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What caught my eye this week.

Five years flies by when your country is shooting itself in the foot, the world’s most powerful nation is led by a man-child, and a global pandemic sinks and then super-charges your portfolio.

Even so, as the dust settled I was surprised to see that my NS&I Index-linked certificates are up for renewal again.

If you have no idea what these are, I don’t blame you.

NS&I’s coveted certificates haven’t been available to new investors for almost a decade. Existing holders have been able to rollover what they have – but only for increasingly measly returns.

Roll over Beethoven

If I renew my certificates for another five years, then I will get a guaranteed return of 0.01% tax-free per annum, plus inflation1.

The same return is also available on rollover into two-year and three-year certificates.

Given that I am sure NS&I is familiar with the time value of money, this unchanging return profile over two-to-five years tells us a lot about where the market appeal lies with these certificates.

It’s all about guaranteeing the preservation of the spending power of your money via the index-linking.

If I rollover for five years, say, my money will preserve its real2 value over that term. But the additional returns on top could be beaten by skipping a latte a year.

That’s a pathetic-looking reward for planning to lock your money away for five years3.

And it gets worse!

In 2019, NS&I shifted the measure used to calculate the index-linking portion of the return. It now uses CPI instead of RPI. There are justifiable reasons for this, but as CPI has tended to run lower than RPI the net result for us investors is smaller gains over the years.

NS&I doesn’t hide the impact of the shift, as illustrated by its table below (which uses 2019 inflation rates). It shows what you would get from a £1,000 investment under the two different inflation measures:

Historically low returns will very likely be even lower with CPI.


Merrily we roll along

So why do I plan to rollover these certificates again – and for the full five years?

Because even just getting your money back with that inflation-tracking uplift beats cash in the bank. Returns on savings are currently far lower.

And because if inflation should spike dramatically, these certificates provide some protection against that, too.

Meanwhile if inflation turns negative, the NS&I certificates don’t go down in value. You’d just get the 0.01% applied that year. So there’s an asymmetrical risk/reward on offer.

Finally, I’ll renew for the whole five years just in case they decide to scrap them in the next few years.

You’ve got to roll with it

The big potential downside to rolling over is, of course, the probable opportunity cost.

My self-managed portfolio more than doubled over the past five years. Needless to say that smashed the return from my NS&I certificates.

But good investing isn’t just about holding assets with the highest expected returns. We need diversification, and we need an emergency fund, too.

I wrote a lot about my last rollover in 2016 that holds true today. Please check back for a full run through the attractions of these certificates.

The RPI element has gone since then, but that aside the certificates still look like unique asset class that we private investors are lucky to have access to.

Moreover they’re not issuing them any more. When it comes to the rollover it’s use it or lose it for those lucky enough to own them already.

Perhaps the biggest argument against rolling over for me, personally, is that unlike in 2016 I’m now running a big mortgage. I’d expect to earn a (slightly) higher return by cashing in my certificates and paying that down.

But then they’d be gone for me – and with them their unique diversification traits – and my overall investment posture would be less liquid (because I’d swap the semi-liquid certificates for a lower mortgage balance).

The cash value of my certificates could cover a couple of years of my mortgage payments, in a desperate pinch. Liquidity is valuable.

All told, my conclusion is much the same today as it was five years ago:

If these Index-linked certificates turn out to be the weakest performers over the next five years, then hurrah – because it will mean my vastly larger allocation to equities, for example, will have done better.

True, if I had a massive slug of these certificates then perhaps I’d need to think more carefully about how much money I wanted to commit to merely keeping up with inflation.

But like most people I only have a few percent in them, and as we’ve discussed they’re not making them anymore.

A solid hold, then. If only all investing decisions were this easy.

Let’s see where we are in 2026!

Have a great weekend everyone.

