I had an older friend in college in the 1990s called Guy who was significantly cooler than me.

Guy got his mathematics PhD two years early. So far so nerdy. But like the best Chinese food, French movies, and Ben and Jerry’s ice cream, everything else was contrast.

Guy was a geek, but he had silky long hair that would have flattered the court of the Sun King. He seemed relatively disinterested in women but had a whip smart lover who looked like Maria Carey studying biochemistry. He saw the world in numbers but freelanced for the NME. He taught me a lot, and was generous in other ways, too.

“I read your short stories, you’re the next Martin Amis except you’re nicer to your girlfriend,” he said. “Come over for dinner.”

The graduate student lifestyle of kings

Guy shared a place with Faux Maria in Ladbroke Grove. It was a trendy area on the front line of gentrification. I didn’t know anyone else who lived there.

In fact, I didn’t know anyone else with their own flat. Everyone I knew lived in a crowded prototype of Big Bang Theory before technology was hip and deodorant was universal.

Guy welcomed me in with a smile and some quip about his castle.

The flat was on the first floor. Evening light fell through bay windows that would cost millions to buy in situ a few years later. There was no carpet, just rum-hued floorboards. You could see the worn heads of nails.

It looked like a photo shoot. But not pristine – everything was a bit battered and scruffy.

There were brown leather armchairs, wire shelves, a mannequin in the corner wearing a combat jacket, other intriguing stuff. It seemed like someone had cherry-picked the best of Portobello Market, but Maria said they’d found most of it in skips. All around, houses were being gutted and refurbished. Maria had an eye for the best of what these developers were throwing out.

Guy made me a cocktail – he’d just got into them – and joked he should be wearing a smoking jacket. The ice in the battered silver shaker sounded sophisticated.

Later he poured me the first glass of red wine I can remember drinking, because it was memorable, and told me he’d started spending more than £3 a bottle on that, too.

They made Thai food, also trendy then, and we listened to the vinyl stacked on the shelves. Like my other friends, I had a CD Walkman that plugged into a cassette player that I’d brought up from my teenage bedroom. Guy had black separate units he’d wired into the sort of Marshall speakers I’d seen at gigs.

They lit some candles and a spliff, and things sparkled.

I wasn’t half as good a writer as Martin Amis – I was a grungy student who’d recently ploughed through Marx.

But I now knew I needed some money from somewhere because I wanted to live like Guy.

Living well on less

Here’s the thing – Guy’s lifestyle wasn’t expensive. All his stuff was cheap, artsy, and secondhand. His flat was well located if you didn’t mind the drug dealers. But it wasn’t massive.

He and his girlfriend went to two or three gigs a week, but it was all free, either through NME or the student newspaper. Thai is cheap to cook and eat from plates off your lap. Billionaires listen to the same good music as the rest of us.

I’ve had some lucky breaks in life – my saving gene, my frugal dad – and another was being entranced at an impressionable age by Guy’s graduate student lifestyle.

I have friends who grew up wanting the same sports car as their uncle, or a cupboard full of expensive high heels.

I wanted my own secondhand separates system on a wooden floor.

And for many years, with variations, that’s what I got.

My DIY Guy

I lived below my means for decades. I rarely felt like I was doing without.

I didn’t drive, own more than one suit, or refurbish a kitchen.

I ate out and partied around the world in my 20s, but it was almost all through my (lowly paid) work.

I created this blog, which was a cheap, time-consuming hobby. Eventually it even made a few quid.

I didn’t have kids, which probably shortened relationships but helped my bank balance. New partners tended to be taken with the whole bohemian investor angle.

I pushed it for as long as anyone I knew.

Graduating from the eternal student lifestyle

To be fair, I have spent more in recent years.

I’ve certainly long stopped cutting away like my zealous co-blogger, The Accumulator. I’ve felt like a spendthrift buying a discounted Ted Baker jacket at TK Maxx or taking the odd Uber instead of a night bus.

But I’ve still been saving around half my income.

It was only when I hit 40 that I began to feel a bit sheepish having people over. Not old friends – you’d eat fish and chips in a tent with them – but new people I met later in life.

By then I’d been sharing a house with a pal from university for a few years. It was a good arrangement – we had lots of space and a social circle in common – but we’d begun to be joked about as a married couple who’d die together.

We were definitely a couple who didn’t want to spend anything on where we lived. Instead we saved for the ever-postponed future homes of our own. And it began to show.

Some people all but asked me where it had all gone wrong. My assets were invisible, up in the floating world, and I rarely talked about money. (I always talk about investing, but that’s different.)

It’s nice to think you are immune from all this but let’s be honest: Few of us look at those tin can collecting millionaire tramps without asking if something hasn’t gone a little wrong.

After that it’s all a matter of degree.

Someone will say in the comments: “Ah, so you caved in to keep up with the Jones!”1 And I suppose I have, a bit.

The real story is I got bored of not spending, of semi-disposable furniture, of not hanging anything bigger than an ironic postcard on the wall.

