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How to protect your portfolio in a crisis

How to protect your portfolio in a crisis post image

The standard story is that when equities collapse we should be saved by our bonds. Like a financial Clark Kent, this hitherto unassuming asset class takes off its glasses, reveals its cape, and soars above the chaos, lancing losses with laser beam glances.

The so-called flight to quality – when capital deserts risky equities to take refuge in high-grade government bonds – worked during the meteor strikes of 2008-09 and 2000-02.

But – oh big surgery-enhanced buts – it doesn’t always work.

UK equity and gilt returns since 1899 reveal that bonds are not always enough. Our portfolio defences need to be multi-layered like a castle, with walls, moat, archers on the ramparts, and pots of boiling oil ready to meet the potential threats.

How often do bonds rise to the occasion?

UK equities have ended the calendar year with a loss 43 times between 1899 and 2018 according to the Barclays Equity Gilt study, the go-to source for UK returns data.

That’s a timely reminder that you can expect to see an annual loss on your allocation to UK shares around one year out of every three.

So how often have UK government bonds (or gilts) proved an effective remedy for that portfolio pain?

For each year that ended with a loss for UK equities, gilts:

  • Rose 28% of the time.
  • Fell by less than equities 37% of the time.
  • Lost more than equities 35% of the time.

Two-thirds of the time you’d have been better off holding some gilts versus 100% equities during a down year – but even our safe haven bonds would have made things worse a third of the time.

Not ideal.

Do gilts save their best for darker days?

When equities lost 10% or more in a single year,1 gilts:

  • Rose 25% of the time.
  • Fell by less than equities 65% of the time.
  • Lost more than equities 10% of the time.

This is more like it! Gilts made a bad situation worse in only 10% of major market corrections. Nine times out of ten owning gilts cushioned the blow.

When equities lost 20% or more in a single year, gilts:

  • Rose 40% of the time.
  • Fell by less than equities 60% of the time.
  • Gilts have never underperformed equities in this scenario.

UK equities have lost more than 20% in a year on five occasions. Gilts didn’t do worse in these years but the airbag left you in a body cast three times. Double-digit inflation was running amok in each case – 1920, 1973, and 1974. Gilts got trampled like a traffic cop trying to halt King Kong.

To put some gory numbers on the UK’s biggest horror show:

You’d struggle to live on those crumbs of comfort.

As mentioned, gilts did register gains during the Dotcom Bust (2000 – 2002) and the Global Financial Crisis (2008 – 2009). Not by enough to fully cancel your losses if you held a 50:50 equity/bond portfolio, but enough to help you pay the bills and buy equities during the fire sale.

Just add cash

The problem is our memories are short and the textbook performance of quality government bonds during the last two meltdowns can easily blind us to the fact that gilts haven’t worked one third of the time.

Can we solve the problem if we diversify into other defensive assets as well as gilts?

Cash has lost value in real terms every single year since 2008. That dismal record might easily stop us digging deeper to learn that cash scored better annual returns than UK equities and gilts in 27 of the 43 drawdowns – or 63% of the time.

Note: The Barclays Equity Gilt study uses UK Treasury bills2 as a proxy for cash.

Cash looks worth holding because:

  • Gilts and equities were both down 72% of the time in a losing year. But adding cash meant that you’d have at least one asset in positive territory 51% of the time.
  • Cash outperformed bonds 65% of the time when equities lost more than 10% over the year.
  • Cash outperformed bonds 80% of the time when equities lost more than 20% over the year.
  • Cash beat bonds during all three of the supply shock years – 1920, 1973, and 1974. Cash was still down in real terms, but by much less than equities or gilts.

Index-linked gilts for anti-inflation

Might we improve our portfolio’s resilience with index-linked gilts?

These inflation-resistant government bonds (called ‘linkers’ by their fans) have only been around since 1983, which is a pity because they would have been more popular than flares in the 1970s.

  • UK equities have had ten down years since ’83.
  • Linkers only outperformed conventional gilts twice. And linkers were still in the red both years, just marginally less so than gilts.
  • Linkers ended down when equities lost over 10% in 1990, 2001, 2008, and 2018.

Index-linked gilts did register a small gain in 2002, when equities lost 24.5%. But all told they’re no replacement for conventional gilts as a safe haven.

With all that said, linkers are the only asset class regularly cited as offering useful protection against high and unexpected inflation.

Don’t expect equities, property, or most commodities to help when inflation is off-the-hook. Gold might assist, but not reliably so.

Talking of gold…

Gold for chaos insurance

Gold is famously uncorrelated with equities or bonds. It sometimes works when nothing else does.

We can take a look at whether gold improved a portfolio’s return during every UK equity market drawdown since 1970, thanks to the amazing Portfolio Charts.

