learn anything in building your career and growing income that you wish you’d known earlier?
Obviously with hindsight I can see the good times did continue. I’d probably have borrowed more.
When we had our first child we were living in a tiny end-of-terrace house. We borrowed £70,000 from my mother-in-law to buy a £140,000 detached house, which we lived in for 22 years and eventually sold for a million.
We should have borrowed much more. But my glass-half-empty nature would never allow it.
I started a SIPP at the urging of my accountant. As with many people in their 30s I thought the day I’d need a pension would never come. With the benefit of experience I wish I had put more into it when I could, and that I’d managed it better in the early days. I just used to follow some model portfolios, and I did not pay enough attention to charges.
Do you have any other sources of income?
We earn a bit from the holiday let, and I pay my wife from my non-exec director business because for historical reason she still needs two more years of earnings to qualify for the full state pension.
I drawdown enough from my SIPP each year to use up my basic-rate tax allowance. We’re in the process of putting the holiday let into my wife’s name so she can use more of hers up.
Did pursuing FIRE get in the way of your career?
No. I had no structured career to speak of after age 27. I just freelanced or ran my own businesses.
How did running a business affect your attitude to personal finances?
I felt a big responsibility to my employees. We had very little staff churn so a lot were with me for many years. By the time I sold the last business we had around 50 employees. We didn’t take the highest offer, but the one that we thought best fitted our own ethos, and which would keep the most staff.
In the event only four were released. But even then one had also become a good friend and things have never been the same with her since, which is a source of regret.
By the end we were having to find a quarter a million a month in pay and employer’s National Insurance (NI), and £30,000 more for other overheads. That did concentrate minds, and sometimes led to sleepless nights.
I don’t think the current government understands how much small business owners are risking – although the previous government wasn’t great either.
What motivated you to leave paid employment to become a contractor?
In the mid-1980s I was working in the City of London – a real boom time. I was employed in a sought-after technical role earning £10,000 a year. I was surrounded by more experienced people getting £400 a day.
After two years of that I thought I was as good as them, and left anyway to try my luck in Australia – where my role was also much sought-after, making immigration easy – and chanced my arm as a contractor. I stuck out contracting for ten years, though I came back to the UK after three years.
How did freelance contracting turn into a business with employees?
The transition came organically. I was already running a couple of contracts which I was largely sub-contracting to others. And I had a number of customers who wanted my technical and management skills. Down the years I’d met some really good people, and when one customer in particular asked if they could outsource the bulk of their IT to me – backed up by another contractor with whom I’d worked well – I took the plunge.
I never really looked back from there. Even so, in the early days there were just four of us and a handful of contracts. It was a long haul to use those original contracts (all with quite big names in their sectors) to acquire new customers and build a business with 50 employees.
We also had a big break in substituting for another supplier engaged to one of the big beasts in a particular new sector. We did a good job and so kept that partnership. Then that sector really took off and burned brightly for a while.
Did you offer anything unique?
In IT services there are literally thousands of small suppliers jostling for attention in a very crowded market. Our strategy, driven by our top salesman, was to present ourselves relentlessly both to customers and to the large vendors as THE people to turn to in that new sector I mentioned.
It sounds easy to stick to a strategy. But when you’re a small business struggling to boost sales and meet payroll and overheads every month it takes a great deal of self-discipline to persevere with your core messaging and to turn down easy money from ‘non-strategic’ sources.
Finally, my tech director spotted the potential of cloud computing and we rode that wave successfully too.
So some of our success was spotting a trend and exploiting it. But a large part was being in the right place at the right time!
What was the biggest challenge you encountered?
Sales was vital. Coming from a largely technical background I found managing techies quite easy. Ditto finance and admin, but sales is a different world.
Most sales people are quite avaricious and competitive (in a good way) but in my experience the best also at heart want to be valued. And like most people they perform best when they believe in the product and service they’re pushing.
Unlike most jobs, where there is to a greater or lesser extent subjectivity in assessing performance, there’s no hiding place in sales. You have a target and you either hit it or you don’t. There’s no ambiguity.
I felt I spent more time managing our 3-5 sales people – I never had a sales manager – than all the other teams put together!
Did FIRE-type thinking and business strategy gel at all?
My aversion to debt meant that we grew our businesses fairly organically. Occasionally I was tempted to borrow to buy a competitor but – with the exception of one small complementary business – we never completed on a handful of potential deals to do so. This may have been a mistake in the years after the Global Financial Crisis. We found ourselves competing with other companies much less well-run than us, but who were able to keep operating and competing fuelled by very cheap debt.
Should we have gone for it? Maybe, but I’m happy enough anyway.
So no regrets?
One of our largest customers was owned by a well-known billionaire, who had taken an interest in that business because it had great potential in the event of a regulatory change. Watching him at close quarters was breathtaking – the utterly ruthless elimination of every last bit of cost. They just slashed and burned, and somehow they kept going despite disillusioned staff, elderly technology, and poor customer service.
In fairness, the business they rescued from administration to become our customer would have failed without him. But he always paid late, and argued about every last penny. He personally authorised every invoice over £5,000, despite having a massive media empire.
I could never run my business like that. Probably in consequence I could never be a billionaire. But it was a window into the world of a true tycoon.
Do you feel entrepreneurs get the same acclaim in the UK as they do in the US, or even Australia?
I would say they do not.
It doesn’t seem to be much of a stigma to have a failed business on your CV in the US, but it certainly is in the UK. And – perhaps this is just a function of some of the media I read, such as The Guardian – many people in Britain seem to openly despise anyone making profits and creating jobs.
The UK seems to have a mindset of preferring public sector jobs to private. In many parts of the country the pay scales and benefits in the public sector – which outside London have no local variation – are so good that small businesses are frozen out, particularly in poorer areas where the public sector pay rates are thereby relatively high. Private companies can’t compete for good staff.
I was lucky in that by growing my businesses organically, we didn’t need much seed money. Where we did, I could fund it myself. But others I know have found it very difficult to borrow from banks and have been asked to put up a lot of security.
That’s okay I guess if the rewards are there for the risks. But recent tax changes – especially the drastic reduction in Business Asset Disposal Relief (BADR) – must make potential entrepreneurs question whether it’s even worth bothering?
I’m certainly not interested in starting another business that would involve employing people. Employer’s NI is too high. I’ve already used up my lifetime BADR allowance and I’d pay 24% CGT on disposal of any business I sold.
I already have enough money. It’s no longer worth the heartache!
“Why didn’t I start Monevator in Australia?” mused The Investor, editing another article as a cold rain fell outside.