I started to wonder why I was still working if it was just to save money I can’t touch, or to hit arbitrary targets.

I felt ready for something new – and willing to let go of obsessing over the maths.

And I like nice things! I’ve been making occasional sightseeing trips to Heals and Habitat since I graduated. My former housemate couldn’t care less – if you can’t plug it in he’s not interested – but I’ve always loved the boutique hotels I stayed in through work.

So I am going to recreate one here in my new home.

A time to save, and a time to spend

Just how much money my eternal graduate student habit saved me has become apparent since I bought my own flat.

I don’t even mean the heartbreaking cash evisceration of paying stamp duty. (Guaranteed to move anyone two paces to the right.)

I mean that complete lack of four-figure home-related purchases for my entire adult life.

I knew I’d saved by living like Guy for so long. But I thought mostly about rent or utility bills. I was used to paying those. I didn’t think much about the cost of furniture that didn’t come from friends, IKEA, or Gumtree.

Now the savings are clear – in a punch to the gut sort of way.

People have been spending like this since college? Really?

I’m like some hunter-gatherer brought to civilization and left staring at a wall of flatscreen TVs. After years of writing about how much stuff costs, I can’t quite believe it.

I’m set to spend 2-3% of my net worth making this place the home I want. I’ll shop well and kid myself I’m buying quality. I’ll get the odd affordable antique and claim it’s an investment. Really I know I’m stepping on to a treadmill.

I just ordered a mattress for £600!2 A year ago I promised myself I’d buy such a mattress after I woke up at a friend’s feeling as if I’d had a full body massage.

But £600? That’s £10,000 in tomorrow’s money!3

The mind reels.

Still, the money I’m spending on my flat – after 20-odd years of living light, saving, and compounding, remember – looks surplus to my foreseeable plans, given my aim is not to quit work anytime soon.

In unhappy contrast, a 40-something friend recently told me she’s yet to start a pension.

I can’t avoid being hit by that bus forever

Roughly 97% of my post-house purchase money should continue to compound unmolested. I’ll save less in the future, but I’ve realized I don’t want to be the richest eternal student in the graveyard.

When I was still dithering about buying my new flat, an ex-girlfriend asked me: “Well, what ARE you saving for then?”

I didn’t have a good answer.

Many of us have to learn to save. I’ve had to learn to spend.

But put it off for as long as you can, I say. Have eclectic tastes and comfortably scruffy friends. Keep dinner at the Indian a treat for as long as possible. Go to Menorca, not Barbados. Look after your things.

Have fun when you’re young and rich in other ways.

And save, save, save.

1. They will probably be the same people who say everyone should be happy renting while opining from the comfort of their paid-up own homes, but hey ho. [↩]
2. Or £50 less through that link, and I get a referral fee too. Go on, it’ll help me pay for my new lavish lifestyle. [↩]
3. £600 compounded for 30 years at 10%. [↩]

What caught my eye this week.

I continue to live out of boxes after the move – and more pertinently have no Internet as of yet – but I’m still reading and reading and reading when I’m out and about.

Google blew up my ad revenue when it insisted I make Monevator and other sites look good on mobile phones – but for these past few days I’ve been glad of it!

Here are the articles I bookmarked for the links this week. Feel free to add anything Monevator-y that I missed in the comments below.

Have a good weekend!

[continue reading…]

Fear not friends, and back to the drawing board foes. I’m alive and well. Thanks for the several notes of concern.

A few readers mused whether the – ahem – tumult of the past few days had sent me into exile?

Had my 100% all-in bet on a low volatility ETF blown up, taking my wealth and credibility with it?

Alas, no cigars. It takes much more than a 5% swing in my portfolio to send me packing. Besides, this is too much fun.

All week I mentally drafted and redrafted a post about the fascinating return of market volatility in the past 10 days.

Unfortunately though I first had no time to write it, and now I’ve no Internet. More on why below.

It’s probably just as well. Whenever the stock market makes the mainstream news, there are worse rules of thumb for long-term investors than to turn that news off.

Watch the rugby instead! I found this past week or so invigorating, but I’m a fanatic. You don’t need to be.

Musing on the markets

Here’s a few quick thoughts – feel free to skip if you’ve sensibly developed an intolerance for one person’s speculations:

• Talking heads on CNBC and elsewhere blamed the volatility on robot traders and ETFs and the new era of Skynet and Robocop. This is mostly nonsense. Volatility has always existed in markets, especially at times of regime change, which is what I think this. (Regime change is loosely a systemic change in fear levels or rate or inflation expectations or a momentum change).

• Hilariously, the same pundits have spent two years blaming the very low volatility we’ve had on robot traders and ETFs. Equally nonsense. The market has been through low volatility periods before, too.

• If anything novel was dampening volatility, it was almost certainly very low interest rates since the financial crisis. It is that regime that seems to be ending.