There were 15 down years between then and now. Gold, equities, gilts, and cash all sunk together only twice – just 13% of the time.

Gold improved the portfolio return two-thirds of the time.

It did a spectacular job in the stagflationary 1970s. But it’s impossible to know how connected that performance was to the ending of US political controls on the yellow metal in 1971.

Gold also put in a good shift at the height of the Global Financial Crisis. It returned 90% between November 2007 and February 2009.

What’s less well remembered is that gold fell 30% in October 2008, swirling in the same toilet bowl as everything else. Year-end returns can only tell us so much about what it’s like to be a forced seller in the midst of a crisis.

There are many reasons to be wary of gold. It’s not a good inflation hedge for small investors and it has a long-term track record of low returns and high volatility – the opposite of what we want in an asset class.

But gold’s reputation as a safe haven holds up, on balance. Passive investing champion Larry Swedroe sums up the evidence:

As for gold serving as a safe haven, meaning that it is stable during bear markets in stocks, Erb and Harvey found gold wasn’t quite the excellent hedge some might think. It turns out 17% of monthly stock returns fall into the category where gold is dropping at the same time stocks post negative returns.

If gold acts as a true safe haven, then we would expect very few, if any, such observations.

Still, 83% of the time on the right side isn’t a bad record.

An asset that counterbalances falling equities 83% of the time is pretty remarkable in my view.

Gold may help you avoid being a forced seller of shares

Cash and gold do not feature in my personal accumulation portfolio because the evidence shows they’re a long-term drag on returns.

Instead, I’ve backed myself to ride out any crisis and to not panic sell if my portfolio heads south for a few years.

Living off your portfolio in retirement is a different ballgame, however.

A deaccumulator must sell to live.3 If a bear market lasts several years then ideally I’d have at least one asset class in my portfolio that’s above water when I need money. At worst, I’d want an asset that I can sell for a marginal loss.

The nightmare is selling equities at a loss over a protracted period and torpedoing the long term sustainability of your portfolio.

Retirement researchers have found that the dreaded sequence of returns risk hurts us most during the period that starts five years before you start living off your investments until about 10 to 15 years into your retirement.4

That period is the red zone for any retiree. Avoiding too much damage to your portfolio during that time is mission critical.

Which leads me to think that cash and gold should join my deaccumulation portfolio alongside conventional gilts and linkers to provide defence in depth when I’m most vulnerable.

Since 1970 there have only been two out of 15 total losing years for equities where all these asset classes ended the year down together.

I doubt I’ll hold more than 6% of my asset allocation in gold. In the deaccumulation red zone I could probably squeeze two years of living expenses out of that. The ever-excellent Early Retirement Now has also mentioned a couple of times that small allocations to gold (5-10%) can mitigate sequence of return risk.

Gold would be a one-shot weapon for me – fired off to protect my other assets from a worse loss. I’d be unlikely to replace it once used because I’ve only got to make it through that first decade or so. I remain firm in my belief that gold is an expensive insurance policy over the long term.

I feel similarly about cash. Again, I can see myself holding a couple of years supply to get through the height of sequence of returns risk.

One of the odd advantages of being a small investor is that I can probably do better than the Treasury bills rate by keeping cash squirrelled in the UK’s best buy bank accounts – refusing to let it rot when bonus interest rates evaporate. I’ve certainly done alright with cash in the last decade using that strategy.

The critical takeaway is that we need to diversify our defences so that the high watermark of a crisis does not flood our equity growth engines. History tells us not to rely purely on equities and conventional bonds to protect our portfolios.

Take it steady,

The Accumulator

  1. There are 20 instances between 1899 and 2018. Okay, okay, I admit I rounded a -9.6% and a -9.8% to -10%. []
  2. Short-term government debt with maturity dates of 12-months or less. []
  3. Editor’s note: Ahem. Presuming they’re not following a ‘living off the income’ strategy, which requires a larger starting pot of capital. []
  4. Peak vulnerability to sequence of returns risk can even last up to 20 years in the deaccumulation stage if you’re a precocious FIRE type looking forward to 60 years in retirement. []

Weekend reading: Brexit bites

Weekend reading logo

One of my occasional forays into the cruel and unusual punishment of Brexit. Not your cup of tea? Feel free to skip to the money links below.

Will August 2019 be remembered as the moment the Brexit brown stuff hit the fan? It’s a brave call – what with the three-year pantomime already resembling a bust-up between a mountainous Marmite stockpile and the London Array.

But so far it’s been mostly political, with one unprecedented crisis after another Parliamentary omnishambles.

Now it’s the economy, stupid.

Or, as the Brexiteers call it, the stupid economy.

We voted to be poorer

Even I wouldn’t imagine the UK’s just-revealed lurch into ‘negative growth’ last quarter was entirely due to our decision to shoot our own foot off.

