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Fighting the Financial Independence demons

by The Accumulator on February 2, 2021

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 FIRE ¹ 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:

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 wealth ² 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 year ³.

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

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

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Weekend reading: All in the game, yo, all in the game

by The Investor on January 30, 2021

What caught my eye this week.

Should the average Monevator reader – likely a passive investor – give two basis points about this week’s GameStop-centered mania in the markets?

On the one hand, no.

Even though it made the BBC News. Even after it drew an investing-related comment from your friend who only posts about cats and macramé.

Only a handful of stocks went bonkers this week. They’re immaterial to the indices.

You might argue mass fund ‘de-bulking’ in the face of the volatility caused prices to decline more broadly for the past few days; I’d agree it’s possible.

But we don’t invest with a time horizon of days around here.

These distortions will work out. We’ll hear about a hedge fund or two getting rescued. 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.

GameStop might have a brighter future. The initial short squeeze was inspired. But the firm surely wasn’t undervalued by a factor of 50 or more?

You have to know when you’ve won.

It ain’t what you takin’, it’s who you takin’ from

On the other hand, yes, all investors of all stripes should care.

I was going to write a lot more about this today. I said I would in the comments. But I feel like I’ve eaten two KFC buckets worth of information in one sitting.

And if I – an investing junkie – am stuffed, then 95% of you are, too.

So just a few quick discussion points:

You can’t have major dealing platforms imposing and then removing and then reinstating trading restrictions without fallout, even if – perhaps especially if – it was outside their control.

You can’t have hundreds of thousands of ordinary people making headlines around the world for apparently sticking it to gilded hedge funds without creating a narrative that will linger.

You can’t help but notice we’ve had two destabilizing flash situations – the Washington insurrection and now this pile-on – already in 2021. Very different, ideologically, though some of the rhetoric is the same (elites, corruption, control). But both were partly nurtured by algorithms that notice and nudge and readjust and prod us ever more – and ever more of us – in a given direction. This seems all-important, in the same irreconcilable way that climate change does.

Me and The Accumulator can’t agree on how much of the class warfare rhetoric that’s said to be motivating the Redditors is real and how much is window dressing. What’s undeniable is it strikes a chord. The gulf between the wealthiest and the rest looms larger than ever. (See the Oxfam report link below). We can’t say there were no canaries.

There’s no way Wall Street (and the City, or specifically the cluster of streets around Berkeley Square) isn’t in on both sides of these trades.

People complain about vocal shorting. But promoting long positions sustains an entire media industry and is just matter of fact investing. Why is that so different? It’s only in edge cases that shorting actually hurts a good company, aside from banks.

Money ain’t got no owners. Only spenders

Of course, if I have to choose I’m on the side of the ordinary guys.

The biggest hedge fund managers are ridiculously rich on the back of what they do, which is about as socially useful – on a relative ‘per pound of earnings’ basis – as if you and I sat down to have a game of Risk this weekend.

We need some custodians of capital and price discovery, sure. So let’s have ordinary fund managers paid outlandish six-figure salaries fighting the zero sum fight. Not eight-figure oligarchs.

With that said, shorting isn’t evil. And targeting hedge funds for a perceived role in the 2008 financial crisis is way off-base. (It takes respectable bankers to have the influence and debt to blow things up that badly.)

Anyway, I’ll outsource my defense of shorting to the excellent Cullen Roche in the links below, and my musings on where social media and attenuation fits into all this to the chap from ETF Trends.

Both are great reads, among much else good stuff this week.

You come at the king, you best not miss

Now for some good news: after this week’s announcements (again, see the links below) we have five Covid vaccines that work.

Broadly, it seems the tricky-to-handle mRNA vaccines have a very high efficacy and prevent the vulnerable from succumbing to the virus. The more traditional ones are less effective, but prevent serious illness.

So the former into the arms of the vulnerable, and the others ASAP for the rest of us for herd immunity. Hopefully that’s enough to get us out of this mess and away from our screens. (Those screens are getting to everyone!)

Indeed I believe it’s just possible we’re starting to see this working in the UK statistics, following the UK authorities’ commendably advanced rollout.

A BBC report I saw today dwelt on the apparently mysterious persistence of high Covid prevalence in today’s data from ONS random sampling, versus falling official Covid case counts and all the rest.