Saving and spending: living a quiet high life
What is your annual spending?
It’s been an unusual few years, as we’ve been building the house which, with the land, cost over £1.6m. But I would say that our run-rate spend is about £100k a year.
It’s really expensive running three properties. Almost £15,000 a year in Council Tax alone.
Do you stick to a budget or otherwise structure your spending?
No. Aside from the multiple homes we don’t have expensive tastes or hobbies. We’re not interested in cars (although we have a fairly new electric car, and we also have a 12-year old Mini and an elderly Land Rover). We don’t travel all that much (though I go First for long haul if we do). We eat out infrequently.
What percentage of your gross income did you save over the years?
I probably always saved at least one-third of what I earned.
Chunky! What’s your secret to saving?
I vividly remember a contract I was doing after I returned from Australia. At that point I was probably on £400 a day but driving a five-year old Cavalier. One of the other contractors had just got a really smart sports car and told me I was an idiot for living like – as he saw it – a hermit.
But to me it’s important not to spend every penny you have. Bad times could be just around the corner (although in fact they never were!)
Do you have any hints about spending less?
Don’t borrow, except a mortgage.
Do you have any expensive passions, hobbies, or vices?
No! I have a very dull life.
I go to a lot of live sport – lower league football and cricket – and I have subs for all the sports channels, so I suppose that’s an extravagance.
My last business was big in IT for sports and so the TV subscriptions used to be an allowable expense. No longer!
Investing: progressively more passive
What kind of investor are you?
Nowadays I’m almost entirely a passive investor, having recently sold a large chunk of Fundsmith that did really well for us.
What was your best investment?
Probably Fundsmith. My wife and I were in from almost the start – my account number is in the hundreds – and they turned a £100,000 investment into something north of half a million over ten years.
In terms of pure percentage appreciation, though… I bought a few hundred pounds worth of Bitcoin a few years ago, just to learn a bit about the process. I checked how it was doing for this interview and was amazed to see it’s valued at almost £22,000!
I’m still a sceptic, but might buy some more if and when the next crash comes. However my bank (First Direct) makes it very difficult to buy via reputable sources.
Also, not an investment but my accountant talked me into taking ‘2012 Protection’ on my SIPP. Although this is less of a boon that it was before the abolition of the Lifetime Allowance, it still entitles me – at the time of writing – to take an extra £182,000 tax-free from my SIPP.
Did you make any big mistakes along the way?
I probably didn’t look at costs enough early doors.
I had several million at once to invest after the last company sale. If I’d discovered Monevator by then I’d have done it myself. But instead I used an IFA who guided me into a fairly conservative fund with a big-name institution.
Now I know that – in terms of performance and low-cost – a DIY combination of tracker and gilts would have been the way to go.
I started to diversify into gilt funds a couple of years ago. In a fatal mistake borne of arrogance and laziness I didn’t take the trouble to understand how the funds worked properly, and I (deservedly) lost big money in 2022.
I still like gilts. But now I’ve taken the time to understand them, buy individual ones, and hold them to maturity.
I also sold a fair bit in a panic at the start of COVID. I should have held my nerve!
What has been your overall return, as best you can tell?
I’ve only really started to take notice since I got the big bucks when I sold the last business, and had to invest a very large sum at once. I took some advice and used a managed fund from a big bank, which I sold last year and reverted solely to trackers.
When I sold, the value of the fund had gone up by about 50%. Probably not as good as VWRP!
How much were you able to use your ISA and pension allowances?
My SIPP has done okay, given that I stopped contributing to it in 2012 in return for protection. I’ve withdrawn £200,000 from it over the past four years and it’s still worth £1.8m.
Given that I was planning around the now-defunct Lifetime Allowance of £1.8m I think I’ve managed it as well as I could have.
We’ve both contributed fully to ISAs, and PEPs before them, since inception.
Neither of us is an ISA millionaire though. In that respect we probably should have invested better!
To what extent did tax incentives and shelters influence your strategy?
We’ve exploited both SIPPs and ISAs fairly tax-efficiently. As I mentioned earlier I also cut back my drawings from my business in its latter years. This improved its cash position but it also meant that I was able to get out the free cash and pay just 10% CGT on it.
The limit on this relief has since been slashed from £10m to £1m, which I have already exceeded. That is one reason why I have not started another serious business.
How often do you check or tweak your portfolio or other investments?
I probably check once a month, and re-balance once or twice a year. Rarely anything dramatic. I did however sell that tranche of Fundmsith in anticipation of a large CGT rise in the recent Labour budget.
Were you ever tempted to apply insights you gained in business to active investing? It’s interesting that you worked in tech, but the active fund you mention – Fundsmith – is hardly a tech play…
Never tempted, really. I’ve dabbled in the occasional stock or sector pick, but I’ve come to realise that I and most other people know nothing and can predict nothing. So I am happy with a passive style.
I do have a few VCTs and EISs which I didn’t mention before. Perhaps £100,000 and £60,000 of each respectively. In the EISs I do tend to pick sectors which I know something about. I have also invested a few tens of thousands in a friend’s cloud business.
Fundsmith was just a punt on a recommendation that paid off by Merryn Somerset Webb, whose podcasts and writing I enjoy almost as much as Monevator!
Wealth: mo’ money no problems
We know how you made your money, but how did you keep it?
Paying down debt, particularly mortgages, as soon as possible.
This may not always have worked to my advantage.
When I sold the business in 2016, the IFA who advised me on investing the lump sums was keen to have me borrow against these to invest further in equities.
In hindsight this would have been a profitable strategy. But I lack the mental attitude to take that kind of risk.
Which is more important, saving or investing, and why?
Well…both! Bigger picture, I am torn between two approaches, both of which I was introduced to by Monevator.
Nick Magulli wrote a book – which I bought because Monevator told me to – Just Keep Buying. As the title suggests, the ethos is to buy stock the minute you have spare cash, and don’t worry about it. The best time to buy equities is now.
On the other hand, another Monevator-recommended column (I forget whose) said that if you’ve won the game already, stop playing.
I think I probably have. There’s enough money to keep us comfortable. I don’t want to be the richest man in the cemetery. Nor am I obsessed with leaving my kids as much as possible. I can afford to buy pretty much anything I really want.
I don’t need large real-terms growth, so I should probably take a step back and be conservative.
Orthodoxy would have someone at my age – largely decumulating – being at most 50/50 equities/bonds. I think I can probably live with 60/40, or even 70/30. As long as I have, say, five years of anticipated spending money in cash or gilts to minimise the need to sell in a slump.