The 0.2% GDP contraction between April and June – the first such shrinkage since 2012 – may in part be an unwinding of a previous growth boost the UK ‘enjoyed’ from companies frantically stockpiling before the last Brexit cliffhanger.

Also, Brexit’s fellow traveler over in the White House deserves some of the credit for the way in which he’s advancing America’s not unreasonable case against China. The resultant trade war is hitting German manufacturers as surely as Texan farmers and Chinese chip makers.

But I think we can mostly blame Brexit.

The UK economy applied the brakes with the 2016 Referendum result. Not entirely – we escaped a recession – but we’ve been losing momentum ever since. That lost growth had cost us £66bn by April, according to the ratings agency S&P. There’s been no positive news since then, and I wouldn’t be surprised if the figure is now significantly greater.

Given our depreciated currency, whatever the exact number is you wouldn’t want to see it in US dollars.

And remember – as we Remoaners are wont to remind-ya – Brexit hasn’t even happened yet! Nevertheless Brexit uncertainty intrudes into the reports of many of the UK companies I read, aside from the multinational behemoths.

UK retail, for example, is on its knees. If you’re confident of a post-Brexit bounce back (and you’re not too worried about Amazon) you can already buy listed commercial property REITs at a 40% or greater discount to the underlying assets.

As for British manufacturers, they seem to have made little from the weaker pound they’ve always wanted. (Big surprise, you can’t devalue your way into becoming Germany).

Not that manufacturers are of key importance to our service-orientated economy, unless you’re a blurry-eyed Leaver nostalgic.

And even if you are, don’t you dare bring fisheries into it. The entire UK fishing industry is about the size of High Street bike shop Halfords.

Down but not out

One episode of shrinkage doesn’t equal a recession, as an erectile dysfunction expert might say. We’ll need two quarters of negative growth for that.

Will we get it? Who knows but the omens aren’t good.

The likes of Chancellor Sajid Javid are always pointing to the resilience of the UK economy as a reason to be confident about Brexit. It’s true that unemployment in particular is very low.

But remember we were busy bouncing back from the deepest downturn for global economic growth since World War 2 when we voted for Brexit. Where would we be now if the recovery had continued unimpeded by the referendum-winning Gang Show?

Anyway, bragging about how great the existing trading framework is working even as you’re seeking to undermine it as a Brexiteer makes no more sense than Woody the Woodpecker hammering away at the branch beneath his feet.

The boys are back in town

Active investing in the face of this Technicolour episode of the Twilight Zone is a maddening enterprise and I envy all you sensible passive investors serenely sailing through it with globally diversified index funds.

I made an especially duff call a few months ago. I believed Parliament looked like it would prevent the Brexiteers from doing their absolute worst. The pound was rallying but it still looked potentially undervalued so I pivoted a decent chunk of my global funds back to Blighty and sterling.

Oops! As things turned out, the ultra-Brexiteers repeatedly voted against Brexit for their own Byzantine reasons, and the rest is history, Boris Johnson, and the pound back down at a two-year low.

Chastened by that experience, I have to consider that the worst case scenario could really come to pass on October 31st.

Boris Johnson is many things – most of them better expressed in Olde English slang about merkins and fopdoodles – but he’s not stupid. It’s hard to believe he really wants to preside over a no-deal Brexit and the likely consequences.

On the other hand we can see Team Leave are at work again now they’ve got the band back together, with Downing Street preparing to blame everyone else for the mess of their own making, from the EU to British MPs, cynics and pessimists like me, and no doubt poor Larry the Cat.

The latest wheeze from the Defenders of Democracy is to consider holding a General Election over the October 31st deadline so we crash out while there are no grown-up MPs at home to stop it happening. I saw a Tory MP interviewed by the BBC conceding the enemies of Brexit may try to thwart such actions “in the courts”, as if the law was something only a dirty foreigner would stoop to.

Let’s remember the courts have already upheld previous skullduggery by Remainers, such as that MPs should get a vote before triggering Article 50, precisely because it was, you know, the law.

I don’t see how MPs insisting the law should be followed are Enemies of the People – and I don’t want to live in a world where the courts aren’t there to protect the hard won rights of us little people against our rulers – but then I’m not a 55-year old Leave voter who talks as though I lived through the Blitz.

Brexit: Imagine a bureaucrat stamping your papers forever

Let’s be realistic: We can’t rely on Sinn Féin to save us from a no-deal Brexit and the disintegration of the Union.

Yes, Brexit has brought us to a place where that sentence was not ironic.

So perhaps Johnson will go through with it, and this isn’t all an admittedly more plausible bluff.

He seems to me entirely the kind of must-win schemer who would turn over the Monopoly board as a kid, so anything is possible.

