What caught my eye this week.

Sensible readers who passively invest and so haven’t been following the gyrations in the markets this past week, please jump to the links below.

Oi! That includes you, Accumulator!

Right. I presume I’m now addressing only those readers who have ignored our exhortations to invest purely into index funds like Saint Accumulator – those who instead get up to naughty active activities like yours truly.

In which case, I’m curious: How was it for you?

Ooft!

For my part I’ve had one of the toughest 10 days or so that I can remember, investing-wise.

At the worst point my portfolio was down by nearly 10% in barely a week.

That’s not the end of the world – I’ve seen far worse – but what was infuriating is that I’m running the lowest equity exposure in my tracked portfolio since, well, forever. ((Or less glibly since 2007. But in those days I treated my entire net worth as one big investment pot, so it’s not really like-for-like.))

True, I was still well over 70% in pure equities. Ben Graham – who advocated 75% at the most bullish times and 25% at the least – would have frowned, given that I have slowly been decreasing my exposure to shares partly on account of my nervousness about the rampant complacency others were showing concerning the risks of shares. (Especially in the US, but also here whenever we made a case for cash or bonds.)

Still, I’d hoped mine would prove to be a pretty eclectic 70% collection of shares, as it had in the past, and hence it wouldn’t simply shadow the market down. That proved optimistic.

Most times over the years when markets fall 5-10% quickly, I’ve owned some small caps or thinly-traded larger companies that don’t move much at first. Many a pleasant 30 minutes I’ve spent trying to grind out a few points of gains or risk reduction by rejigging between them in a sell-off.

This time, none of that. Almost everything was down – on Thursday in some cases by 7-10% on the day.

Had underlying markets become more (or less?!) efficient since the last lurch down? Was I unlucky? Or was there something different going on with this fall?

One aspect wasn’t a mystery. I knew I was running some chunky additional risk with my active stock selection.

If I were marketing my portfolio as a fund, I’d perhaps spin it as a ‘barbell’ approach of low volatility assets mixed with ‘strong conviction holdings in global disruptors’.

But what it boils down to is I own several outsized shareholdings in tech shares that have multi-bagged. They are taking forever to whittle down, because I own them outside of tax shelters for historical reasons. And that, as I’ve written before, is a massive pain.

There are paperwork hassles. There are capital gains taxes to consider. Also, I am trying harder not to sell my winners too soon, because sins of omission have cost me much more over the years than sins of commission. (That is, I’ve forgone big gains by selling too soon and putting the money raised into some turkey.)

I knew this risky exposure was there. It was another reason why I’d been de-risking the portfolio where I could inside my tax shelters. But clearly I miscalculated somewhere because when the markets fell, I still went down with it.

Remember – I felt I was running less risk versus the market because I held fewer equities.

What’s more, historically my portfolio has been less volatile than my underlying equity benchmarks – even with the concentration risk and sector risk I manage, and even when I’ve been near-100% in shares.

Hence I really felt it in the nads when it all came to naught in the falls.

It’s not a disaster. I was nicely up against three of my four benchmarks year-to-date (YTD) when the rout started, and I’m still ahead of each of those by several percentage points. I remain down against the world index YTD, but the gap didn’t really widen. I’m underweight the US/dollar, and I think the under-performance here in the last couple of years will probably reverse if and when pound recovers.

We’ll see, but anyway I know I shouldn’t feel too bad that a bit of mean reversion has caught up with me.

So why do I?

Partly I think it’s because my purposeful risk reduction hasn’t paid off.

This slightly gives me the willies.

Lord make me a passive investor, but not yet

I have an existentially bleak view about active investing. In fact I’d bet I see active investing as far harder than almost any active investor you’ve met, despite what I feel is my creditable record.

In the middle of last week’s sell-off I described what I believe is required to even try to beat the market nowadays to a friend asking for advice on Facebook. He persisted even after I told him my only advice was – as ever – to invest in some select index funds every month from his salary and come back in 30 years.

He said he’d seen the news, and wanted to know if it was a “buying opportunity” because in his opinion the market had been too calm before.

Didn’t I have anything clever insights, he wanted to know? As usual I got the impression he felt I was blowing him off by urging him into passive funds. Keeping the good stuff to myself!

Eventually I snapped. Me in blue:

Often I tell friends I won’t know if I was a successful active investor for another 40 years, whatever my track record is to-date. It’s that uncertain, and luck is so hard to disentangle from skill.

As that renowned day trader Sophocles wrote:

“One must wait until the evening to see how splendid the day has been.”

I know I’ve not been obsessed over the past nine months, if I’m honest. I’ve spent countless weekends shopping for home furnishings. It’s ages since I read an annual report in bed gone midnight – something I used to do more weekday nights than not.

I thought about putting everything into a Vanguard LifeStrategy 60/40 when I bought the flat near the start of the year, and taking a year out. Perhaps, on this evidence, I should have.

Home alone

I guess I also have to acknowledge that the mortgage I’m now running to sit in this flat that I’m typing from has probably turned some of my dials to new settings.