We should note the statistics do cover different time periods.

But could it also be that fewer people are developing strong symptoms and seeking a test because the vaccinations are now having an effect on the more vulnerable cohorts? Even while the continued spread of Covid means it’s still showing up as amok among those randomly sampled people, who maybe have little to no symptoms?

As our Covid article the other week explained, that’s the sort of thing we’d expect to see first as vaccination begins to have an impact.

Lars isn’t convinced yet, but I want to be optimistic. Of course my guess is as good as yours. We’ll have to see what the experts say.

Fingers crossed. Here’s to saner times – and more normal markets – to come.

[continue reading…]

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Stonking gains, hedge fund pains

by The Investor on January 28, 2021

Like many naughty amateur active investors who should know better, I watched the movie The Big Short with popcorn, envy, and a grin.

Oh how I wished I was one of the movie’s heroes.

One of those quirky, semi-Aspergic, single-minded and misanthropic hedge fund managers who spotted the fatal flaws in the system that precipitated the Great Financial Crisis.

And who then profited mightily from all the mayhem.

After all, I’m quirky and I might be at home somewhere on the spectrum.

Why shouldn’t I be paid billions for being a single-minded misanthrope who watches share prices instead of football games?

I’d be played by Christian Bale, natch.

You can have Steve Carell.

In truth though, a lot has happened since The Big Short came out in 2015.

And most of it happened this week.

Today it’s hedge fund managers who are watching in awe and fretting about what amateur stock traders will do next.

Specifically about whether said retail traders are about to blow up their hedge funds.

In this moment it’s the little guys who are the (anti) heroes of the movie.

Don’t stop me now

By now many of you will have heard of the poster child for this revolution – GameStop.

That’s ‘poster child’ in the sense of an official warning that you’re about to be electrocuted, nuked, or biologically poisoned if don’t get the hell away.

And that’s ‘GameStop’ as in the US video game retailer that’s listed on the New York Stock Exchange.

As opposed to ‘GameStop’, the safe word that’s stammered by hedge fund managers through their ball gags when they’ve taken enough of a beating.

Here’s a graph of GameStop’s share price action recently:

Kind of hard to read, right? Looks almost flat – until you spot that cliff on the right hand side.

Surely that’s where the action is?

Fair enough. Here’s a chart of GameStop’s share price just year-to-date:

No, that’s not much better.

It’s probably easier if I tell you that GameStop began 2021 priced at less than $18. As I type it’s now around $325.

That’s roughly an 18-fold increase in less than a month.

It’s up nearly 10-fold since this time last week.

Wow.

Game for a laugh

An innocent, easily fooled person who believes that human beings and markets always behave in predictable, simply modeled ways – an economics professor, say – might suppose GameStop has enjoyed some kind of super-fortunate change in its business model since the Monday before last.

Perhaps GameStop found all its stores were located on top of gold mines?

Or it’s recovered a password to a lost wallet stuffed with Bitcoin?

Or it’s devised a way to jam Internet access for everyone forever, so people have to traipse to a GameStop shop to buy a disc in a box like it’s 1999?

No, no, no.

In a reality so unlikely it has even seasoned market watchers rubbing their eyes, re-reading the ingredients list on that Kombucha they’ve been mainlining in their lockdown home offices, and deciding that they really need to get out more, mutant virus or no mutant virus – what’s happened is that thousands of members of a Reddit subforum called WallStreetBets have engineered perhaps the greatest short squeeze of all-time ¹, transforming GameStop from a potentially doomed video game retailer from another era valued at $2bn into a potentially doomed video game retailer from another era valued at $22.5bn.

And brutalised several hedge funds along the way.

And turned some of the Redditors into multimillionaires:

At least for now.

Wall Street frets

Surprisingly to those just tuning in, none of this interruption to normal programming is entirely new.

The gleefully anarchistic punters who populate WallStreetBets have been getting themselves noticed as they chase their favourite stocks via the free trading app Robinhood since at least the beginning of the pandemic.

And the subReddit was amusing itself in spectacularly reckless style for years before then, as this amusing video history recounts:

Monevator has even linked to several relevant stories about all this retail action in our Weekend Reading links over the past year.

Admittedly it’s been more the stuff of opinion columns and wonky commentary.