[continue reading…]

  1. Technically ‘index-linking’ but it amounts to the same thing []
  2. i.e. Inflation-adjusted. []
  3. You can get the money out early if needed, with a penalty. []

Why you might be your own diamond of a dream tenant

Dog dressed as unicorn to represent the dream tenant

Getting a dream tenant for their buy-to-let is, well, the dream of most landlords.

A tenant who pays on time, tidies up, and refrains from crack parties on a weeknight will make landlord life so much easier

Investing in property isn’t like buying an index tracker. Property is much messier. Buildings and their inhabitants can let you down.

Indeed the consensus around places like Monevator is that buy-to-let is more hassle than it’s worth. Property investing is for the Homes Under The Hammer crowd who don’t know any better.

And I’d agree its glory days are behind us.

But where I differ from many of the Monevator faithful is I’m not leery of real estate as an asset class. Nor of having a stonking big mortgage.

Despite my love of the stock market, I’ve long believed owning your own home is the best investment the average person makes.1

Homes are typically bought with a mortgage. That mortgage is a forced saving scheme that gets the average person socking away money for 25 years. The mortgage also leverages up an initial deposit, hugely boosting the returns from even modest house price growth over the long-term.

Mortgages are a major reason why most of the Haves Have, while the Have-nots are still renting.

Mortgage is an eight-letter word

Despite these dreamy qualities, mortgages get the same cold shoulder as buy-to-let from many seekers of financial freedom.

Indeed there’s a band of Pay Off You Mortgage First militants who show up whenever you mention the M-word on the Internet.

Presumably there’s some kind of bat signal. But it must be pretty targeted, because while YouTube is flooded with heavily-viewed and Liked videos urging you to continually remortgage and re-up your buy-to-let empire, I get taken to task simply for not immediately paying down my big interest-only mortgage the first moment I’ve got some spare cash.

Now, I do get where the anti-mortgage brigade are coming from.

A mortgage – like all debt – introduces risk.

Mortgages are usually cheap and they’re secured against an asset (your house) and today most banks bend over backwards before repossessing.

But you’re still more vulnerable with a mortgage than without.

When I took out my mortgage, I admitted to a friend it was the first time I’d felt nervous about money in decades. Because it was suddenly possible for me to concoct a (far-fetched) scenario in which shares went to zero, my house plunged in value, too, I lost my income, and I was left bankrupt.

Whereas in my debt-free Bohemian days, bankruptcy was impossible.

It’s true, too, that paying off a mortgage delivers an instant, known return.

Pay down £50,000 of your mortgage and you’ll definitely save all the interest you would have otherwise have paid on it.

That’s a precise return. None of the ups and downs of the stock market, and usually more attractive than the fluctuating returns from cash at the bank, too.

There are even tax benefits to paying off a mortgage versus saving cash.

You’re your own landlord

All this came to a head recently as I wondered what to do with a six-figure lump sum I’d conjured up by panicking prudently realizing some capital gains before the last Budget.

I considered everything, from the early repayment of some of my mortgage to buying an investment property in the provinces.

But for me, not paying off my mortgage – and investing the money instead in other assets – still seemed to offer the best balance of risk, reward, and a simpler life.

I mean a simpler life compared to potential buy-to-let headaches, of course.

And my conclusion was hugely enhanced by knowing that I would never find a dream tenant for my buy-to-let who’d be as good to me as … me.

You’re a dream tenant

As a home owner, I effectively rent my house to myself.

This isn’t a fanciful metaphor. There’s a concept called imputed rent that we need to get into some day, which represents the housing services you enjoy by living in your own home.

Some countries even tax homeowners on this notional rental ‘income’.

So yes, I am a landlord already – and my property has the perfect tenant:

  • I look after it like nobody else would.
  • My rent is never late.
  • In fact, I’ve done a deep dive on myself and my financials are spotless.
  • I love the furniture, the garden, and the area. I’m in no rush to move!
  • There will be no illicit smoking, pets, or neighbour-baiting parties here.

Perfect! I should really send myself a bottle of bubbly this Christmas.

Dream tenant or demanding drain?