For as long as I’ve been investing, I’ve had a relatively monstrous buffer between me and the streets. Long-time readers might even recall that I really started actively investing when I decided to put my house deposit to work in equities, rather than in property, way back in 2003.

Don’t get me wrong, there’s still a big buffer in place. I feel secure… a healthy monthly cash flow from earnings in the front line, cash deposit ramparts, NS&I saving certificate moats, and a five-year fixed rate mortgage that means I’m safely inland from raids from along the coast. My assets well outweigh my debts.

Still, mine is not the fortress balance sheet it once was.

Effectively, like anyone with an investment portfolio and a mortgage, I can consider my portfolio to be levered up. (Because I could instead use the portfolio to pay down the debt.)

This was by design, but it would be foolish to deny there’s a price to pay.

Losing loadsamoney

Finally, while I’m sharing, there’s also the fact that while I’ve suffered bigger percentage losses in a week – far greater in the financial crisis – this was the biggest in cash terms.

I’m ten good years on from 2008, and hence I have more money exposed to the shredder. It’s harder to be as gleeful at the prospect of a bear market as I used to be.

Perhaps that’s why my back pain returned on Thursday. Like George Soros’ gnomic spine, mine tells me when I’m stressed, which is handy because I seldom feel stressed much.

I felt it this week.

A warning to recalibrate before the big one? Or have I just got to get my money-losing muscle memory back?

Something to ponder.

How was it for you?

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Here at Greybeard Towers, the economy has taken a turn for the worse. Like many other freelance writers and editors I know, I’ve seen a softening in the marketplace in which I sell my skills.

These things happen. Ten years ago – exactly ten years ago, as banks imploded, and stock markets plunged – the same thing happened.

Back then we had kids still living at home, and the last few thousand pounds of a mortgage to pay off. Today, my wife and I are far less encumbered with fixed outgoings. Nevertheless, the experience has been instructive.

Firstly, it’s been instructive in that I took a decision to cushion the hit to our lifestyle by withdrawing a monthly income of several hundred pounds from my ISA-sheltered share portfolio.

This was a weird sensation, and left me – no, leaves me – feeling oddly guilty. For the first time in decades, instead of reinvesting dividend income, I am withdrawing it, and spending it.

Somehow, it doesn’t – yet, anyway – feel right.

All change

The second instructive experience has been less angst-inducing, but is still challenging.

Namely, I have decided to accelerate my plans for retiring. Or, rather, semi-retiring. I hope to carry on working, but I’ll also be taking a pension income.

As readers with long memories may realise, this wasn’t the original game plan.

For years I have planned to retire at 70, gradually winding down as my seventieth birthday approached. And – to be blunt – probably carrying on doing a few simple commissions for long-standing clients, if such opportunities came along.

But having just turned 64, with the state pension two years away, it seemed sensible to consider taking income from my two SIPPs.

Former pension minister Steve Webb’s much-vaunted pension freedoms have not only made that easier, but also introduced new options such as UFPLS ((Uncrystallised Funds Pension Lump Sum)) flexible drawdown.

Frankly, why not take advantage of these freedoms?

From strategy to tactics

Right from the outset, the broad strategy seemed clear:

• Disregard the annuity option. Some form of cautious drawdown on my assets should leave an inheritance for the kids, as well as hold out the prospect of a growing income.

• To this end, take the natural yield, rather than eat into capital. With tax-free ISA income from a share portfolio, some freelance earnings, other investment income, two state pensions, and my wife’s occupational pension, that would be ample.

• Although (as I’ve written before) I’m attracted to the more flexible end of the new pension freedoms – and in particular, to UFPLS – it would be necessary to figure out some way of mitigating the effects of the £4,000 Money Purchase Annual Allowance (MPAA) limit, which would severely restrict my ability to shelter freelance earnings in a SIPP, away from the beady eye of the taxman. This wouldn’t be a problem with an annuity, or with drawdown (as long as I didn’t drawdown any income, just tax-free cash), but would be a problem with UFPLS.

All good stuff, but I was uncomfortably aware that it was very high-level stuff, as well. The practicalities would need thinking through, and organising. And I would need to be very careful about avoiding any hidden bear traps.

Plus, of course, there was a significant element of irrevocability. Once I’d triggered drawdown, for instance, there would be no turning back.

A summer of careful reading and researching beckoned.

Here’s what I found, along the way.

A route to follow

One immediate realisation was that multiple pension providers offer an abundance of free literature, readily downloadable. I devoured stacks of it.

I could also send off for pension projections and illustrations – including my personal state pension forecast of £148.88 a week, or £7,768.35 a year, which was curiously empowering.

The government’s Pensions Advisory Service and Pension Wise websites also contain a wealth of useful information.

Not all the advice I obtained was through the written word. Determined to do things ‘properly’, I took up my option of a free pension consultation with the government’s Pension Wise service, booking a Pension Wise appointment, which duly happened in early August.

The adviser, named Colin, was incredibly knowledgeable, and we went the distance, going for the full hour. Well worth doing, and highly recommended.