But right now we’re only about 30% equities (14% Gilts, 10% Gold and 46% cash). That’s because of the Fundsmith sale and – here I feel the wrath of Lars Kroijer et al at my back, asking why on earth I think I know better than ‘Susan’ – now just doesn’t seem like a good time to buy more global trackers.
There’s an interesting contrast between your relatively cautious stance as an investor and the riskier lifestyle of having been an entrepreneur…
I don’t think I am actually that cautious an investor!
I have fairly conventional assets (global trackers, gilts, cash, gold) but until quite recently I was pretty bullish on the percentage of assets I held in equities.
Even now am planning to get back to 60% equities – which is high for a decumulator I think?
When I started my IT contracting journey, my dad, who’d worked himself up from tea boy to sales director at the same business for 30-plus years, kept telling me I should ask for a permanent and secure job. But even by then – early 1990s – I think those days had gone.
Unless it’s in the public sector, is there a really secure job any more?
I accept that employees in the UK have a reasonable amount of tenure after two years – which the current government plans to extend to all employees from day one. This will be a disaster through the law of unintended consequences! But even so, people can be managed out for relatively small sums.
So whilst as an an entrepreneur I didn’t have the security of a permanent job, I also kept a very close eye on the worst case at all times. I never put myself at risk of losing everything.
Many do of course, for example by putting up homes and so on as security. Some become billionaires through it.
But I don’t think I ever had the risk-taking mentality to earn more-than-you-could-ever spend big bucks.
When did you think you’d achieve financial freedom – and was it a goal with a timeline?
I never thought I would until I did.
Even now I worry.
What would you say to Monevator readers pursuing financial freedom?
Be realistic, and have an enumerated plan.
I no longer use the IFA who helped me invest the proceeds of my last business sale, but he did one thing that really helped me. He sat me down with Mrs Valiant and we worked out a plan of expenditure over ten years – to take us to state pension age, when we’ll get a £25,000 a year injection I hope – and then used that to suggest the balance of income and investments needed to achieve it.
Of course that plan has required adaptation down the years and it’s far from perfect.
But I do believe that a clear, spreadsheeted plan – which like rules are for the guidance of the wise but the blind observance of fools – is a great help.
How long did you use an IFA for? Were they not helpful when the sums to manage got well into seven figures? Or did your accountant handle all your tax advice?
I had one or two IFAs after I started making decent money contracting. But I was an awful client really.
The first one I had was a lovely guy and we talked football incessantly. But even when I asked him to his face he just couldn’t come up with firm recommendations. It was all: “on the one hand, on the other…” In the end I gave up on using him because of this.
Later on I tried an IFA that a non-exec director we used recommended, and he wanted to be wholly prescriptive. One time he wanted to put 10% into commercial property. I invited him to look out of our office window at the vast array of ‘For Let’ boards stretching to the horizon.
But I didn’t want to go with a managed approach either. I always resented the fees. I’m better off managing my money with simple Lars Kroijer-style strategies. If it goes tits I only have myself to blame.
Even as the portfolio grows so substantial?
When I sold my last business I had millions to invest, and wanted some help with the selection and the mechanics.
This was a decade ago. I’d have more confidence to do it myself now.
As mentioned my IFA was quite good at forcing us to sit down and work out our medium and long-term objectives. And he did negotiate a good management fee rate with a reputable supplier.
But in the end the performance wasn’t great. Also he kept suggesting more off-the-wall things that I was obviously never going to do – lending money to an ex-Premier League footballer was one highlight!
The IFA wasn’t earning much if I wasn’t re-investing or re-cycling the funds, so we decided to part company. I have been self-invested since.
I get most of my tax advice from my accountant. On occasion – when selling a business, for example – I use a specialist tax advisor recommended by my accountant.
I’m interested in this unusual and long-standing relationship you’ve had with your accountant. You must have both been very young when you first worked together. Presumably his career grew as your business expanded?
I needed an accountant when I started contracting in 1988, so in my mid-twenties. He’s probably about five years older.
After initially using a local accountant – who was used to Mr-Bun-the-Baker businesses and was fine getting me up-and-running – I felt I needed someone more specialist. I found an accountant writing in a specialist contracting magazine and I liked his straightforward, play-it-straight-on-tax approach. We’ve worked well together for over 30 years now.
The curious thing is that – as he’s based in the North and I’m in the South – I’ve only met him in person maybe a dozen times in all those years!
One of the best pieces of advice he gave was to take 2012 SIPP protection. Even though the Lifetime Allowance has been abolished for now, it still means I can take £450,000 from my SIPP tax-free rather than the new limit of about £290,000. That saving alone is probably greater than all the audit and advice fees I’ve ever paid him. He’s truly brilliant in my view.
His practice did grow as mine did, wholly incidentally of course, and he’s quite a big fish in his area now. The advice is all very conservative and we swing the lead very little. Although I may have missed out on some allowances and questionable wheezes, it’s worked well for me.
Any other business?
When did you first start thinking seriously about money and investing?
In my mid-thirties.
Did any individuals inspire you to become financially free?
My accountant, who as I say I’ve been with for over 30 years. And also my father, who was a salesman. My father taught me always to be as straight as a die with other people over money. And also to have self-awareness: £50 might not be that much to me but it might to an employee or a small supplier, so always pay expenses quickly. I hope I have lived true to this.
One of my businesses was started with a junior partner. We got on amiably enough but were never besties and didn’t socialise out of work. Nonetheless I trusted him implicitly never to f*** me over.
Trust is such a vital part of my work and my financial journey.
Can you recommend your favourite resources for anyone chasing the FIRE dream?
Lars Kroijer (writings and webinars), Tim Hale (book), and Monevator.
What is your attitude towards charity and inheritance?
I try to give generously, especially to smaller charities which get crowded out. I always try to support friends or acquaintances who are doing things to raise money (although I dislike people doing a bucket list entry they wanted to do anyway under the guise of charity). And I give a lot of time to the two charities for which I am a trustee.
I could and should probably give more money to charity, but I’m frightened I’ll end up needing all I have to avoid living in a cardboard box.
I don’t like this aspect of my personality.
And inheritance?
I’d like to leave some money to my kids but I also try to help them as much as I can now. One has a really good and well-paid job and the other is struggling financially. It’s difficult to remain even-handed.
What will your finances ideally look like towards the end of your life?
In reality I wouldn’t be surprised if I end up with as large pot as I have now. All will go to my wife, if I die first, or to my kids.