Of course you’re not the perfect tenant in every way, not even for you.

You know exactly what buttons to press to get your landlord – you – to accelerate that refurbishment, or to buy a new sofa. Which could be costly.

(Slightly) more seriously, you don’t scale.

You can only be your own tenant in one place at a time. Perhaps two if you buy yourself a commercial property within your SIPP and work from it.

Beyond that, you’ll have to risk a third-party if you want to own more properties.

Alternatively, you could buy yourself a bigger home, get a bigger mortgage, and seek exposure to residential property via listed housebuilders, or the few trading companies that own it such as Mountview Estates or Grainger.

But many people are already over-exposed to residential property. Buying more global equities is probably a better bet.

Method in the mortgage

The main benefit of having me as a tenant is risk reduction.

I am much more comfortable running a sizeable debt this way, compared to if I was relying on a stranger to cover my mortgage via a buy-to-let rental.

Also note that I don’t increase my exposure to the property market by not paying down the mortgage.

My exposure to residential property is the value of the asset that is my home. The size of the mortgage I finance that ownership with is irrelevant.

Still, having a mortgage does ‘gear up’ my overall investable wealth.

I could use mortgage debt to increase my exposure to property (by getting a bigger home or an investment property).

Instead, I’ve effectively deployed it to own a larger basket of shares, high-yielding bonds, REITs, Bitcoin, cash, and various other types of assets.

I am much more comfortable running a big debt this way, compared to if I was relying on a stranger to cover my mortgage via a buy-to-let.

A strategic bet

It can be helpful to look at common financial constructs through a new lens.

For example how a mortgage is money rented from a bank.

Or how a landlord is someone who borrows money on your behalf.

Similarly, don’t overlook your qualities as a home-owning tenant.

Of course I don’t expect the mortgage haters to call up Halifax tomorrow about a five-year fix, just because they read this article.

For one thing, there’s nothing wrong with paying off your mortgage. It has loads of benefits – emotional and psychological as well as financial – and not everyone wants or needs to boost their returns.

But equally there’s nothing intrinsically wrong with having a mortgage, either, especially at today’s low rates. It’s all a matter of knowing what you can afford and can comfortably handle.

With a dream tenant in place to meet the interest payments, a mortgage might be the safest way to enhance your investing returns.

It sure beats YOLO-ing on meme stonks!

  1. There’s no need to explain how *you* make 80% a year trading out-of-the-money options or whatnot. I said the ‘average’ person. 🙂 []
Space Invaders attacking image as a metaphor for the depreciation of expensive items.

Knowing how much you need to live on is key to achieving financial independence (FI). But a common mistake is not accounting for the depreciation of big-ticket items, and for irregular but direct hits to your bank balance.

We’re talking about expenses that don’t happen very often, but bust the budget when they do.

For example, replacing the roof is a peril that hangs over my head like an Independence Day UFO, or a menacing killer asteroid patrolling the edge of the solar system.

You know something’s lurking out there. It just hasn’t arrived to blow apart your financial life yet.

One option is to bury your bonce in a convenient bucket of sand. But if your FIRE1 annual income is to withstand reality, it needs to include these dark star expenses – lest a cluster of them materialise and put a black hole in your budget.

Identify the cost-bombs

First, you need to list the shock expenses that individually show up once in a blue moon – and yet one or another occurs all the time.

For example: new car, boiler, windows, roof, white goods, tech, replacing kitchens, bathrooms, and private jets (I can dream).

Bucket list items might go on here, too. For example, trips of a lifetime, dream house move, and your next wedding or divorce. (I jest but personal tastes vary).

Next, you need to estimate these costs, and then average them out across the years. This way you can add a single figure to your annual FIRE income.

We’re not attempting to predict the exact cost or timing of these events. The idea is to create enough wiggle room in our budgets so that we can deal with the bills when they land like Space Invaders.

In lucky years, you’ll underspend. Any spare cash can then be dropped into your piggy bank! (Of course it will).