Right from outset, it was clear that the inflexibility of traditional drawdown posed a challenge.

Essentially, I was turning on a tap, releasing a flood of income. Should the freelance market pick up, I’d face an awkward choice between turning down work or getting clobbered by higher-rate tax. Due to the MPAA rules – designed to clamp down on tax-rebate ‘recycling’ – once I’d sheltered £4,000 in a pension, any further earnings were taxable.

This in turn reinforced the attraction of UFPLS as an option.

While UFPLS is a form of drawdown, it’s a flexible form of drawdown. If the freelance market picks up and my earnings look to leave me exposed to a hefty higher-rate tax liability, I can simply turn the UFPLS income tap to the ‘off’ position. Like this I can maintain a level income, by using UFPLS as the balancing factor.

On the other hand, the initial plan of a monthly UFPLS income seems unrealistic. Providers do offer it, and apparently people do take it. But the paperwork seems disproportionate, with every UFPLS drawdown triggered by a completed UFPLS application form, and accompanied by an ensuing (and legally required) UFPLS illustration.

Being pragmatic, it probably makes sense to combine my two separate SIPPs into one, and going for three-monthly or six-monthly UFPLS payments, rather than monthly payments. The downside: to some extent, this will limit my ability to ‘flex’ income to avoid higher-rate tax.

Finally, the rules around the taxation of pensions after death seem unduly harsh. If I die after age 75, and my wife survives me, the remaining pension investments she will inherit are taxed as income. That’s not a good option for a sum that should amount to several hundred thousand pounds.

To avoid a massive tax hit – repeated again when the kids inherit it after my wife dies – it’s necessary to set up a dependents’ drawdown account, from which an income is taken.

More research is needed here, but at least I’ve got 11 years to undertake it.

Ready, steady… go?

So what have I done? Nothing, so far. But at least I know the broad outline of what I will do, when I push the button.

Our income, at the moment, is just about adequate without massive belt-tightening. (If you’re looking for a first-class writer and editor, get in touch…)

What have I learned? More than I thought I would.

Moving into retirement – and making the right choices – is a complicated business, unless one goes for the straightforward annuity option. I knew that already. Even so, I’m still surprised at the complexity of the choices I face.

The government, it seems to me, has brought into being a range of pension freedoms, but hasn’t invested the time and energy to provide a regulatory and tax framework to help retirees readily access those freedoms. That is regrettable.

Making the right retirement choice was difficult enough in the old ‘annuity versus drawdown’ environment. It’s tougher still, now.

Read all of The Greybeard’s previous posts on deaccumulation and retirement.

What caught my eye this week.

Most of us moan now and then about life sneaking some booby-traps across our path to financial independence.

But few of us will face the hurdles overcome by The Humble Penny’s Ken Okoroafor and his family.

I’ve always been inspired by recent immigrants. In the main, statistics show they work hard, contribute more than they take out, and they are more entrepreneurial, too.

As I wrote back in 2007:

Mostly those who’ve taken the plunge and come to the UK don’t say, “We are very lucky to come here and scrounge from you stupid, lazy rich British.”

They say, “You British are very lucky to live here, to be able to make such money.”

They’re on a mission – the kind that happens when you decide to reinvent your life and choose your own path.

One of the many dismaying aspects of the Brexit referendum centered on immigration.

When the saner elements of the Leave campaign realized they couldn’t solely target EU migrants as a drain on the state – because such migrants contributed more than they put in – they shifted the argument to claim they were taking our jobs and driving down wages. Again with scant-to-no evidence.

One of the best retorts I ever read came in a comment from a Monevator reader:

The difference between “the poor Northener” and the “the poor immigrant” is that the poor Northeners can catch a train to visit their families on their days off, that they don’t have to learn a new language, and that they will have it even easier to find a job.

But because they don’t want to use their right for free movement (not even within their home country, FFS!), they decide to take that same right from other people.

[…]

London is a challenge for everybody who comes here, no matter where you are from.

I see 19-year-old girls who are still babies in their head leaving their family and their nice sunny beaches in Spain or Italy to come here and work 50-hour-weeks for £7.20 per hour and getting told off by their managers for being late for their 5a.m. shift, which happened because they don’t know what “this bus is on diversion” means.

They are afraid to lose their jobs for minor mistakes, because how shall they pay their rent…actually, how shall they pay their rent?

They don’t have a bank account and to open a bank account you need a proof of address and they don’t have a proof of address because flatsharers seldom have their name on utility bills, and their NINO appointment is only due in four weeks.

They are tired all the time, because they spend too much time commuting, and running errands or shopping for groceries takes five times as long in London as in any of their home towns.

When I say that my main reason for being here is that I love to be here, they look at me as if told them that I love to swim naked in the Thames every morning. I could go on forever.

The struggle is real, as they say. At least it is for those who take it on.

For others, easier to find a scapegoat.

Note: I’m publishing early this week. If I’ve missed anything good, please do feel free to pop it into the links below. Also, if people do want to debate immigration please do so respectfully. I’ll be moderating hard anything I personally deem racist or inflammatory. There are other places for that.

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