What caught my eye this week.

I enjoyed Ben Carlson’s response to the GameStop ferment this week.

He could have dived into the minutia of gamma squeezes and Reddit lore. But instead the Wealth of Common Sense blogger and Weekend Reading favourite dived into his archives.

Ben decided to reprint a chapter of his book Everything You Need To Know About Saving For Retirement. In it he explains how he helped his then-girlfriend (miraculously now his wife) to get familiar with market volatility with data like this:

It’s a golden oldie, and foundational to long-term investing.

As Ben writes:

Many people compare the stock market to a casino but in a casino the odds are stacked against you. The longer you play in a casino, the greater the odds you’ll walk away a loser because the house wins based on pure probability.

It’s just the opposite in the stock market. The longer your time horizon, historically, the better your odds are at seeing positive outcomes.

There’s something grounding about returning to old writing and classic wisdom when confronted with a new tumult, don’t you think?

They’re more like guidelines

Of course religions have been doing this sort of thing forever. Anyone who grew up within earshot of a holy book-quoting relative can attest to that.

And indeed it’s too complacent to get religious about investing.

The US stock market doesn’t have a preordained right to 10% returns a year over the long-term – let alone to spank the pants off other markets around the world for years. Equities in general aren’t totally guaranteed to deliver higher returns than bonds, say, even if you hold them for a generation or two.

But there’s many good reasons to think they should. Implicitly, whether we invest passively or actively, we put our faith in that, and other investing ‘truths’.

The point is to – just like a church go-er trying to weigh up contradicting passages and the strong suspicion they’ve sinned – achieve a balance.

Trust in shares for the long-term, but have some bonds and/or cash.

Don’t watch your portfolio every day if you’re a passive investor. But tune in once or twice a year to rebalance and check everything is on-track.

And so on.

Amen.

Forgive me father

Okay, so Ben is not a saint. He did also deliver his own hot take on the GameStop squeeze. Several hot takes in fact, including in his podcast.

Ah well, we’re all only human.

I wonder which version his wife got this time if she happened to ask about GameStop?

I also wonder where to find these eligible people who’ll marry someone who explains the stock market to them on a date. They elude me!

Have a great weekend.

[continue reading…]

Financial regulators exist to stop anyone ever losing any money and to protect us from ourselves, right?

Many people seem to think so.

As the GameStop drama reached its zenith, a clamour went up.

“Where are the regulators? Something must be done!”

My view was closer to that of the president of the Minneapolis Federal Reserve:

“If one group of speculators wants to have a battle of wills with another group of speculators over an individual stock, God bless them… If they make money, fine. And if they lose money, that’s on them.”

Neel Kashkari, on Bloomberg via Twitter

Of course, seeing sophisticates like Chamath Palihapitiya, Mark Cuban, and Jordan Belfont (the real Wolf of Wall Street) cheering on retail punters – many of whom clearly had no exit plan – made me uneasy.

Those big guns can handle themselves. So too can the sophisticated sliver of Redditors who first proposed GameStop as a target.

But the masses from Robinhood were already looking at unsustainable profits by the time GameStop had all our attention.

What they needed to do was to get out.

As I wrote:

As for those long GameStop who say they’ll hold at any price – they’re probably already dead, in trading terms. They just don’t know it yet.

Praying your stock turns into a Ponzi scheme – with ever more new money coming in to keep it elevated – isn’t trading, let alone investing.

Sturm und damn

As I write GameStop is priced at $61, having peaked at $483 just a week ago.

You’d hope new traders are learning lessons about risk management, position sizing, taking profits, and market structure.

But most will more likely cheer on this Tweet from entertaining stock gambler Dave Portnoy:

I have officially sold all my meme stocks. I lost 700k ish. Vlad and company stole it from me and should be in jail. pic.twitter.com/qXP1N1UFil

— Dave Portnoy (@stoolpresidente) February 2, 2021

Robinhood and other brokers restricting GameStop at the height of the frenzy – for operational reasons, such as capital requirements – probably did help burst the bubble.