As opposed to something being of interest to the White House:

There’s also nothing new about the mechanism by which the Redditors drove up Gamestop’s share price – the fabled short squeeze – either.

You can read about this sort of thing in Jesse Livermore’s 1923 classic Reminiscences of Stock Market Operator.

And if you run a hedge fund I suggest you do, because more than 100% of GameStop’s shares were sold short when WallStreetBets came calling.

Yes, more than the entire issued share capital had been sold short by sophisticated and amply remunerated market participants.

Which is rather surprising, even without a horde of Redditors at your gate.

If you wonder what happens when the music stops and more shares are sold short than exist, ask any seven-year old who has played musical chairs.

It might save you having to ask your billionaire hedge fund mates to bail out your hedge fund to the tune of $2.75bn.

Alternatively, read Matt Levine’s vintage take for Bloomberg.

Levine goes into all the detail – and he’s writing about the little squeeze before the big squeeze – but the gist is:

…that these two factors—a short squeeze and a gamma trap, if you like—combined to push the stock up rapidly on Friday. Something started the ball rolling—the stock went up for some fundamental or emotional or whatever reason—and then the stock going up forced short sellers and options market makers to buy stock, which caused it to go up more, which caused them to buy more, etc.
Matt Levine, 25 January 2021, Bloomberg

Talking of hedge funds, while some stock watchers now call for regulators to step in to stop uncouth youths from stiff arming honest, hardworking capital market oligarchs, the reality is hedge funds have been ripping each other to shreds with orchestrated takedowns for about as long as hedge funds have existed.

Rival funds were probably in the mix alongside the Reddit money pushing up GameStop.

Heck, George Soros and Stanley Druckenmiller – and a bunch of other funds that piled on – broke the Bank of England with what was effectively a short squeeze on Sterling in 1992.

And you didn’t see the Queen running to the regulator whining that meanie hedge funds were trashing the value of her coin of the realm then, did you?

No, like any good market player, Regina1926 just logged into an AOL chatroom via Buck Palace’s dial-up and conceded she’d been pwned.

Flows before pros

Perhaps at this point you’re wondering what the hell you’ve been doing with your life?

Why you have been steadily trickling £500 a month into a balanced passive portfolio in an ISA when you could have been whooping it up on Robinhood? Or at least on Freetrade, the UK’s equivalent? ²

The game has changed, right? The power is now in the hands of the little guys – provided there’s enough of them.

As Bloomberg’s Tracy Alloway puts it, today’s market is favouring flows before pros.

And retail punters are the ones with their hands on the money hose.

Not so fast.

I know, I know. It seems a lot of fun to ride meme stonks by going YOLO on calls like a pure autist with his eyes only on the tendies, diamond hands clenched tight, barely bothering to do any DD on the way to the moon!

(Translating from WallStreetBets-ease: It sure looks like it would be an enjoyable – not to mention profitable – enterprise to invest every penny of one’s capital into buying call options on a popular stock represented by an amusing image posted on Reddit, just like a gifted but somehow limited mathematical savant would, refraining from selling any of your securities, and focusing only on the six- or seven-digit returns to come rather than being bogged down with due diligence on said stock, all the while looking forward to some delicious chicken nuggets as a reward.)

But if you want to make easy money, do something hard.

We’ve seen this movie before. If following Internet posters into hot stocks was a sure route to enrichment, the Dotcom Bust would have been left with a different name.

We will, we will, rock you

I don’t begrudge the WallStreetBets crowd their fun. It’s been a miserable 12 months, so get it where you can I say.

I may be an active investor for my sins, but I’m not a hypocrite.

I understand the thrill of punting like this (it certainly isn’t investing).

Only with money you can afford to lose, ideally.

Otherwise fine, let’s see this run for a while. I’m enjoying the show.

Right now the day-traders are scanning the lists of the most-shorted stocks in the market in their hunt for new targets.

Some such stocks (sorry, ‘stonks’) are already seeing their prices rise.

Perhaps traders and investors have begun to buy in anticipation of the WallStreetBets eye of Sauron alighting upon them.

Or maybe sophisticated shorters are bailing, covering their shorts, and putting an ‘Out to Lunch’ sign on their door. And who can blame them.