Maybe he’ll salvage his conscience by turning us into Singapore by the North Sea as the best way to benefit from the rotten hand of cards he’ll have dealt us.

It’s all very difficult, and I will certainly make more mistakes on the way to navigating Brexit from an investing perspective. It’s hard to win when you’re tossing a loaded coin.

One mistake I won’t make again though is to think the pound looks cheap while Brexit is still in play. That’s to fall into the same trap as the Brexiteers who point to the fact that our economy is doing well while we’re freely trading with our biggest trading partner as a reason to confidently derail the relationship.

The pound looks cheap against the world as we knew it. But we don’t know what’s to come.

We won’t truly know for years, most likely. If you’re a Leave fan who somehow read this far, please understand that one thing.

The day after we make our glorious break with the EU in a no-deal scenario, we go back to the EU and begin negotiations about trade. There is no escaping it.

Even assuming the EU partly saves us from ourselves (for its own reasons) by, say,  extending current arrangements in some kind of emergency status for an indefinite period of time, we’ll still be negotiating from an ever-weakening position.

The talks will go on for years. I’d bet you £10 that progress will be being referenced somewhere in the pages of the Sunday newspapers (or their digital equivalents) a decade from now.

It will never end. And something that five years ago most of us were totally relaxed about and basically ignored because it just worked will be an annoying buzzing in our lives indefinitely.

Meanwhile three years worth of Leave voters have passed away, leaving the EU has been revealed as like having your cake and eating it only in the same way as Henry 1st ate his surfeit of eels before keeling over, and we have a prime minister plotting to achieve Brexit by doing it while nobody is running the country.

Draw your horns in. Avoid hero bets. Stay diversified.

And put a raincoat on.

[continue reading…]

I asked the chief executive of a bank to give me a mortgage and he did post image

Ater 20 years of playing cat and mouse with the London property market, maybe I needed a big dog to get me into home ownership.

But I never thought it’d be the boss of a major bank.

It was Spring 2017, and I was visiting an ex-girlfriend. As usual, I was singing her new-ish flat’s praises. My ex knew I’d wanted to buy my own home forever. She’d seen me go dreamy in Habitat. She’d caught me scrolling through Rightmove like a home alone teenager discovering PornHub.

She’d also suffered many long explanations as to why I hadn’t bought my own place in London – despite my living here through most of a 25-year property boom.

I could have bought, barely, somewhere dodgy, in the mid-1990s, I’d begin, but I got greedy for a nicer first purchase in a better area… but then I couldn’t buy because I had just gone freelance… then prices doubled in what felt like 12 months… even so, I almost did buy in 2003… but then I pulled out on fears that London really was ludicrously overvalued and the whole financial system was bonkers… and after that I wanted the money to invest…

On and on I went. All true on one level. Waffle on another.

My ex’s attitude: “If you want a home of your own to live in, buy one if you can. It doesn’t matter if it’s the right time – you’ll make it work – and it doesn’t matter if prices go down – they’ll go up again. In the meantime, you live your life.”

I’d heard this many times. My dad said much the same when I left university. Battered by two decades of astronomical price rises and the absence of the sustained crash I’d expected since the early 2000s, I no longer saw such sentiments as naive and anti-historical. I now saw them as pragmatic. Maybe even worldly wise.

Even so, I continued, we had to consider that –


She interrupted my 50th explanation of some issue or another I had.

“You’re a smart guy,” my ex said, generously. “If you really wanted to buy your own place you’d figure out a way. So do you want to? Really?”

It was a fair question.

I didn’t have reasons why I couldn’t buy, even though I wanted to.

I had reasons why I wouldn’t buy, even though I could.


Let’s leave the laundry list of why I wanted to get my own place for that great unfinished article in the sky drafts folder.

Suffice to say I mostly still thought it was an awful time to buy a London flat. But I really did want to own.

I’d had this as an aspiration for almost as long as a couple of my friends had been alive. It didn’t just feel like unfinished business. Much more delay and I’d be repaying a mortgage in my seventies. I wanted this monkey off my back.

Also, one of the few reasons why it was perhaps not a terrible time for me to buy was I knew the UK banks had lots of spare capital and wanted a return.

This might not sound like a big deal. However in two of the three times I’d almost bought before – the mid-1990s and 2008 and 2009 – the opposite was true. They were good times to buy property, but they proved impossible times for me to get any financing.

I’d come to realize there was a tension here. I’d probably need to buy into-the-cycle, when banks were more willing to lend and my portfolio was riding high, rather than contrarily in a crash.

You see, my financial position was weird.

Yes, I had a decent net worth for somebody who’d stupidly missed the great London property lottery that had floated friends towards millionaire status for about the cost of my rent.