But the price was always going to fall from the artificial levels achieved on the back of shorts caught off-guard.

Besides, if you want to play this game, you need to know things happen – from margin calls and getting stopped out to your platform bailing on you.

There’s a scene in The Big Short where one of the managers realizes the bank facilitating his wager against the US mortgage market could go bust.

His apocalyptic bet could be right – but the bank might not be around to pay up.

That’s the level of paranoia you need when markets are roiling on your trades.

Why regulators?

You might think I’ve just made the case for more intervention by regulators.

Self-proclaimed dumb1 money pitted against professionals in fast markets with platforms taking away the ball mid-game…it’s hardly sober investing for your old age.

But remember why we can even have this discussion.

For decades, direct investing was for the rich. They knew the game and could afford to play.

Perhaps the purest manifestation were the wealthy Lloyds names who profited in the London insurance market for centuries – at the risk of unlimited personal liability.

But even with investing in shares, fees were horrendous, information unevenly distributed, and what we’d now call insider trading was rife.

Ordinary people could eventually pool their money into active funds. But returns were often poor, and the charges astronomical. (Think 5% upfront just to get a fund to take your money, and it didn’t get much better after that.)

Today is very different.

Information is abundant. Brokers like Freetrade charge nothing for trades. Anyone who passes an identity check can deal in all kinds of securities. Cheap index funds enable 99% of people to get the exposure they need.

Of course now that people have access to far more financial products and securities, there’s more scope for things to go wrong, too.

And some people still believe the markets are rigged against them, despite this democratization of finance.

Hence the Bat-signals regularly sent out to the regulators. With every mishap comes a call for more intervention to protect poor investors.

I say be you’re careful what you wish for.

Our hard won parity with richer or more sophisticated investors could be lost to overzealous regulation.

Banking crisis

Many Reddit traders said they wanted to take revenge on Wall Street. And Twitter is full of claims the market is ‘rigged’.

It’s all a great cover for overly nanny-ish regulators to dial back many of the freedoms these new traders prize.

Luckily, regulators seem to be more sensible so far.

A few politicians have made noises. But from what I’ve heard from the regulators, their focus is on ensuring the system holds up and remains well-capitalized.

Most especially they want to avoid a cascade, where one platform borks and its partners and counter-parties fall like dominoes.

Still, considering all the red tape introduced after 2008 – such as the Dodd-Frank Act in the US – we might ask why there still always this call for regulators?

One reason must be the lingering lack of faith that resulted from that crisis.

It’s hard to remember now just how revered bankers had become before the crash (they were seen as near-infallible) and how often we were told things were made more resilient by all the complex financial plumbing.

Despite (or perhaps, it was implied, even because of) so-called light-touch regulation.

Oops!

That claim didn’t age well.

Payment Protection racket

Many who say they want justice cite the lack of repercussions – especially jail time – for the bankers at the heart of the crash as their casus belli.

Countless more bankers walked away with big bonuses than went to jail.

But one big difference – in the UK – was the billions forced out of the banks as a result of the (mostly unrelated) Payment Protection Insurance scandal.

The total bill for PPI claims against mis-selling came to over £53bn.

A staggering sum. I personally think it was excessive.

No doubt many customers hadn’t bothered to read up on what the PPI they were paying for did.

But I don’t believe banks genuinely hoodwinked customers out of £53bn, or anything like it.

When I was looking to buy a flat in the early 2000s, almost every article I read about mortgages mentioned PPI – and told me I probably didn’t need it. If I was cajoled into getting a PPI-bolt-on, I would have gone elsewhere.

But many buyers just signed paperwork blindly. They didn’t do any homework.

Anyway, after the regulators ruled the banks had mis-sold PPI, early estimates of the provisions quickly snowballed.

Shady companies sprang up, cold-calling us into making a claim.

In the end people who had never heard of PPI were getting compensation for forgotten credit cards they’d been perfectly happy with at the time.