The blast radius is expanding. I even noticed a relatively obscure German battleground stock called Grenke was up 16% yesterday. It’s hard to imagine that’s on the typical Redditor’s radar.

Short fall

This can’t last forever, though. And I don’t even mean regulation.

GameStop isn’t worth $22.5bn. It just isn’t. The company should try to raise capital while it can at this price, because it won’t stay here.

It seems a poor short to me – originally the epitome of a crowded trade, it also has net cash, a billionaire cheerleader, and while you wouldn’t want to start today with a load of shops in malls, games aren’t exactly a fading force – but nevertheless, it won’t be the new Amazon anytime soon.

Eventually fundamentals and prospects will – at least vaguely, in the hand wavey look-into-my-eyes way of the stock market – be reasserted.

That’s not to say a precise intrinsic value will be reflected in the stock price.

But something within – oh, I don’t know – say 200% of what it’s worth.

And you really don’t want to be holding the bag on the way down to there.

Eventually you’ll run out of greater fools to sell to.

Flashy mobs

What I haven’t got much time for is all the FinTwiterrati proclaiming Something Must Be Done, This Isn’t Capitalism Dear Boy.

There’s talk of a disorderly market. Of the breakdown of true price discovery. Of big losses to come in the aftermath.

But as I said, hedge funds have been taking advantage of opponents caught offside forever.

Why shouldn’t retail traders have a go for a change?

Perhaps the only thing that’s truly different is the risk tolerance of the newbies.

A hedge fund that’s short a particular stock can’t afford to see its assets go to zero. It has a fiduciary duty, as well as more practical limits on its losses.

But the WallStreetBets army? They have a cavalier attitude to losing money at the best of times.

Perhaps the mathematics of tens of thousands of coordinated punters being ready to lose $100-10,000 does change things a little bit.

Maybe new risk controls are needed at funds. Maybe the mechanics of options trading need a rethink. Perhaps there will be regulatory tweaks – whether advisable or not.

But that’s something for the zero sum traders to figure out among themselves.

Personally I think the market will take care of it – in brutal fashion – eventually.

The rest of us are best off watching with a bag of peanuts from the gallery. Or at the most having a flutter with some fun money.

I’m an active investor. But I’m the old-fashioned sort who expects to see long-term gains achieved over a few years, or even a few months.

At least a few weeks!

I don’t expect to get rich in an afternoon. Day trading is not and has never been a profitable way to wealth for nearly all who try it.

Bet on the horses. Bet on ‘stonks’, if you must.

But invest for the long-term in stocks.

My unexpected piece of the Gamestop action

Here’s a fun postscript.

I thought I’d be ending this article bemoaning that I wished I had some GameStop shares. Simply so I could sell them.

Well, it turned out I did own some GameStop shares!

It’s around this time every week that Freetrade tells me if anyone followed my affiliate link to bag their free share for signing up via my referral – granting me a bonus share in the process.

Imagine my surprise when I fired up the app to see if anything had come in – only to discover my single largest holding on the platform was GameStop.

It wasn’t my number one holding last week. It wasn’t even yesterday.

Truth be told I hadn’t even known I owned any GameStop shares. (I typically just let my free bonus shares be.)

But there they were. Two of them! Awarded to me when they were priced at less than $5.

Now priced at $330. Up around 70x.

Freetrade handily reminded me that GameStop had been on a bit of run:

What to do next? Should I evaluate the prospects for GameSpot’s future like a serious investor?

Cling onto my shares in a mini-me version of a WallStreetBets’ YOLO trade and ride the company to the moon – or to zero?

Reader, I hit hammered the sell button:

A huge shout out to whoever signed up to Freetrade and randomly granted me this windfall.

And I’ll add something that nobody has said for most of the past five years…

…I hope you got a GameStop share, too.

Sign up to Freetrade via my link and maybe we’ll both get another free share that’s going to the moon. No promises, mind.

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How to calculate your personal inflation rate

by The Accumulator on January 26, 2021

Have you ever received a measly CPI-adjusted wage rise and felt like the headline inflation rate bears as much relation to your cost of living as a neanderthal tribe does to the Rich Kids Of Instagram?

CPI inflation and its RPI cousin measure the average change in prices for a representative basket of goods and services bought by UK households. This average figure is highly unlikely to match your spending habits.

In fact, it would be extraordinary if it did.