But my own money had mostly come from saving a huge proportion of my income for decades and aggressively investing it – two things seemingly unheard of by the average mortgage-granting banker.

What particularly bothered them was my income.

I’d earned well below the higher-rate tax bracket in my 20s and for much of my 30s. I’d then used VCTs to keep my take home income below the 40% band, before turning to big SIPP contributions when the pension freedoms came onto the horizon.

This all mattered because even those banks who’d look properly at the self-employed – and who’d squint a bit at the full accounts to see the potential as generously as possible – wanted to picture a hefty income coming in every month.

I’m no pauper – I count my blessings. But the fact is in a city where by 2017 the two-bedroom flats I wanted started at well over £500,0001 and banks lend 3-4 times income, I didn’t make the starting line.

A miser for ISAs

The obvious solution was to liquidate some investments and buy the flat with cash. However this was about as attractive to me as a two-for-one deal on enemas:

  • At the time, in early 2017, I felt global shares were still pretty good value, not least compared to London property.
  • Crucially, most of my investments were wrapped inside precious tax-free ISA wrappers that I was loathe to lose forever by liquidating.
  • I was concerned about Brexit. I didn’t want to go all-in on Sterling by swapping my overseas shares and foreign earners entirely for London real estate – not when I foresaw many years of posturing and national foot-shooting nonsense ahead.
  • Investing had become my passion. My liquid capital was “the water I swim in” I’d portentously said to a friend who suggested I sell my shares and buy a place. The thought of starting the snowball again from scratch was too depressing.
  • I was vaguely discussing setting up my own active fund at this time (another story!) and as part of this I was using my portfolio as a proxy for a professional track record. My money would also need to be part of the seed capital we’d kick off with, at the least to show my commitment.
  • Finally, I hate change!

My reluctance to sell shares was a tad ironic. I’d started my stock market investing in despair at the London property market, pumping my flat deposit into shares in 2003. Perhaps it was illogical to not want to reverse that trade.

What was logical though was wanting to keep hold of my ISA wrappers, which I’d built up with 15 years of annual allowances. ISAs are a fabulous perk for UK investors – still routinely underrated. Thanks to my ISAs, I could compound my wealth for another two or three decades mostly untroubled by the tax man.

Did I really want to trade this glorious tax shield away for leaky gutters and a dodgy boiler?

Maybe it’d have been easier if I’d expected big tax-free gains from whatever flat I bought. Finally enjoying the massive own home tax break that’s invariably taken for granted by homeowners was a sensible reason why I wanted to buy. However I saw near-zero prospect of windfall gains from London property anytime soon.

No, the ISA fortress was the one concrete benefit I’d gained from abstaining from buying property. I was loathe to give it up.

Forcing myself to try harder

So there I sat in a trap of my own making. My flexible take on what some keen types call Lifestyle Design had enabled me to work as I pleased, enjoy long walks on weekday afternoons, teach myself active investing, and amass a six-figure sum sufficient to buy outright a flat I wanted – all with only a couple of short stints in a regular office job.

But set against that I had only a small income by London standards to show a bank, and a horror of liquidating my tax shelters.

If it was the mid-1990s, it’d have been easy – I could have sold just a fraction of my ISA holdings. But my years of timid and querulous bumbling in the face of the London property cage fight meant I needed a small fortune to seal the deal.

My ex-girlfriend appeared before me like Obi-Wan Kenobi.

“Use the force,” she commanded. “Let it guide your actions”.

Perhaps I’m misremembering.

Oh yes, she thought I was a smart guy – or at least that was what she was saying now we’d split up.

I was a pretentious one, too, I pondered. Hadn’t I told an unfortunate friend that I was like a fish flapping about in a bank account or some similar tortured metaphor about my good sense with money?

If I really wanted to buy my own place then I could surely find a way.

For good or ill I did want to buy. And so the game was on.

Margin call

I quickly established the traditional banks would not help me. Even the one I’d kept since my student days partly in case I ever needed a record of my long financial probity was no use. They had their procedures, and lending me ten-times my income wasn’t going to get through their sausage machine, even with a chunky deposit.

Some high-flying types, such as the blogger Fire V London, have used margin debt to buy a property. What’s more, he’d favoured a margin loan despite having a private bank account that, as I understood it, he kept around precisely for such DIY financial innovation.

Could I similarly consolidate all my investments with a broker that offered margin against my portfolio and then draw out a half a million quid or more to add to my deposit and buy a flat?

Well, perhaps, but I didn’t entertain the idea for long.

I hate debt, and I hated the idea of borrowing to invest.

True, borrowing to invest is what everyone effectively does when they take out a mortgage whilst investing elsewhere – even into a pension. That may well be a sensible strategy (particular in the case of a pension) and in practice lots of people rail against it while doing it themselves (because they compartmentalize their mortgage and their pension and ISAs into different buckets). But once you get beyond taking out a mortgage to buy your own home, the risks multiply.