I know it’s hard to have sympathy for big banks who cynically tacked unneeded costs onto their dockets.

But if we don’t expect people to try to know what they’re buying when they borrow four-times their annual salaries or more, when should we?

It’s a very slippery slope.

Banned substance

Anyway, it feels to me like the PPI scandal infused the UK consumer of financial products with a compensation culture mindset.

Barely a week goes by now without something labelled ‘the next PPI’.

Indeed, avoiding ‘the next PPI’ has probably already helped restrict what products we have today.

• The Order Book for Retail Bonds launched with great fanfare a decade ago as a way for ordinary investors to buy higher-yielding company bonds directly. It’s now moribund. Mostly that’s because cheaper funding became available elsewhere. But I suspect corporations also decided they could do without the hassle of retail investors.

• Riskier mini bonds have effectively been regulated away. You might say good riddance after some blow-ups. But I enjoyed my mini bond portfolio – the higher interest mostly, but also exploring the asset class.

• A host of factors killed off peer-to-peer investing as originally billed. I think regulation and fear of The Next PPI was in the mix. The big platforms Zopa and Ratesetter had their ups and downs, but overall they allowed enthusiastic users to earn higher interest rates for years. They’re just a shadow of their old selves. Even some readers of this website called them ‘the next PPI’.

• Whenever a bank threatens to do something with its preference shares, campaigners cite poor pensioners subsisting in blissful ignorance on the dividends. Yet some of these people cried foul at restrictions on retail investors buying new kinds of hybrid bank debt. You live by the sword…

That list is hardly complete, incidentally.

Regulators don’t seem exactly enamored with Innovative Finance ISAs, for instance, which may be one reason they’ve been slow to take off.

And while you’re free to gamble away your life savings at the bookies or online, the checks and restrictions around sticking £50 into a crowdfunded start-up are more rigorous.

Recently the FCA banned the sale of crypto-derivatives, too.

Cry freedom

For sure people don’t require any of those to achieve their financial goals.

But I used some of them – and I certainly liked having the choice.

I don’t dispute a need for some regulation, of course. I can also see that regulators have a very difficult job.

Equity crowdfunding – to take one of my vices – is beset with inflated claims, inadequate markets, scant due diligence, illiquidity, and failure. That’s despite active regulation. You shudder to think of the losses if literally anyone was allowed to say and sell anything to anyone.

But there’s always a danger regulators will go too far. And the cries that go up whenever someone loses some money in some ill-fated venture these days makes it more likely.

For example, there was an episode I remember where it seemed like investment trusts might be accidentally regulated out of retail portfolios.

I even dimly recall a couple of decades ago that dealing in individual shares might have ended up restricted to professionals or other financially sophisticated persons.

Luckily nothing came of it. But don’t be complacent that you’ll always be able to invest in the future like you can currently.

Consider pension freedoms, for instance.

Most people hanging around Monevator are fans of being put in control of their own pension money, obviously.

But we’ve already heard warnings that some people spend their pots too quickly, or that you should have to jump through more hoops to get access to your cash. And that’s in a mostly rising market. Imagine how a big bear market could underwrite that case.

Maybe if you’re forced to convert your index trackers into a derisory annuity when you retire, you’ll sympathize with those of us who don’t like being told we can’t do something because someone else was stupid.

The only way is up

Perhaps the craziest compensation call I’ve heard was that investors in Neil Woodford’s funds should be compensated for the gains they would have made if they’d invested in other, higher-returning products.

The giant can of worms such a precedent would set hardly needs explaining. Yet a few otherwise sensible people nodded along in agreement.

Besides the impracticality and unintended consequences of such a move, it would also cement the growing sense that investing should, apparently, only involve rewards and no risk.

What could you invest in if such a view won the day?

An FSCS protected bank account paying less than 1%, and that’s your lot.

Self-preservation

Regulators do an important job. We don’t want lawless markets.

Regulation around stuff that really kills people – such as debt – is especially important.