Perhaps you don’t smoke, or drive, or have a pet. Maybe you’re a vegetarian, or don’t consume prescription drugs at the ‘average’ rate. Or you could spend more on housing or less on food than is assumed by the official inflation rate methodology.

My personal inflation rate is closer to Afghanistan’s national figure than the UK’s.

The reality is that official inflation metrics aren’t designed to reflect your specific situation. And the difference can have a big impact on your investing plans.

Best practice calls for us to adjust our investment contributions and target numbers by inflation. Updating like this keeps your portfolio on track to deliver the purchasing power you need in the future.

Given it’s your own future at stake, it’s far better to correct drift using your personal inflation rate than to use CPI or RPI.

Inflated expectations

Inflation is an insidious money-munching monster. Innocuous differences between your rate and the official statistics can have a disproportionate effect on your lifestyle given time.

For example, the historical UK inflation rate of 3% will halve your purchasing power in 22 years and nine months.

But a personal inflation rate of 5% halves your spending power in 13 years!

With a healthy lifespan, you could be exposed to inflation for more than 70 years over your combined accumulation and deaccumulation phases.

It’s worth working out what you’re really up against.

What is a personal inflation rate?

Your personal inflation rate measures the change in prices that are representative of your precise spending patterns. That’s as opposed to the official inflation figures, which calculate the national average.

Your personal inflation rate accounts for how your situation diverges from the national picture due to your:

Demographic and gender
Level of affluence
Region
Housing choice
Brand preferences
Product and service preferences
Choice of vendors
Ability to switch to cheaper products or take advantage of offers
Ability to substitute – for example to switch to pork if steak becomes too expensive

If you spend more on items with large price increases in comparison to the national average, then your personal inflation will outstrip the official number.

If you spend relatively more on items with low price rises then you will experience a lower rate of inflation.

Remember, we tend to be susceptible to the money illusion. This is our very human habit of valuing our wealth in nominal terms (the figure before inflation adjustments) instead of real terms (our actual purchasing power).

The money illusion gets worse as you age. Your price perceptions are partially anchored by the past. It can be hard for even the money-savvy to update their outmoded notions, such as that a pint of milk should cost 20p or a cinema ticket no more than half a farthing.

The illusion can be broken by knowing your personal rate of inflation.

How to calculate your personal inflation rate

Calculating your personal inflation rate starts with tracking your spending.

You can use an online budget tracker or customise your own spreadsheet.

The simplest method is to capture your total annual spend, then calculate its percentage change every year.

For example:

Year 1 total spend = £30,000

Year 2 total spend = £33,000

Percentage change = (33,000 – 30,000) / 30,000 x 100

= 10% annual personal inflation

This crude method has a problem, though. Many people’s annual spending is pretty volatile.

For instance, my annual spend shot up 44% one year, then down 16% the next. I’m not advocating I should have increased my investment contributions by 44% in a year and then slashed them by 16%!

(The technical term for that is “nuts”.)

What’s needed is a personal inflation method that smoothes out our consumption patterns.

Our expenses can be quite benign some years. Other years the consumption gods hit you with spendy thunderbolts like replacing the roof in the same year you get married.

We need to account for that variation.

Two ways to stop your personal inflation rate whipsawing

One method is to track a subset of your everyday expenses and to exclude large and infrequent purchases.

The Everyday Price Index maintained by the American Institute for Economic Research excludes items such as car purchases, appliances, furniture, and housing.

What’s left on your budget tracker will be a reasonable indicator of your inflation rate. It won’t be suddenly blown out of all proportion because you moved house one year.

The second method is to include your large and infrequent purchases, but to notionally spread the cost over time. This enables you to flatten out major expense spikes into a smoother series of annual expenses. You can insert these into your personal inflation calculation.

If you buy a new car worth £10,000, say, and intend to keep it for 10-years then it shows up as a £1,000 expenditure every year.

Obviously this is a guesstimate. Much depends on how much you spend on a car next time.

Inflation hedonists

Official inflation indexes can understate inflation if a consumer product improves in quality but doesn’t drop in price.

You get more for your money, and that shows up in the index as a decline in inflation (according to some methodologies).

But say you pay £1,500 for a laptop, and you spent £1,200 on the equivalent model five years ago. You’ll experience personal inflation even if it’s twice as good as your old laptop.