As I wanted to keep my ISAs and stay invested while taking on debt, I would have to play the borrowing to invest game. But I wasn’t going to do it on margin, that was for sure.

What’s the difference?

With a mortgage, you repay monthly amounts as agreed with a lender when you arrange the mortgage. As long as you make those payments, the rest of your financial life is in practical terms irrelevant from its point of view (at least until you need to remortgage).

In contrast, margin debt is typically borrowed against a portfolio that’s marked-to-market. As shares in your portfolio fluctuate in price, the total value of the portfolio is recalculated (that’s the marked-to-market bit).

If shares go up no problem. But if your portfolio loses money then you risk breaching your borrowing limits. This is when you’re required to make a margin call – which involves topping-up the asset side of your ledger with fresh cash to bring down your ratio of borrowing to assets. At best this means you need to add more money, assuming you have it. At the worst, you – or even your broker, without your say-so – could be required to liquidate your portfolio at a terrible time, impairing your finances forever.

No thanks!

Such an approach might make sense for a sophisticated super high net worth investor who is also a high-earner and who likely has other borrowing avenues open to them if required (such as bridge loans) or an ability to sell other assets in a crunch (second homes, cars, jewels, Banksy paintings, and so on).

Nah, nah, that’s not me.

I wanted a mortgage – the safest and cheapest form of borrowing there is. And I wanted to fix it for a long period, so I would hopefully have time to regroup should any calamity strike.

Could I get one?

Stay away from my precious!

As I saw it, I was a super-safe borrower.

For a start I had at least 20% ready as a cash deposit. I’d been steadily setting aside a good chunk of cash into savings accounts, premium bonds and the like, and I’d also raised money defusing capital gains.

I believed this 20% deposit already gave a lender a lot of cover in a 5%-down world.

Then there was the fact that I was demonstrably good with money.

I already had the assets to pay off the mortgage from day one. I just didn’t want to sell them unless I had to. It was the proverbial opportunity for a bank to lend me an umbrella when the sun was shining.

Compare that to a traditional first-time buyer. They have a small deposit saved – or more likely these days donated by their parents – plus the promise of a salary. Their potential was in the future. Mine had already been realized.

I was also a bit self-righteous in that I believed my track record should count for something. How many first-time buyers in London go to a bank without super high-earning jobs, a partner, or a holdall stuffed with cash from the death of a loved one? Very few.

Clearly I would have to sit down with somebody to make my case.

My first serious attempt was with a broker attached to one of the estate agents in London. The agent was in her early 20s and didn’t seem to know much about investing. But to her credit she understood my desire to stay invested in the ISAs, asked sensible questions, and made promising noises about specialist lenders who would look at me favourably.

Of course, she said, you’ll then transfer all your invested cash to our own fund manager to manage when you get the mortgage.



They needed to be sure I wouldn’t make terrible investing decisions, you see, or spend the money once the mortgage was secured.

But but but… we’d been through all my paperwork. The agent saw I didn’t earn a fortune, but I had a relatively large amount of money. Didn’t this show I was (a) good at investing and (b) not one of life’s great spenders?

Why would I give my money to an expensive and mediocre manager to potentially throw my portfolio in reverse?

The agent made sympathetic noises but it was no good. I had found a human face to the computer says no.

Challenger blows up

I didn’t give up. I saw there was some flexibility out there, even if there might not be quite enough for me.

Perhaps I could cut out the intermediaries. I turned my attention to the challenger banks. I’d read a lot about how they aimed to do things differently – heck I was even invested in one – and I wanted to do something different.

Pretty rapidly I followed a chain that led me to a manager at one of the UK’s challenger banks who told me that yes, he thought what I wanted should be possible. He’d get back to me with the forms and we could get the process underway.


Only… the promised forms didn’t come. I chased him up but he was unavailable. An assistant relayed the message that the paperwork was being updated, hence the delay. The delay continued. I pressed, he evaded. Finally I pinned him down and he said he couldn’t do anything for me. However here was the number of their mortgage specialist and they could sort me out.

I called the number and was asked for a few details. No, they couldn’t lend me that huge amount of money. They could lend me four times my income or thereabouts. Maybe a bit more for affordable good behaviour.

I had gone through to a standard mortgage inquiry line. They had no idea who my contact was, and they didn’t really understand what I was asking for anyway.

We agreed it would be best if I hung up.

It takes a fair bit to annoy me to the point of feeling physically cross, but at this point I was hot-heated. I found my housemate sitting on his PC deep into Elite: Dangerous and bombarded the disinterested back of his head with an update.

“I should write to the bank’s CEO and tell him his publicity is full of it,” I ranted.