I’m pleased regulators will soon regulate ‘Buy Now Pay Later’ firms, too.

But if you’re someone who calls for regulators to swoop down whenever trading gets frothy, on the grounds that people could lose money, please think again.

It took a long time to win the financial independence and options that we enjoy today.

We don’t want our financial lives shepherded back into the hands of advisors, simply due to excessive regulation.

1. The word WallStreetsBets uses is “retarded”. [↩]

Like other solitary human endeavours, the road to financial independence (FI) is long and daunting.

The perfect conditions for demons to materialise and siphon away your confidence!

Catching you off-guard, they snicker in your ear that it will all be for naught.

Whoever gave these psychological trolls the log-in credentials to our minds wants shooting…

…except that it turns out to be us. If you’ve ever sent the self-sabotage brigade into battle against yourself then you may find the following scenarios familiar (and possibly the strategies I’ve used, helpful.)

Death

How about a nice, easy one to warm us up?

Naysayers ridicule FI-ers with the classic: “You might drop down dead tomorrow.”

Sure, it’s a statistically innumerate cliche, but it’s hard to shake the nagging fear that they might be right.

Over-emphasising the small risk of a catastrophic outcome is a known cognitive bias. So forgive me, but I often wondered how Mrs Accumulator and I would respond to an untimely diagnosis.

Would I jack it all in for a final few months of trying to make the last memories the most precious of all?

Or, would I work on in an ill-conceived attempt to give Mrs Accumulator more to fall back on?

(You’d think this one answers itself, but demon-slaying isn’t logical.)

I stopped the gob of this demon with a few pieces of paperwork, as follows.

Life assurance

The policy would have paid enough to see Mrs Accumulator alright if it had been needed. I cancelled the policy once we hit financial independence.

Monevator has some insurance articles that provide excellent food for thought.

Emergency instructions

A handwritten letter lays out where to find everything, clear instructions on what to do, and who to call for help.

Like many couples, we split family investment duties like this:

• I’m obsessed.
• Mrs Accumulator happily outsources the detail to me.

That’s just the way it is, so I’ve done my best to create a paper trail. It includes ‘boil it all down to a Vanguard LifeStrategy fund’ simplification measures, and ‘call The Investor for guidance’ emergency ballast. TI is an old friend of Mrs Accumulator as well as mine.

Obviously I’m trusting that TI will deploy his passive investing 101 module and not set Mrs Accumulator up with a portfolio of his favourite meme stonks, as featured on WallStreetBets.

A will

This should be obvious but it’s often missed by couples who get together early in life, never marry, and forget that they’re not as young as they feel.

Attitudes to death matter when thinking about these precautions. You may think it’s morbid, I think it’s practical.

Still, I wouldn’t blame anyone for putting the Admin Of Death at the bottom of their to-do list.

The payoff on completion is that it’s very reassuring to know you’ve done what you can.

Mental health setbacks

We don’t have a great tradition of talking about mental health in Britain. And it’s just occurred to me as I write, that I’ve never talked about this with anyone.

Some corners of the internet make financial independence sound like a short sprint to the finish line, blowing kisses to well-wishers along the way.

In reality, it’s a slog. The danger of a breakdown cannot be discounted.

It happens. I’ve seen it. We probably all know people who’ve been set back years, or permanently diminished, or quietly get by nursing a drink or drug dependency.

I’ve put myself through personal hell a few times. Though the stress was surmountable, it has left its mark. We’re all feeling our way through the dark, but you start to get a sense for where the cliff edge might be.

There’s a school of FIRE1 that says ‘cost-cutting is for the birds’ and that you must scale your income. Hit the career accelerator, show the CEO your brass nuts, and drive your pay up, Up, UP!

Survivorship bias tells us we’re not going to hear much from people who try that, and then burn out.

That was one risk I didn’t want to take. I decided to level out my career, and to focus on what I knew I was good at.

I found a mental comfort zone where I still accepted challenging assignments but I didn’t risk being overwhelmed.