I probably should be doing much more planning and giving away now for tax efficiency. But I’m terrified that I will end up… well, you know the rest!
Now and then I’m reminded of the vast range of backgrounds behind the usernames I’ve interacted with on Monevator for years. Hearing Valiant’s life story and outcome has certainly been one of those times. Please remember Valiant is just another reader sharing his story, not a gnarly old blogger like me. Useful feedback and questions welcome. Personal attacks of any sort will be deleted. Read our other FIRE studies.
After the (IMHO) rather rough handling that Rob Dix received for his alternative take on FIRE the other day, I feel the need to re-emphasise that I will not tolerate an everyday reader who has been generous enough to share their life story being barracked for doing so in these comments. 🙂
If it’s not for you then no worries, it’s not compulsory to read all our articles.
You’ll never be a business owner employing many staff and selling up for multiple millions?
Cool, I doubt that I will now too. But I still enjoyed Valiant’s story and learned a few things about the world and how other people live and think about income and money and investing.
As I said in the intro above, this site was never meant to be solely about spending frugally and living on a pension while worrying about tax brackets.
And I make no apologies for that.
If you’re someone who can only enjoy stuff that is about their specific situation then fine — again just move on, no need to complain here that today’s post isn’t right for you.
We’ll continue to cover a wide range of situations, so something should come along to suit you soon enough.
My apologies for this pre-emptive mini-rant to the by-far-majority of readers who approach our articles and comments constructively. 🙂 Thanks!
Fascinating story.
The telling bit for me is that Valiant still feels as if he’s not fully financially secure, the “Even now I worry” bit was a surprise. I wonder where this worry comes from, but that’s possibly more for your therapist than an internet forum. For me growing up with parents who lost jobs, saved and were cautious still set the tone in my mind.
There could have been two paths here. One where you recognised you were doing well in your 40s called it quits early, relying on compounding and maintaining low costs, or even joined your accountant in the north. Yet you did more… not just one-more-year, but one-more-career as a business owner! And the reward is a comfortable life for your family, ability to chose to live in London, give children options and housing, and all the good stuff that comes with it.
It sounds like you enjoyed the work and journey, I’d imagine you have many war stories from the time with the succession billionaire. Thanks for sharing, I hope you can relax and appreciate your very comfortable position.
Thanks @Valiant for providing an insight into your interesting story. I really enjoyed reading it.
Whilst I was also in IT from 1980 onwards and retired early after contracting for a while, I never ran a full company with employees as you did. I too “worry” about not having enough one day but the cashflow planner says that’s not going to happen. So I can relate to almost everything you said. Thank you.
Hi
I like to read about other peoples experience and attitude to life…etc
it is not about being wrong or right, and we are certainly not all the same.
Luck (perhaps) and making certain decisions which turn out to have been good or bad many years later play a part.
Very interesting read.
I have a couple of good friends who were both pretty successful businessman (with their own businesses) and I saw them both really agonise over selling up. So I kind of get where you are coming from; esp. re former employees, and loyal/long-standing customers too.
Re” On the other hand, another Monevator-recommended column (I forget whose) said that if you’ve won the game already, stop playing.”
This is by William Bernstein. His words are often boiled down as you quote.
IMO, it is definitely worth seeking out the whole Bernstein quote (Bogleheads perhaps) that includes an important qualifier that you should not play with what you need – but [IMO crucially] playing with anything above that is up to you.
Re: “But right now we’re only about 30% equities (14% Gilts, 10% Gold and 46% cash). That’s because of the Fundsmith sale and – here I feel the wrath of Lars Kroijer et al at my back, asking why on earth I think I know better than ‘Susan’ – now just doesn’t seem like a good time to buy more global trackers.” With you 100% re your timing/valuation sentiment.
I take it this [“46% cash”] means your SIPP’s/ISA’s hold a fair amount of cash too? And, in any case you are definitely not alone in holding relatively ‘far too much’ cash.
Do you intend to keep your three properties for the duration?
Lastly, do you have any suggestions (other than not using an IFA) for anybody who has come into a large cash sum?
Although I will never be a FIRE club member my children might well be so I use these profiles to help me advise them. The range of pathways people have followed makes for fascinating reading. Many thanks
Really interesting – thanks for telling your story. I had the same experience with bond funds. I am now more comfortable holding gilts directly to maturity – it’s easier to understand the cashflows and control risks and let the equity portion of the portfolio be the risky part.
Thanks @Valiant for sharing your experiences, always fascinating to hear how others go about things. Its interesting to see you were able to build up your businesses without a lot of borrowing or provision of security.
A smart move too, I think, to develop your own house to current standards, this will always pay dividends in terms of environmental performance. In the short term it may have been a financial negative but you will have the pleasure of living in it for many years to come.
I don’t have FCB for me but for my widow. If money is needed to pay for “care” for me how is she to cope? In particular will she be able to cope when/if her turn comes?
It’s really an insurance problem but, naturally, no insurance firm will want to gamble that a government won’t turn on a sixpence and shaft them.
(FCB = Fear of Carboard Box. I suggest we adopt this as a standard Monevator acronym.)
That damn BOX! Apparently the fear of it will never leave many of us in peace. I still picture myself on a street corner with a three pound chihuahua, my box and hollowed out cheeks with millions in investments. Ugh!
Thank you for the wonderful telling of your story.
Thanks for sharing your interesting story so openly Valiant, the whole series but particularly this one is a great illustration of why personal finance is indeed so personal and the most subjective of topics.
I’m at a different life stage but the disconnect between your secure financial position and the lingering feeling of discontentment you describe is very relatable.
As is the contrast between flying first and maintaining a pied a terre in London with living in a modest house, driving older cars and doing DIY demolition work with a sledgehammer (love that bit). Frugality and extravagance are very relative and subjective concepts, I think most of us exhibit both. Similarly I think your story illustrates how risk appetite is deeply nuanced and context specific and we are often simultaneously risk seeking and risk averse, people are more complicated than a simple risk profile can capture.
Congrats on your self built success, it’s inspiring
Not as much to comment on as the others so far, but thanks a lot for the insight you’ve given, it’s fantastic to see. Good luck for your continued health and wealth!
Might an annuity help dispel fears of destitution?
Nice story, and congrats to you, Valiant – you’ve won the game. Re your concern about 60% equities when you’re in decum mode, that is just about spot on in terms of what the recommendation is for retirees. The theory is that this ensures you get some upside when the market rises, which helps counter inflation; and you have some ballast in the fixed income side to protect your portfolio when the market drops.