“Yes why not?” my friend said disinterestedly, as he traded his space ship’s cargo of bootleg liquor for a case of neofabric installation at a way station at the far reaches of the Heart nebulae. “I bet he’d love to hear from an angry customer setting him straight.”

As it happened, I remembered an interview where the boss in question had claimed that he really did read all customer feedback. Was it worth a try?

A vision of my ex-girlfriend fuzzed back into view.

“Use the Force,” she intoned. “You’re supposedly a smart guy. Giving up instead of going all the way to commitment is exactly why it never worked out between us. Also for the record I didn’t really like dressing up. I was just trying to be nice, you perv.”

Screw it, I was going to do it!

I quickly found the chief executive’s email address and within a few minutes I’d sent a polite but disgruntled message.

I won’t republish it here as it contained a few personal specifics. In summary I told him I already had more than I was looking to borrow, that I didn’t want to sell down my ISAs but I could if I ever needed to in order to meet repayments, I had a 20% deposit, and incidentally, his people hadn’t read the memo.

It felt good to outline my case. At least I had tried, as I told my housemate.

“Yeah, well, you think you’ve got problems – I’ve got alien stowaways feasting on my illegal narcotics.”

It seemed a fitting epitaph to my wild goose chase.

Surpassing expectations

Obviously I didn’t expect to ever hear from the CEO of the challenger bank.

Certainly not as soon as the next morning when – before 9am – I had a reply from his email account.

They’d let me down and he was sorry, he said. At the least I should be heard. He’d cc-d two colleagues who he was now directly asking to look into my case.

I googled. The two names were directors at the bank, and I don’t mean American-style Director of Being Third Intern. I mean proper directors who sat on the board and oversaw billions.

I gulped.

Before lunchtime one of them was on the phone with me. It was a super conversation – he was a friendly and urbane type – of the sort you see in serious movies about financial titans discussing corporate actions. Or maybe that was in my head, but he took me seriously. He not only understood my motivation regarding the ISAs, but said he’d done something similar for the same reason.

A few days later and I was in a meeting with him and the private banking specialist who’d been assigned to me on account of my unusual circumstances. This fellow was great, too, and I was frustrated at the end of it all that I wasn’t actually of sufficiently high net worth to keep him!

I’d worn a great suit for the meeting, and had duplicates of paperwork I’d prepared. This not only covered my current assets – evidence of what money was where – but included projections of how my assets might grow in three different scenarios over the lifetime of the mortgage. At this point the urbane director politely excused himself, I guess persuaded that he wasn’t putting his name to the fantasies of a nutjob – or at least that if I was a nutjob I was the sort you wanted to lend money to.

From there, the process was much like you imagine getting a mortgage would be if you were doing it face-to-face in the 1970s. The bank was diligent in its risk assessment, and when my first attempt at a purchase fell through we had to go through most of the 20-odd page questionnaires and illustrations again. My man laughed as he explained several aspects of the risk warnings in the light of the fact that I’d previously presented my own investing models to a director, but he went through them just the same.

I eventually did take some money out of an ISA to buy the place I wanted at the interest rate I was after, but it was only a small fraction.

Finally, six months or so after I started with the challenger bank and nearly a year after I’d decided to go for it and buy a place, the money was transferred and I finally bought my flat.

Home, a loan

I am very grateful to the bank for finally hearing me out, even if I think it’s crazy that they and the others found it so hard to initially make the space to do so. I suppose it speaks to how rare a situation like mine is.

The bank didn’t explicitly confirm it wanted any publicity about all this when I asked, which is why I’m not naming it. I imagine the CEO gets a lot of emails! I’ve recommended them to friends though.

There’s a post to be written about why I chose specifics of the (fixed rate interest-only) mortgage I did and I should also explain how having all this debt has changed my investing style (for the worse, in terms of returns, but that’s partly because I’m much more risk averse now.)

But let’s conclude for now in early 2018, with me taking ownership of my own place in the midst of the first sustained price falls in London for decades. (Property, eh? Can’t lose!)

Have I now made a habit of emailing bosses when I don’t get my way?

I have not. It was a very out of character action for me, as is usually required by the hero of any story in resolving their conflicts. (Seriously, just read your Joseph Campbell).

What I did do though is profusely thank my ex for kicking me up the backside. She was one of the first to have dinner at my new place!

  1. Compared to about £50,000 in the mid-1990s! Sigh. []

Weekend reading: How are you setting your table?

Weekend reading logo

What caught my eye this week.

I was stood up last night. Well, my dinner date didn’t make it. There were reasons. But my Google Alert for the Zombie Apocalypse didn’t trigger, so no excuses.

(Obviously in practice I’ve bumbled out Hugh Grant-esque assurances that I understand and it’s no problem and really another time, because I do and it isn’t and maybe. But Hugh doesn’t have to write dramatic blog openers.)