This strategy meant that bonuses and merit rises kept the savings rate climbing but there was no boost from a big promotion.

There’s a small ego-hit to take but this was the right move for me. My overriding goal was to leave work with my sanity intact, not to win a few more pips on my epaulettes.

If you’re young, you absolutely should climb the career ladder as high as you can. The rungs become narrower through your 40s though, and can turn as slippery as snakes. So it can pay to hold fast rather than try to knock another 18 months or so off your timeline.

My other hedge against prematurely failing health was to take out an income protection insurance policy.

I discontinued this as soon as financial independence was within touching distance.

Loss of joy

This fear could be lost on anyone who became accidentally financial independent, or who is naturally frugal. But if you get there by suppressing your inner consumer, you can worry you’re forgetting what life is all about.

Consumer society causes us to over-identify with what we buy. For example:

• I shop in Waitrose.
• I eat out twice a month.* (*Life before COVID.)
• I deserve a gorgeous espresso machine.
• I am this chic outfit or sporty convertible.

You might get into stormy ‘We can’t afford that’ rows with a spouse. Or wonder what you’ve become when, instead of enjoying a night out with mates, you’re regretting the impact on your savings rate.

Will you be a joyless husk after a few more years of this?

The most important lesson I learned was to ease up a little.

I did charge hard at the mortgage. I’m not saying I’d have risked scurvy to pay it off quicker, but I didn’t spare the horses.

However I knew I had to pace myself better through the rest of the financial independence marathon.

• Good food is important to us, so let’s not skimp on that.
• But home-cooking proved better than restaurants any day.
• Go out with your mates and colleagues to the pub, but feel free to say ‘no’ sometimes.
• Also, everyone loves a summer evening in a park with a few cans and a frisbee.
• Paying up for quality makes complete sense for items that form the backbone of daily life. Computers, bikes, and comfy mattresses come to mind for me.

Never forget the value of things that cost little but mean a lot:

• Connecting with an old friend.
• Helping someone, even a stranger.
• A walk with family.
• Reading a book.
• Playing a game.
• Being silly.

Remembering the things for which I’m thankful helps, too.

“I’ll never get there!”

The middle section of FIRE is deadly.

After you’ve laid down your plans. After you’ve poured money into a cheap global tracker. When there’s nothing to do but rinse and repeat.

FOR YEARS!

You gotta gamify your brain because, without positive feedback, it’s gonna look for trouble:

• The plan’s not working. Quick! Change it!
• Why aren’t I FI ALREADY?
• I can’t go on like this.

I found two good ways to combat this.

Identify with your cause

It’s much easier to keep the faith if it’s part of who you are.

Yes, I am advising you to self-indoctrinate. You can brew your own personal FI Kool-Aid by making a:

Private commitment – Reveal your plans to a small circle of confidants that you don’t want to lose the respect of.

Public commitment – Find your community then nail your colours to the mast. Knowing I’d have to answer to the Monevator Massive has helped keep me on track.

A blog is mucho work though, so if you’re not feeling the TikTok alternative, you can cry “Freedom!” via FIRE-friendly communities such as:

• The FIRE UK subreddit
• Money Mustache Forum
• Early Retirement.org
• The Early Retirement Extreme Forum
• Your local FIRE Facebook Group

Make it part of your secret identity. Everyone’s got a hidden talent. The sort of thing we’re supposed to confess at some hideous dinner party, just after dessert and before the wife-swapping.

Being on your way to millionaire next door status is massively satisfying the next time some blowhard is banging on about their boat or is getting Glencarry Glenross on your ass: “I drive an $80,000 BMW, that’s my name!”

Milestone tracking

The second technique mitigates the financial independence journey being featureless like a trek through the Sahara. You can create a strong sense of progress by inventing your own milestones. Lots of them.