That all said, with GBP9m NW, you’ve won, as I said above. At that point, putting it all into a bond ladder returning 4% would be fine, too. Why keep playing after you’ve won the game?
I agreed to this in part because I was interested in other’s thoughts. so thanks everyone!
@KISS (2): Yes, fear of the cardboard box is an irrational mental flaw. I do remember Gary Neville, not everyone’s cup of tea but he won everything in club football, saying he had huge satisfaction from winning the League for a few hours, but even that very evening would then be worrying that he would decline the next season and end up a failure.
And the billionaire mentioned above wrote in his autobiography that was haunted then later driven by a childhood in which he was very fat and very lonely, living above a shop in N London, after his father, a successful advertising exec, had gone deaf and lost his job, his money and all his friends.
Self-doubt can be a good motivator.
@oldie (4): So many entrepreneurs will tell you that it’s all down to their brilliance. Indeed The Investor’s original brief cautioned against just writing “And next, I did another brilliant thing …”, as that would be a dull story. Luckily I’m quite self-aware, and although I commend myself with having the skill and presence of mind to exploit them, there’s no doubt that I benefited from several “right person in the right place” opportunities.
@A1 Cam (5): Thanks for reminding me that it was Bernstein.
I don’t think we’ll have 3 properties for ever: I am already thinking that it would be cheaper to go and stay in Claridge’s every time I go to London than keep the apartment going. Mrs Valiant enjoys running the Airbnb but will tire of it in the end no doubt.
If I had another large sum to invest I’d have the confidence to do it myself. That said, I don’t regret the IFA: his advice (at least that which I took!) didn’t really pay off, but he taught me a lot.
@AoI (11): We all have these contradictions, don’t we? I’ll pay £8k for a First Class flight to Bali, but if the Co-op has a pack of prawns for £3 and 2 for £5, and there’s only one pack left, I’ll walk away! It’s less to do with the money itself than not wishing to feel taken advantage of. I read a biography of John-Paul Getty, who once waited outside a restaurant in the rain for ten minutes until it clicked around to 7pm, and the cover charge reduced.
@Wodger(13): I did consider an annuity. But the Lars Kroijer book is quite down on them, making a point that I hadn’t previously considered, that they carry counter-party risk (remember Scottish Amicable!). I think I’d prefer a gilt ladder, although the way public expenditure keeps rising in the UK, can we even safely assume that the UK government will never default?
@NoMoW2 (14): Food for Thought.
@Valiant (15)
Scottish Amicable? Are you thinking of Equitable Life? If so, remember that the ordinary annuitants were not affected at all and continued to be paid (I believe the annuity book was taken over by Prudential). Only the With Profits Annuitants, together with all other With Profits policyholders, were affected.
For full disclosure I had an Equitable Life with-profits pension policy as a SERPS/S2P opt-out. I hung on to the bitter end until the with-profits fund was wound up in early 2020 and I still achieved an eventual IRR (including compensation) around 5% (~2% real).
@DavidV (16): Yes, I’m thinking of Equitable Life – thanks!
I can only dream of the sums involved here, but – though comfortable compared to most – can very much relate to the FCB! I also don’t like this part of my personality. Hedonic adaptation hopefully works just the same if you’re on the way down as well as on the way up … I have recently been plunged by a combination of luck and misfortune into a part-time early retirement (PPIER?) of sorts in my mid-40s and would love to tell my story in this FIRE-side chat format. How can I go about doing so? If only to marshal my own somewhat confused thoughts on the matter and to have my rough financial plan eyeballed by the Monevator community.
Thanks Valiant – wonderful fireside as always. I’m in year 3 of living and working abroad and it’s good to hear from another voice who found success this way. Curious to know why you went back after 3 years and how you found contracting when you returned?
Quite apart from the tax benefits setting up a business here in Asia has shown me that there’s so much opportunity in young, ambitiously entrepreneurial countries that we could definitely learn from back home.
Phenomenal achievement. Very impressive.
1.8mm of ISA – that really is something!
But an IFA talking about how to pad a decade on a 9mm fortune to take you to what I assume is 25k state pension? That makes no sense on any level. No wonder you got rid of them!
Very interesting. What always strikes me with people who end up truly wealthy (and I’d call nearly 8 figures truly wealthy to me) is how it’s almost happened by accident. It was never the driving force but more of a by product.
I compare to my own modest wealth when that has always been the overriding motivation and wonder if there’s a lesson in that for everyone
The late Iain Banks said of many self publicising billionaires “They were mostly lucky and claimed genius level intelligence” I’m so pleased to read the opposite in this post. Recognising how fortunate one was is a skill that ought to be on school syllabuses.
@Rob (18): I imagine that The Investor will find you soon enough for a chat if he’s doing more in the series! Personally, I emailed to offer.
@mr_jetlag (19): We went to Australia indefinitely. But when Mrs Valiant “fell” pregnant she wanted to come back to the support of her family … and with one thing and another, we never returned. I found contracting in the early 1990s in the UK OK, but I was in what was then quite an arcane niche (database admin).
I’ve also had subsiduary companies in Canada, Australia and the US and the compliance and regulation is equally painful – the Curse of The West. Would be interested to know how it is in Asia: my one venture in Singapore flopped because no matter that we easily the best-qualified, the customer wanted to drain all our knowledge buy from local and Chinese suppliers, not us. How do you find this cultural aspect (assuming perhaps wrongly that you are not ethnically Asian)?
@Rhino (20): You’re being a bit tough on the IFA! Not all our assets are liquid. £5m in investible assets, if used to buy an index-linked, second-life annuity at age 55, would probably buy an income of around £140k. In that context a £25k pension income isn’t insignificant.
@21Fatbritabroad (21): Indeed. Only in the last 2 years or so did I really start to think properly about exiting for big bucks, and put into place the kinds of structural changes to the business that would maximise sale value. Until then we just concentrated on turning a profit, and delivering good service.
@all — Just a quick note to say further to my first comment that I’m really enjoying the constructive, supportive, and insightful comments. Appreciated! Thanks again also to Valiant for continuing the conversation here. 🙂
Interesting reading as always.
On the question of asset allocation in retirement/deccumlation, say a 35% government bonds / 65% equity or similar mix is my personal preference presently and similar to that mentioned by Valiant.
Rather than an annuity , with 2% real yields on bonds both conventional and inflation linked ( 2%+ with Tips and a little less with linkers but not so far adrift on longer durations). Then an annuity like self managed government bonds fund to run for for thirty years, assuming a 2% real yields gives an inflation protected real yield of around 4.5%
In practice it’s likely that the equity part of the portfolio could be left alone to run for thirty years for Valiant, living off the bonds.