You can adjust for this ‘hedonic inflation’ by annually noting the prices for similarly-featured, brand new versions of your big-money, irregular expenditures.

The £1,000 per year expense for the car, in the example above, would be upweighted if newer versions of the same model rose in price.

Granted, doing this takes some work. But your personal inflation rate will be more accurate in return for a bit of light Googling.

Alternatively you can assume you’ll stick to your current price point and accept a more basic product than is widely available next time.

That will be an interesting test of your frugal muscle.

Once in a lifetime

You can disregard costs for genuine one-offs for the purposes of personal inflation. Ignore the cost of your wedding or laser eye surgery, and assume you’ll never move house again.

Just make sure those costs are genuine one-offs.

Being sensible about what you ignore will help dampen your personal inflation rate volatility without torpedoing its accuracy.

Personal inflation annual average calculation

Once you have a few years of data, use a geometric mean calculator to reveal your average annual rate of personal inflation.

You’ll now have a good sense of how your personal inflation stacks up against the headline rates.

My average annual inflation rate is 6.38% vs 1.34% for CPI over the seven-year period I have good spending data for.

I’ve stayed ahead of inflation by increasing my income by an average of 8.25% per year. But I’ll have to get a grip on my personal rate if I retire early.

I can’t expect my portfolio to punch the lights out enough to cope with that level of inflation when headline rates are so low.

You can benchmark yourself against the UK inflation rate of your choice by visiting the ONS’ inflation page.

Slice and dice

It can be pretty revealing to chop up your spending data into categories. You can then analyse your inflation rate at a more granular level.

My annualised personal inflation rate for groceries is 4.85%. Knowing this figure has given me fresh impetus to rein in the food bill as it’s one of my biggest spending categories.

Utilities spending has declined by 5.51% annualised over seven years. I even impress myself with that. My gut would have said I’m burning money on heating. My gut is a notorious pessimist.

I’m going to credit this spending decline to the power of annual switching and installing the most efficient boiler that I could. I also installed smart heating controls.

How to use your personal inflation rate for investing

Adjust your key investing numbers by your personal inflation rate on an annual basis:

Investment contributions
Your investment target total
Your target income to achieve financial independence (FI)

Step 1 – Add your end of year one personal inflation percentage to 1.

For example, 5% inflation: 1 + 0.05 = 1.05

Step 2 – Multiply your year one investing contributions by that annual inflation number e.g. 1.05.

For example, £500 monthly investing contribution:

500 x 1.05 = £525 investing contribution per month in year two

Step 3 – Next year, multiply year two’s investing contribution by the end of year two’s personal inflation number.

For example, if year two personal inflation is 4% then:

£525 x 1.04 = £546 investing contributions per month in year three

Do the same for your investment target total and your target income to maintain your spending power when you decide to live off your portfolio.

Personal inflation rate calculators

The only functional UK personal inflation rate calculator I can find is provided by UK fund manager’s Rathbones.

It still requires you to track your spending. Rathbones is pretty vague about the methodology.

The BBC host an ONS personal inflation rate calculator but it looks defunct.

There are a few US personal inflation rate calculators. They’re liable to be misleading as they try to squeeze you into Moses baskets representing different US inflation profiles.

Remember, relatively small divergences can devalue your wealth many times during a human lifetime. For this reason you’re better off calculating your personal inflation rate by hand.

Don’t blow yourself up

As investors and FI hopefuls we’re rightly warned to fear inflation like a baby chimpanzee is taught to fear snakes. Inflation is the serpent in the garden ready to make off with our nest egg if we’re not wary.

We’re too easily lulled by low official numbers. Meanwhile our goose is being cooked by a personal inflation figure nobody talks about. (Because if you do, people shoot themselves in the head.)

If you already track your spending then calculating your personal inflation rate is easy.

If you’re not tracking your spending – you should be!

Take it steady,

The Accumulator

P.S. – I love this little detail about the RPI basket of goods from a paper on inflation:

Changes in the price of bacon are represented by back bacon and gammon: it is assumed that other cuts of bacon will, on average, move in line with these two items.

Jim O’Donoghue, Matthew Powell and David Fenwick. “Personal Inflation: Perceptions And Experiences.” 2007.

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