Here’s some examples:

• Recording your monthly or quarterly savings feats.
• Tallying your annual and semi-annual progress.
• How many months or years could you take off work if you reimagine your FU wealth2 as an emergency fund?
• How long would it last if you went part-time?
• Is your pot enough to live on in old age if you throw in a State Pension and compound interest?
• Is it enough to support your significant other if you did get knocked down by the proverbial bus?
• Can your savings to-date cover life’s essentials if not the luxuries?

Reward yourself by dancing a secret victory jig every time you pass a milestone. Dream up as many as you can. That way there’s always a moment to look forward to, along with the next holiday, the next date night, or whatever it is you treat yourself with.

Living in the moment is a nice trick but it’s hope that keeps us going.

Losing your job

The nightmare financial independence scenario is suffering a major drop in income with little hope of securing employment at the same level ever again.

You may not fear this. But if you work in a declining/hollowed-out industry, or a one-horse-town, or an occupation where ageism is rife, then it’s a clear and present danger.

Achieving financial independence now becomes a race against time.

The question is do you go all-in on your job in an effort to keep it? Doing so, you could raise your skill levels. Or over-deliver such that they’d be insane to fire you, for instance.

Promotion and pay rises could follow.

Or burnout and irreparable damage to health and relationships.

Even then, you could fall victim to politics or your function being outsourced to Narnia or wherever. (Those fawns will do anything for money.)

Alternatively, you can hedge your bets with a side-hustle that delivers instant extra cash and potential second career optionality.

I chose to pursue two very different side-hustles.

One I could do when brain-dead. It didn’t matter how knackered I was, I could always put an hour or two into it, and so make a few quid for the FU fund. It wasn’t fun, it wasn’t leading anywhere, but it wasn’t demanding either. A fair exchange.

The second side-hustle was an enjoyable outlet for talents no longer required on my main career path. That side-hustle is Monevator.

I’m pretty sure all my Monevator research could help me to transition to a new career in financial planning, in the event that I needed to. But I decided staying put was simpler and less risky.

Still, a side-hustle that blooms into a second career may revitalise you to the point that you hit financial independence, but no longer want to retire.

Or it can provide you with enough structure to help you adapt to your new life of leisure.

(Monevator is a disastrous time-sink from a hourly wage p-o-v. Do I regret it? Not one bit).

Stock market fail

This dread comes in two varieties.

Scenario one. You’re all-in on equities. A rapid market run-up puts you on the brink of financial independence but your eyes are dazzled by pound signs and hopes for more, more, more!

The market promptly bombs 30-50%. As a result it takes years to recover and your morale is shattered.

Do not be fooled. This can happen to anyone. Don’t believe the 100% equities hype. The Fed may not always be on your side.

Accordingly, a good few years before you make your financial independence target, put at least 40% of your portfolio into high-quality government bonds. They won’t earn much these days, but they will preserve your capital.

The exception is if you really don’t need your money (you’re never gonna retire) or your savings rate is super high (so you don’t really need the stock market to do the heavy lifting).

Scenario two. The market flatlines. It doesn’t blow up but it moves sideways during the years you’re stretching for financial independence.

This is just bad luck. I hope it doesn’t happen to you. If it does then know the stock market doesn’t need to do much of the work if you can get your savings rate high enough.

At a 70% savings rate, you can hit financial independence in ten years even if the stock market returns just 1% a year.

That’s one year longer than it would take you at the historic stock market average of 5% per year3.

The same returns create a difference of six months if you can push your savings rate to 75%.

Fighting your own demons

Hopefully your financial independence demons are infrequent guests, but we wouldn’t be human if they didn’t dine on our brains every so often.

I hope this post gives you some fresh meat with which to distract them.

I’ve made it to the other side, finally. But if you’re still wandering around the financial independence wilderness then take heart.

It does get easier and one day you will be flying.

Take it steady,

The Accumulator

1. Financial Independence Retire Early. [↩]
2. FU wealth is being rich enough to say – cough – “goodbye” to your boss on a whim. [↩]
3. In real, inflation-adjusted, terms [↩]