No counterparty risk ! Clearly this works if you have generous resources but a mostly bond financed retirement deccumulation using tips /linkers with conventional bonds is possible.
Really interesting article. I see significant parallels here with my own life.
– science background, went to work in finance in 1980s
– set up a consultancy company, primarily on risk but inevitably involving a lot of IT. Hats off for doing by yourself though, I did it with 2 colleagues and that was stressful enough.
– house in London and on the South Coast. We nearly bought a BTL in Tooting back in the early 90s, but I vetoed it due to the additional risk and hassle with a young family (would have been a ten bagger!)
– took 2012 FP on SIPPs. Was able to get quite a lot into them before then due to the generous annual allowances back then.
– seriously considered going to Australia, but pulled out due to plans to start a family.
I don’t think you need to transfer your BTL to your wife by the way as you should be free to split the income between you any way you choose. Get advice on this first though. I am not an expert, but am reasonably confident that joint owners of property do not have to split rental income according to ownership.
On the asset allocation, this doesn’t matter a great deal if you draw below 3% and it looks as though you are well below. Somewhere between 25% and 100% equities and you will be fine. We go for about 90% equities as we are comfortable with the volatility and wish to maximise gifts to charity and family. In truly dire circumstances we could always downsize and probably will at some point.
Uk annuities are very safe. Nothing is 100% safe, but annuities are as good as it gets. Annuities are much better value than a few years ago and with IHT now applied to SIPPs we intend to buy annuities in the new year. Think of it as a diversifier – RPI linked investment for the rest of your life. Hard to achieve through a gilt ladder without over committing. You don’t need to buy an annuity with the whole SIPP.
“I’ll pay £8k for a First Class flight to Bali, but if the Co-op has a pack of prawns for £3 and 2 for £5, and there’s only one pack left, I’ll walk away!”
Snap! I don’t mind spending on luxuries, but if I think I am getting a bad deal I will walk away.
@Hariseldon (25):
“Rather than an annuity , with 2% real yields on bonds both conventional and inflation linked ( 2%+ with Tips and a little less with linkers but not so far adrift on longer durations). Then an annuity like self managed government bonds fund to run for for thirty years, assuming a 2% real yields gives an inflation protected real yield of around 4.5%”
I got a little confused in the jargon here. Are you suggesting that a “DIY annuity” could be set up with 2 gilt ladders set up per the Monevator post of a few months ago, one using conventional gilts and the other with an equal investment sum but using index-linked gilts, for diversity?
@Naeclue (26): If one had a sufficient sum, would it not be more efficient to buy an annuity with sums held OUTSIDE a SIPP, so that the latter would continue to appreciate (hopefully!) tax-free?
@Valiant, you can buy annuities with a cash sum. They are called Purchased Life Annuities. However, the annuity rates are not as good, roughly 10% lower than with pension annuities, and AFAIK you cannot get index linked PLAs. I am not sure why PLAs are such relatively poor value. It might be down to lack of competition.
Otherwise, yes leaving money in the SIPP to grow free of tax is a good thing to do. Unfortunately now though pensions will be subject to IHT.
Ladders may be a good way to go, but do you really want to buy bonds with maturities more than say 15 years? Personally I would rather not, preferring to take equity risk instead over long periods. Annuities may be better as you are sharing longevity risk with other annuity holders. “Self insurance” with a bond ladder can be expensive.
@Valiant (28)
Fundamentally yes , a gilt ladder for each of conventional and index linked , but could equally well use Gilt Funds/ETFs of appropriate duration to keep life simple.
Eg IGLS /GBPG/VGOV are ETFs for Gilts with fairly durations of around 2.5/5/10 years.
And there is Inflation Linked Gilt Funds up to 10 years from iShares , 5-15 years from Dimensional and a regular Index Linked Gilts Index INXG (ETF) with a duration of around 15 years.
A combination of these would work well, clearly with taxable sums it’s worth seeking out very low coupon individual GILTS to minimise the income tax and take advantage of the CGT free nature of GILTs.
My personal preference is to have significant unhedged exposure to US Treasury Inflation Protected Securities via ETFs , I like the ETFs TP05, ITPS and UBTL ( with short intermediate and long durations)
We can live off the bond component of the portfolio quite happily for many, many years and the equity component can be left unchanged for a very substantial period….
Bond yields would not have allowed this prior to the interest rates changes of 2022 but it’s available now.
@Valiant, this may be of some use in splitting the holiday let income between you and your wife. HMRC Form 17. You should not need to change anything at Land Registry. Just use Form 17 to declare your beneficial interests.
https://www.gov.uk/government/publications/income-tax-declaration-of-beneficial-interests-in-joint-property-and-income-17
Another great article. A number of parallels, with my own experience.
I’m a bit surprised that no-one else has commented on the relationship with the accountant. For a good few years, I have thought of my accountant as being almost a secret weapon.
We first started working together in about 1998, when I realised I was soon going to be making real money. I then spoke with a few potential accountants.
#1- partner in big-name firm. Talked down to me; I got the distinct impression that he was going to tell me only what he thought he had to tell me and that the resulting knowledge imbalance was not going to be to my advantage.
#2- partner in one of the bigger regional firms. Told me that I would be welcome as a customer, if I was billing about 5x what I had envisaged doing, that first year. Didn’t come over to me as being particularly customer-focussed.
#3- local guy, recommended by a friend. I’m sure he would have been fine, had my turnover remained small- but the red flag was that he seemed very unsure / verging on frightened, when I talked about my wishes for the business.
#4- a very small firm local to me. It felt right, from the start. They wanted to grow and so did I. At our very first meeting , he said to me that, if it works out like you’re planning, then it will be a really good business. And he then went on to tell me about Entrepreneurs Relief, on the basis that the time would come that I would want to cash out. Now been working together for over 25 years. Only tend to see each other once a year, but he was always there when I needed him. We have sort of grown older together. And the agreement that we made, at the very start, about being hyper-efficient in the use of cash, always keeping things completely honest and straightforward and so on, has held true throughout.
I have no doubt that, had I not been with this particular accountant, then things would not have worked out as well, in a number of respects.
It’s interesting that Valiant seems to have had a similar experience.
Another parallel is probably that the accountant keeps things legal, helps me think through various decisions and assists me in extracting cash for the company, but that he doesn’t have any role in investing the cash, once it’s in my hands.