In years where you crossed a black cat or similar, you’ll need to raid that piggy bank for extra cash. But that’s okay because your overall FI number was built to withstand these expenses over a lifetime.

Straight line depreciation

The Internet runneth over with advice of varying quality on these matters. But I find straight line depreciation is a simple yet useful accounting technique.

Straight line depreciation helps smooth out the cratering effect of each expense into more of a boulder field on my spreadsheet.

Each item is rendered as a depreciating asset using this formula:

(Cost of asset – resale value of asset) / asset’s useful life
= cost per year

For example, if the replacement cost of my car is £11,000 and I can subtract £1,000 for resale value, then if I expect the car to last for 10 years… I need to budget £1,000 for a new car every year in my annual income figure. (Plus a dollop for inflation as the days go by.)

Theoretically, I’ll underspend by £1,000 every year and £10,000 will be ready to purchase the car when it finally kicks the rust-bucket in ten years.

Real life doesn’t work as neatly as that. But, in principle, this is how to build a FIRE budget that can bend with the bills that come blowing in.

Run through this exercise for every item you put on your whopper-expenses list. You’ll then have the extra amount you need to budget for, on top of your day-to-day living costs that are easier to track.

Of course, this model comes with more qualifiers than the Champions League2.

For a start, you’ve probably already noticed it’s a massive guesstimate.

That’s because straight line depreciation requires some kind of grip, however infirm, on:

  • Cost of replacement (very approximate)
  • Lifespan (more approx still)
  • Resale value (super approxy)

Despite notching fairly impressive numbers for neuroticism on the Big Five Personality Trait tests, I’m comfortable that this is a lot of guesswork.

The priority is to add a number to your budget that will enable it to flex to cope. This way you avoid sticking your head in the sand – or worse, actually leaving employment without having accounted for these future expenses at all.

Personally, I aim to make this task relatively easy to do and to update annually. As opposed to modelling every eventuality like I’m a supercomputer, but then never being able to face doing it ever again.

Make it doable

The first thing I did was drop the resale value part of the depreciation equation. That makes my numbers more conservative and saves me a sack of work.

What about the cost of replacement and plausible lifespan elements?

Well, there are websites that publish lists of costs for a mind-boggling array of home items, along with their lifespan.

Gawd knows how useful that is.

Some publish costs in dollars and they have to be putting their finger in the air like they just don’t care.

For certain things, it helps to consult, for example, a ‘New boiler cost’ article, if you don’t have prior experience of the job in question.

If you’re conservative or sense that you’re sitting on a cost timebomb (such as an old house with ancient pipework that should probably be condemned), then plump for the high-end of the price range.

My roof sits on the edge of oblivion, so it was sensible to ask a couple of roofers for a cost estimate. Next big storm, and one of them will get the work.

White goods – I’ve replaced most of them in my time, so I’ve got prices in my budget tracker. Otherwise, it’s easy enough to find the price of a fridge that looks the part.

Brand promiscuity – There are items that many of us don’t care that much about but know roughly how much we’re prepared to spend. The car falls into this category for me. I’ve set a price ceiling and I’ll operate within that next time.

Brand loyalty – Sad to say I’ve got this terrible affliction when it comes to my laptop. As long as I keep tabs on Apple’s latest price-gouging hijinks then I’m sorted. Though it might be cheaper to pay a psychoanalyst to fix my mind.

Past experience and years of budget tracking have given me a reasonable sense of how often I replace my big-ticket items. I’ll take an online estimate for everything else. You can also ask friends and family.

I don’t revisit the prices for everything on my list annually. I simply adjust upwards for inflation and update from my personal experience.

It’s probably a good idea to review the price for each item every five years. Costs can escalate drastically where materials, methods, or health and safety legislation have changed since you last looked. (I don’t actually do this but I should.)

Obviously it’s better to research in-depth any expenses that may be a very large and open-ended can of Lambton worms.

Yes, I’m thinking of my roof again.