Anyway, as I sat enjoying my slow-cooked Mallorcan lamb for two by myself, I found myself admiring my pretty dining table, the natural grain of the wood, the way it’s lit by the fancy pendants above.

Quite the scene, especially if your tastes run to Edward Hopper.

Two times table

It isn’t a particularly expensive table – it was one of my carefully sniped online bargains secured during my materialism mania last year.

One of the good things about dithering for decades before finally buying your own place though is you’ve got a bit more cash spare to indulge William Morris’ famous dictat:

Have nothing in your house that you do not know to be useful, or believe to be beautiful.

(Present company excepted, of course.)

But there were some unfortunate aspects to my delaying, too.

Specifically: Life moved on.

Much as I like my table, it doesn’t extend. I thought this would be a big deal when I bought it, and agonized as it only really fits six people comfortably. But the truth is I’ve only overflowed off the table twice since moving in.

There were periods – years ago now – when I’d have 8-12 people over for some sort of food and drink gathering every month or so. Even more often when I was in a relationship. But most of my old friends long ago went off to have kids in the provinces (i.e. beyond Zone 6). Or they’ve left the country altogether.

And while I pounce on young people like Keifer Sutherland in The Lost Boys – yes, an ancient reference, chosen for effect – much of the cast of Series Two: The Didactic Years has moved on, too.

So it’s mostly just a couple having dinner with me on my table these days, or perhaps one or two older and similarly loner-ish diehard chums, or maybe a rare married London friend returning from that strange confinement of being responsible for children under five, still nervously watching her six-year old threaten to topple my tree fern out in the garden even as she starts to remember how to rant about politics and rave about mini-breaks again like the old days.


Does it matter that I had most of my big social gatherings in rented places shared with friends – where many times the conversation turned to when was I finally going to buy somewhere of my own – and that now I do own somewhere, most nights I potter around it alone like someone from a Philip Larkin poem?

No no, don’t be silly. Time and place and all that.

Besides, I remember Douglas Coupland saying something in Generation X about how you lose your ability to make new friends the day you buy your first piece of non-disposable (/IKEA) furniture, so maybe my extended property serfdom garnered me a wider social circle than my scary Myers-Briggs statistics should warrant.

On the other hand, it’d have been nice to have had my own place, and all my own bits and bobs, and to have enjoyed then the theater of playing the host in my own curated home. I saw friends relish it, and thought I would, too.

None of this may be striking a chord with you, but something similar will. Because these are the sort of trade-offs we make all the time when we save and invest for the future.

Of course you try to do the best with today in the meantime. You tell yourself it doesn’t matter that you’re not going abroad with your friends this summer. Press-ups and a pair of dumbbells are just as good as their gym membership. You can live like a billionaire on a supersavers’ budget.

But you can’t have it all, not in one lifetime. You can’t go back, travel like you could, run like you could, be as silly as you could. You might say you can, but you know you can’t. You can’t get your 20s back, and those glorious reckless days of being young.

Now I happen to believe that being young is such a natural state of grace that you really are best off saving your money for when you’re not young anymore. But that doesn’t change the mathematics of time’s arrow, and the consequences.

I often think about that scene in The Godfather, when Michael Corleone has a flashback to the raucous family table from years before he became a cold-blooded mafioso kingpin. Somewhere on the way to the latter, the former died. Perhaps he killed it, or perhaps it was going to die anyway.

There was a moment in my very early 30s when I’d decided not to buy a flat (too expensive) but I hadn’t yet fully caught the investing mania that went on to define me (too nervous). For a while I considered using the deposit I’d saved on moving to the mountains, or traveling. There was even a silly five-minutes when fed up with chasing property prices I considered throwing my frugal persona to the wind and buying an open-topped sports car. (Especially silly considering I don’t have a driving license.)

What I did instead was learn to invest, get addicted to it, put all my house savings into the market, even started a website about it – and life went on regardless of my previous plans.

We shape our buildings, and afterwards they shape us
– Winston Churchill

Tomorrow, tomorrow, I love you, tomorrow

For more on this theme, check out this short new podcast on Abnormal Returns. It’s about balancing your today with what the guest Jeremy Walter calls ‘Tomorrowland’. I also touched on it in Buffett’s Folly if you want more.

This post sounds a bit maudlin, reading it back, but that’s just the wine talking. (And maybe the empty place at the table. Tiny violins. Don’t worry, this site is unknown to her. Our secret!)

I had my reasons for not buying a property sooner. My friends would have had kids and left anyway. I’ve got options today from the delay that I’m not sure I’d trade for a hodgepodge of fading memories.

So no regrets. Just a little shiver of reality.

[continue reading…]