• Higher bond yields were always going to be reflected in changing equity valuations. That is one reason why I have warned those who feared bonds were excessively expensive to remember that equities are partly priced off bond yields. See my article on the problem with low interest rates for more.

• I personally believe the market has detected the return of inflation, and is repricing accordingly. To some extent the sudden and sharp disruption to the long-prevailing millpond conditions was probably because lots of active money (e.g. hedge funds) had been betting explicitly on low volatility. But as I allude to in that article I linked to above, it’s also because equities are priced partly off long-term yield expectations.

• None of this works like clockwork, not least due to technical factors. So for example bonds and equities can go down at the same time together, and will if the market expects increasing yields in the future. Repositioning an entire market structure creates its own short-term dislocations! It’s over months and years we’ll see what was really going on, not hours or even days. Diversification doesn’t deliver minute-by-minute compensations.

• It is completely true that several daily rebalanced and in some cases leveraged exchange-traded products ‘blew up’ when volatility returned and promptly screamed off the charts. A few closed down. The products didn’t fail as such – they did what they said they’d do, in these conditions. You were silly if you’d bet the farm on them. Surely nobody did?

• More relevant (far bigger) are the so-called risk-parity funds that try to balance equities and (usually leveraged) bonds to the optimal point for the best risk-reward returns. As volatility increases, their risk models change, which means they need to rebalance, which can prompt selling, which will increase volatility, which feeds into the model, and so on.

• To that limited extent there was a feedback mechanism in the market. But I still think it’s wrong to blame ‘robots run amok’. Humans would do the same thing, only more slowly. Higher volatility means more value at risk in a portfolio. For some money managers that can prompt selling riskier assets (shares, maybe certain kinds of shares) to reduce risk.

• Once this (supposed) ‘de-risking’ began, it was going to go on for a while. Personally I think it will likely continue for some time to come, and we may well see a small bear market develop over the next few weeks and months. Your guess is as good as mine though. I’m opining for fun – nobody knows!

• High equity and bond valuations exacerbate all this, for many different reasons. But cheap equity valuations are no protection once the selling begins.

• It’s different for bonds, because the pension world needs to own them to match liabilities (and arguably there’s not enough around.) There’s a permanent bid, and at some point a yield will be found where bonds stabilize. Probably higher than here, across the world.

• Remember this is almost certainly a market correction, not an economic disruption. Growth is great everywhere apart from the UK, which is lagging because of the Brexit baloney (as it will likely now do for a decade, as even the government’s own forecasts have now admitted).

• Great growth does imply higher inflation, but also a good environment for companies to grow profits, hire more workers, increase wages, and so forth. These are ongoing ills that do need addressing. In the long-term this is a good problem to have.

• If you’re an active sort, you might want to make sure you own companies with exposure to bulk commodities. (Passive investors will have some exposure anyway in FTSE trackers etc). I’d consider owning some gold, too. (Don’t expect gold to go up the day markets go down, or anything so orderly. If share prices follow a random walk, gold follows the random walk of a drunk. But eventually he makes it home.)

• People will say “you have to be in equities because they will protect you against inflation”. But remember, we may have already had our inflation protection from shares. Pundits tend to miss this – global trackers have been going gangbusters for a decade, and they could not continue like that forever. You get your on-average higher returns from shares averaged over many years. i.e. High returns in recent years could have ‘borrowed’ some returns from the future.

• The best thing is a balanced portfolio that you set up for all-weathers. Many Monevator readers – particular the passive-minded who find my co-blogger less distracted than old gadfly me – have such portfolios. Along the lines of our Slow and Steady model portfolio.

• Such passive investors should probably do nothing in the face of this return of volatility (and potential regime change towards higher yields). Continue with your plan, and rebalance when you’d planned to rebalance. Don’t panic!

• The exception is if you’ve now realized you really own too many equities as you’ve watched your portfolio oscillate this week. Be careful! Most people find it infinitely easier to see shares go up than down. Do nothing is a plan of action to stop you focusing and fussing, and selling when markets are down. But if you genuinely feel you own too many shares in retrospect, it’s probably better to get comfortable by reducing your allocation a little (I’d switch to cash not bonds for now) rather than risk selling everything if we have a bigger correction.

• Markets go down as well as up. That is not small print, it’s chalked into the walls of the stone Temple of Investing. We were bound to see falls again, and while this week has had some fun elements we will see far worse in terms of peak-to-trough declines in the future, some day.

• Volatility is a feature, not a bug!

Not (yet) all mod cons

Right, so I’m in a coffee shop. Why? Because my new flat has no Internet yet.

Yes, I’ve bought a property and moved this weekend!

Let’s discuss why, how, and whether it was a good idea in a future post. I hope to be back to normal in a fortnight or so – at least back with links by next weekend.

But for now my cup running empty. The millennials around me seem happy to occupy their tables all day with an espresso bought six hours ago, but I’m made of more self-conscious stuff.

Take care, don’t do anything silly with your investments – and look out for The Accumulator’s broker table update on Tuesday!