I haven’t got any advice, as to how you go about finding the right accountant. Something else that is probably very much down to luck. Although I would be inclined to say that, if you’re not completely confident in your accountant, at the start, then things are unlikely to get any better.
@Valiant, having read the notes on Form 17 it is clear that the form can only be used when property is held as tenants in common. If held as joint tenants you will need to change to Tenants in Common with the Land Registry, which you can do by filling in a form.
The form also says that you should not use Form 17 for “income from commercial letting of furnished holiday accommodation”, which may well be what you are doing.
All in all, probably best to ignore my comments and proceed with whatever your accountant or solicitor advises!
@Hariseldon(30): Noted that I could use an ETF. I’m a bit wary because, as mentioned in the interview, I lost tens of thousands on VGOV in 2022.
But here’s a different question: suppose I have a time horizon of 13.5 years, and there’s an ETF with this average maturity (this is actually that of VGOV). Now if I buy a (non-indexed) gilt ladder to work for me for 15 years, the returns are utterly predictable. After 5 years I’ll have only 10 years of gilts left. BUT, with VGOV, as old ones mature it buys new ones to maintain the average maturity. Thus using an ETF is a very different profile from a gilt ladder, isn’t it?
Do the US gilt ETFs you buy have any tax implications for UK residents? Should the pound appreciate against the dollar (I don’t see it: the UK is in terminal decline in my view, and I’d be off tomorrow if I were 30 years younger), you could get really burned, could you not?
@Valiant, you can drawdown using gilt funds instead of gilts through a process called duration matching. Essentially you hold 2 gilt ETFs, 1 long 1 short, weighted such that the average duration of the funds matches your drawdown duration. You then re-weight the funds each year, shortening as your required duration drops.
If you hold only short duration bonds you are subject to reinvestment risk if interest rates drop. If you hold long duration bonds you are subject to the risk of long term rates rising, as you witnessed in 2022. Duration matching aims for the sweet spot, mitigating interest rate risk. Duration matching is not perfect but can work out cheaper than a gilt ladder.
I believe that Monevator may have written an article on how to manage this? Calculating weights and amount to invest up-front?
@valiant(34)
US bonds held in an ETF aimed a UK investor should not cause any taxation issues. An accumulation fund removes issues around any currency charges on dividends etc, your choice of broker matters , HL was more friendly in this respect than ii for example.
An ETF is like holding a collection of individual bonds but maintaining a constant duration, eg a year passes a previously one year bond matures and the rest have all shortened their durations, you use the maturing bond to buy a further long dated bond to maintain the balance.
Re the losses from VGOV Monevator has touched upon this today.
Whilst VGOV was the ‘index’ it had a fairly long duration , I was holding bonds in 2022 but they were of short duration and the effect of interest rates rising was minimal.
I prefer an unhedged approach to deliberately expose myself to the currency risk. ( there are quirks with a hedged exposure which complicate the interest return)
It’s very important to ‘understand’ bonds , in particular duration. ( it’s odd that vanguard for example only shows this vital information on the websites aimed at financial professionals rather than the public )
Another quirk is that duration shortens when interest rates rise , ie VGOV has a duration of around 12+ years in 2021 but under 10 now.
It’s possible to have a bar bell of bond funds to achieve a target duration, ie you want a duration of 10 years , it could be mostly very short bonds/cash and a smaller amount of very long bonds.
Prior to 2022 , very low yielding long bonds and in particular long long index linked bonds with negative 3% real yields were unattractive but when purchased with positive real yields the journey of holding those bonds to the point that the real yields was so low provided equity like returns.
Bonds are interesting because the return ( provided no defaults) can be calculated well into the future with exactitude for any given circumstances.
Very important to ‘learn’ how bonds as a collective work. Takes a little work but well worth it. Holding individual bonds to maturity provides a known outcome if held to maturity , a fund is like a portfolio of bonds that is by necessity updated to keep a set maturity profile with a Mr Market valuation applied.
Bond prices rise when interest rates fall, but of course you are bringing forward future returns, interest rates rise then bond prices fall but your future returns from reinvesting interest payments will rise from reinvesting at higher rates.
If you are going to hold bonds for a long time then rising interest rates are likely to be a plus…
Inflation is the potential killer for conventional bonds, the longer the time frame the greater the chance that unexpected changes in inflation will cause you issues.
Positive real returns from inflation linked bonds provide protection and a known inflation adjusted income stream, just watch the duration profile of your holdings or ETFs
You can find a profile of US Tips real yields and prices on WSJ web site and the iShares bond funds/etfs give real yields and durations of the holdings as a whole.
ZXSpectrum48 has provided insightful comments in the past re bonds in the comments over the years.
Managing duration is of importance, I personally hold a mixture of individual holdings and funds/etfs. Nominal/conventional bonds I prefer to have shorter durations and longer bonds are inflation protected with positive real yields ( on balance at a portable this is around 2%)
The bond exposure is providing certainly to achieve an objective, finance lifestyle for decades. The equity exposure we hold is much larger and can be left untouched for a very long time, it’s likely to provide satisfactory results over time.
Periodically It’s worth keeping an eye an interest rate metrics etc and I have a sheet I update annually and some guidelines to promote changes if required.
@Naeclue (various):
Re: ” … we intend to buy annuities in the new year”
Interesting development; just because of SIPP IHT or is there something else?
Re: “However, the annuity rates are not as good, roughly 10% lower than with pension annuities, and AFAIK you cannot get index linked PLAs.
Is this [-10%] difference before or after income tax. IIRC PLA’s have relatively advantageous income tax vs ‘normal’ annuities?
FWIW, IMO it is very hard to find definitive info about PLA’s. For example, I have seen mention of PLA’s with inflation protection options (whatever that precisely means). There is similarly a dearth of clear info around deferred annuities (DA) in the UK too. I mention DA’s as I idly wondered if a deferred annuity might suit you better?
@TI Another Iain Banks saying (Yep. I hang around SF conventions) which was probably appropriate for poor Rob Dix “They were the wrong act for The Glasgow Empire”.
That venue had notoriously critical audiences. Especially if you were, as Sheena Easton found, a local who had left to be successful abroad.
@Naeclue (35): Can you explain how a gilt ETF can be chaeper than holding individual gilts (even after charges, presuabaly) please?