What goes on the big expenses and depreciation list?

This really depends on personal preference, but here’s some ideas:

  • Windows
  • Gutters
  • Roof (AIEEEE!)
  • Boiler
  • New kitchen and bathroom installation
  • Redecorating every other room in the house
  • Oven
  • Fridge
  • Washing machine / dryer
  • Dishwasher
  • Fencing
  • Car
  • Computer
  • TV
  • Bikes

Lifestyle counts for a lot here. I read a comment from someone talking about how they replace their couch every seven years. I’ve owned one couch ever, it’s near 30-years old, and I still love it.

You’ll also need to adjust your numbers for things nearing the end of their useful life.

For example, if the Internet says your windows need replacing every 25 years but yours are held together by paint, putty, and the power of prayer, then it’s better to set aside a lump sum than spread the cost across your annual budget.

Anytime I ask an expert to look at something in my house that leaks, creaks, or causes Mrs A. to freak, they generally say it could go anytime in the next five years.

Home maintenance rules of thumb

The expenses listed above are on top of basic home maintenance – that is the ongoing cost of patching things up, nailing stuff down, and stopping the place falling apart.

Various upkeep rules of thumb have colonised the Internet.

Here’s a common one:

Allocate 1% to 4% of your house price to your annual home maintenance budget.

You could go with 1% if your home is less than five-years old. Perhaps 4% if it’s past its 25th birthday. Maybe add a premium if you live in a Grade 1 listed medieval property in Lower Slaughter.

Obviously you can run a coach and horses through that range depending on the existing state of your home, construction type, location, size, and so on. And so some prefer this guideline:

£1 per square foot of property size = annual home maintenance budget

My guess is that these rules of thumb caught on because they’re simple, not because they’re accurate. I mention them because they’re a starting point if you don’t have much experience of home ownership or tracking your expenses.

These days I just average out my home maintenance costs tracked over the last decade.

Don’t over-optimise

Most of us can swap war stories of expensive gear that broke 24 hours after the warranty expired.

Equally, we all have a heart-warming tale of that one heirloom appliance that’s still going strong, even though spare parts can only be sourced from a museum.

All of which says to me: it’s better to be roughly right than waste a lot of time being precisely wrong. I’m not running one of the big four accountancy firms.

Because bad luck runs in threes, I maintain my emergency fund in decumulation. I will dip into this when replacement costs are sky high and replenish when my luck changes.

After minimum pension age, I’ll be able to access my entire stash and then it’ll be fine to spend more than my sustainable withdrawal rate to meet a big expense occasionally, on the assumption that I’ll spend less in the years when nothing breaks.

Lumpy expenses can even be smoothed out by paying on a 0% credit card as long as you’re sure you can pay off in full, or that you will transfer the balance once the promotional period expires.

Others will dip into offset mortgage accounts or pawn the kids.

Let us know in the comments what techniques you use to account for irregular budget blowouts and depreciation.

Take it steady,

The Accumulator

  1. Financial Independence Retire Early []
  2. Is that still a thing? []

Weekend reading: Diversified reading

Weekend reading Logo

What caught my eye this week.

I noticed as I compiled today’s links that I’ve a new favourite investing blog. Who Enso Finance is I’ve not idea (and s/he is in great company there!) but I’m looking forward to their musings each week.

Take the latest post on the limits of diversification:

Most things die. All things change.

The ultimate failure mode for diversification is to consider it in too narrow a context, and mistake our attachment to particular mythologies, cosmologies, and models for the immutability of those things.

There are many triggering ways of illustrating this, but I’ll leave it at this: society can remain communist longer than you can remain alive.

I have been linking to Enso Finance for a while. No reader has yet picked up and commented on anything below, though.

Perhaps it’s a blog that you need to have been around the block a few times to gel with? It feels to me full of deep wisdom. Like talking shop with the oldest genial person in the office.

If you’re a veteran investor I say give it a try.

Have a great weekend everyone!

[continue reading…]