@Hariseldon(36): If I am reading this correctly, the average duration of gilts held in VGOV is 13.5y: https://www.vanguard.co.uk/professional/product/etf/bond/9501/uk-gilt-ucits-etf-gbp-distributing
@Valiant, the ETF is not a cheaper way to hold gilts. What I meant, but did not properly explain is that duration matching can often work out cheaper than holding a cash flow matching gilt ladder. You can of course do duration matching with your own portfolio of gilts. If you are investing in gilt ETFs then you cannot create a cash flow matching ladder, but you can use duration matching.
@Naeclue, @Valiant:
The following 2017 morningstar paper may be of some assistance: “LDI Misapplied …” by Idzorek & Blanchett – if you can locate a copy. The paper used to be freely available on the net, but I struggled to locate a link this morning. There is however a discussion thread about the paper at bogleheads.
A possibly useful extract that IMO gives a bit of the flavour of the 2017 paper is given below:
“Common LDI approaches include the ultra-conservative approach of cash flow matching (matching the timing and size of cash flows from the assets with the required cash flows of the liability), followed by duration matching (matching the interest rate sensitivity of the asset portfolio to that of the liability), and liability-relative optimization, also called surplus optimization.
Liability-relative optimization is the most sophisticated and the most flexible of the three approaches. While we have characterized cash flow
matching as “ultra-conservative,” given that it typically involves a zero-coupon, high-quality bond maturing at the time of the expected cash flow, for an individual with an uncertain or variable consumption pattern (water pipes don’t burst on a schedule, even in retirement) the specificity of a cash
flow matching investment strategy may actually be relatively risky.”
@Valiant – thank you for sharing your story so candidly. I love hearing about different people’s money mindsets. I think I have mild FCB syndrome inherited from my Dad who has a serious dose. Dearieme is right, FCB deserves to enter the Monevator lexicon.
Re: duration matching – whether with funds or individual gilts:
https://monevator.com/duration-matching/
https://monevator.com/duration-matching-bond-funds/
I don’t think annuity credit risk is a problem in the UK as they’re 100% backed by the FSCS.
I think Lars is wrong to be down on annuities, especially given the advantages of pooling outcomes with other participants. I don’t remember that part of his book but IIRC he was writing when interest rates were very low and his focus wasn’t specifically on the UK market.
There’s been some interesting discussion on other threads but essentially you can buy cheap add-ons these days to mitigate the risk of early death (e.g. for anyone concerned about the insurance company winning the bet.)
@Naeclue and Al Cam – I’ve previously bought a PLA with an inflation uplift of 5% p.a.
3% was also available but no index-linked version. This was over a decade ago, don’t know what the market looks like now.
@Valiant #23:
>> Would be interested to know how it is in Asia: my one venture in Singapore flopped because no matter that we easily the best-qualified, the customer wanted to drain all our knowledge buy from local and Chinese suppliers, not us. How do you find this cultural aspect (assuming perhaps wrongly that you are not ethnically Asian)? <<
In one of my companies we employ a mix of experienced and junior consultants with niche expertise (in fintech software for PE and alts firms). I would agree that relationships and local connections are valued much more highly here so we sometimes use introducers & agents, but once they trust you your accent and skin color no longer matter. Fwiw I'm ethnically Filipino, so have faced similar issues to you but with different undertones.
Still, at the end of the day
business in Singapore is still business. We managed to secure some 1yr integration gigs early with large sov wealth and institutional clients which laid the foundation for further work. SG is good for early stage funding and access to the APAC market, but we'll likely have to go into Aus / China with local reps to mitigate the problems you mentioned.
Thanks for the insights again! Funnily enough we're back in Blighty for Christmas and Mrs Jetlag already pondering our eventual move back after a day away from sweaty Singapore…
@Naeclue #27: Definitely agree, less about the cost of things and more about perceived value. That said, F on a plane is still a few years away for me!
@valiant39 VGOV from Vanguard has n average maturity 13.5 years and a duration of 9.3 years.
If you imagine a portfolio of gilts that on average mature in 13.5 years and then interest rates rise from2% to 4% , if you try and sell your portfolio of gilts then you will lose money , people will prefer to buy a gilt at 4% than 2%…
However you can reinvest your stream of interest payments at 4% rather 2% and your maturing gilts will be reinvesting in fresh gilts at 4% if you maintain your collection of gilts like an ETF does.
The duration is how long it takes to break even, in 2022 that duration was around 12 years (but today the duration is 9.3 years.)
If interest rates were to rise again by 1% now then the value of your portfolio would fall by around 9.3% but you would be made good after 9.3 years.
If you were to hold your portfolio of gilts for 20 years then you would like interest rates to rise….
If interest rates fall 1% then your gilts will rise in value by 9.3% , however you will be reinvesting at lower rates…. You have simply ’borrowed’ some of your future return early.
There are other factors at play, the shape of the yield curve and the actual level of interest rates, but that is a general simplification of duration.
An individual gilt matures at a certain date and you might kid yourself that interest rates don’t affect you….they do.
As is alluded to elsewhere an ETF is much simpler way of managing maturing bonds and reinvesting interest if you want to maintain a fairly constant duration but there are some ETFs out there that are collections of bonds that all mature at a set date ( or very closely) so can behave like an individual bond but can handle reinvestment of interest payments.
TA, Hariseldon and many others … I’ve learned a great deal about gilts from the comments and am really glad I took the time to do the Fireside Chat.
Many thanks.
Here’s another question, or maybe some food for thought: I can see the attraction of short-dated, low-coupon bonds in a dealing account. But at present, in an ISA, why bother? I’m getting 4.95% (less fees) from Royal London Money Market; better than gilt yields. No-one’s commented upon this as a possible alternative to index-linked gilts.
@valiant (45) the (very unlikely) downside of money market funds is under stress they may have issues with liquidity of the underlying assets. There were problems during the GFC in the US.
The problem is more things can happen than will happen highly unlikely and unexpected things do occur from time to time…
My own view on bonds is to maximise security ( the objective is a “known” outcome) and look for any extra return from Equities.
From my perspective, I don’t see cash/money market and index-linked gilts as occupying the same space.
Index-linked gilts (held to maturity) will hedge headline inflation. Cash has delivered a real-terms loss during the UK’s main inflationary outbreaks.
I certainly agree with holding some cash but not as an anti-inflation defence.
Think I need to write a post presenting my evidence for the above comment 🙂 Just to put my money where my mouth is so to speak. Thank you for the idea!
Another fascinating story, thanks for sharing. I will certainly not hit anywhere close to these kinds of numbers but its interesting to see that FCB doesn’t stop. Congratulations on getting to where you are, clearly all the hard work has paid off so all the best in this next chapter!
Thanks for sharing your story in so much detail.