Good reads from around the Web.

The speedy installation of Theresa May into 10 Downing Street and the self-assurance she displayed in reshaping the Cabinet to fit her agenda made the past week was a good one for Great Britain PLC.

Obviously, we almost certainly still face years of heightened uncertainty as a result of Brexit.

But in avoiding an extra two months of front-loaded angst while the world and its money wonders who is even in charge is akin to avoiding initial fees on an investment fund. We’ve dodged even more pain for absolutely no gain.

That it’s May in charge – and not a cabal of unknowns – dampens some of the tail risks, too. Theresa May has her pros and cons, but she’s probably not going to drive us into a cliff out of ideology or inexperience.

Of course, as the The Economist points out, getting a cabinet in place and the optics sorted is only one step on our journey to Brexit:

“These things matter, of course.

But they melt into insignificance compared with the geological scale of the mountain the country must now climb.

In its continent, Britain must now rewrite its relationship with its largest trading partners, extricate itself from four decades of treaties, laws and conventions and negotiate painful trade offs.

Farther afield, it must reconfigure its role in the world and its relations with other countries.

This is not some hermit state, but one of the most globalised and internationally interdependent economies on the planet.

It rises and falls on its relations with the outside.”

I suspect it will be many months – if not years – before we’re even sure what kind of mountain we’re climbing.

Hammond time

Before then, Phillip Hammond, the new Chancellor, might have rocked a few of our apple carts

If May and Hammond are to be taken at their word, this new incarnation of the Tory government has different ideas about the UK economy – certainly post-Brexit – and perhaps, under Hammond, about our personal finances, too.

Wisely in light of how the Brexit vote broke down, May says she wants to govern for everyone. But it’s impossible to please everyone at the best of times, and these are not such halcyon days.

The commitment to an austerity timetable has gone at a stroke. That can only mean higher borrowing. Fine while gilt yields are low – but will they stay low, given the additional borrowing, likely higher inflation, and our huge current account deficit?

Interesting times.

Meanwhile, will Hammond do anything different on the personal finance front as part of this new purportedly inclusive agenda?

If George Osborne had kept the job, I would have expected him to swiftly cut corporation tax and possibly do something radical like suspend capital gains tax and stamp duty in an attempt to encourage investment. It’s not inconceivable he would have abandoned the goal of balancing the books by 2020, too, but I suspect any dividend he gained would have probably gone on cutting income taxes, in an attempt to cheer our animal spirits and keep the country spending.

This kind of Osborne-style agenda sounds far better for the wealthy than the poor though, which seems incompatible with May and Hammond’s stated goals.

Hammond told BBC Breakfast: “It’s not about making the fantastically rich richer”. He went on to pledge rising prosperity for “ordinary people”.

What might that amount to?

I can’t see him ramping up spending on benefits in a significant way. We already have a minimum wage. And he literally can’t afford to be too generous to the masses – there’s masses of them, and the country is still in debt.

Perhaps infrastructural investment biased to the regions is logical choice, but it’ll take years to get going and make a difference.

No, I find myself speculating that in any abandoning the effort to balance the books in favour of trying to rebalance inequality – even a bit – there’s going to have to be a carrot and stick approach to make it politically palatable.

That suggests halting spending cuts, higher taxes on the wealthy, no changes to the likes of capital gains tax or stamp duty, and perhaps an accelerated end to higher-rate tax relief on pensions.

It seems unlikely that they’ll jack up the highest rate of income tax again – perhaps to 50% – when they’re trying to prevent an exodus of City workers, but who knows? (Answers on a postcard in the comments below!)

Back on the front

Finally, to those who – when not swearing – have told me in the past three weeks to “can it”, “shut up”, “stop Remoaning”, or “go back to writing about passive investing or I’m going to stop reading” I say: Do what you like.

Really. Not to be antagonistic, but that’s certainly what I will keep on doing.

I haven’t run this website for eight years to let unhappy strangers start dictating what I write about.

Especially when a sizeable proportion (though definitely not all) of the complainers are of the Barry Blimp sort.

Life is to short to cater to these people – unless you’re one of them yourself.

For example, one of the Blimps’ traits is they can’t seem to handle nuance or uncertainty. They are convinced they are right, but if they are proved wrong then they blame unforeseeable factors for derailing their vision or calculations. (I’ve mentioned before that many seem to have an engineering background – in my experience one of the reliably worst flavours of private active investor. Perhaps there’s a connection, to do with left brains or similar.)

Now, judging by their annoyance at my Brexit posts, I suspect some of them will accuse me of just the same steadfast intransigence.

“Wait and see, you’ll be embarrassed in 10 years when Brexit is proved a huge success!” more than one has said.

But really I won’t be – I’ll be surprised, but not astonished – because I’ve repeatedly talked about uncertainties and probabilities.

In every post I’ve written about Brexit, I’ve allowed that there may be a net positive outcome from the vote to Leave. I don’t think it’s likely, but it’s a possibility.

If you don’t think in those terms – as their blind certainty suggests many don’t – then perhaps you can’t read it in others.

Alternatively, uncertainty for some seems to mean: “Hey, it’s happened, get over it. Come back in five years when there’s certainty”.

In other words, they believe it’s at best futile and at worst confrontational to think about a range of possibilities, especially one where most of your range sits on the wrong side of their own axis of rightness.

Deliberately not speculating about the future like this is a fine approach to bring to your passive investing strategy.

But it’s a terrible way to invest actively (which is what I do for my sins) and to a lesser extent it can be bad for your personal finances.

And it’s a futile way to critique a blogger who is trying to wrap his (inadequate) head around the potential consequences of a nation-shaking event. You might not want to do it but I do, and I am not going to replace my methods with blind faith in people whose reasoning I doubt.

I see a range of possibilities, and as I said at the start, the odds will keep changing.

This was a good week. Theresa May in, Andrea Leadsom not, and a version of Brexit which essentially amounts to “burn the ships” has become much less likely.

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Good reads from around the Web.

Take the stereotype of a Leave voter at face value, and they’ve already struck a blow against the wealthy and pretentious urban South.

According to an article in The Telegraph, the price of coffee is rising due to the declining pound.

Stephen Hurst, founder of Mercanta, a speciality coffee importer based in Kingston upon Thames, estimates a rise of 60-70p on a kilo of beans, taking the price to around £4.95.

Richard Champion, deputy chief investment officer at Canaccord Genuity Wealth Management, said: “We don’t expect sterling to recover anytime in the near future so we’d expect this to wash through into higher prices.

“It’s another clear example of what we’re going to see happening in the coming months as higher import costs filter through.”

Ye, the infamous latte factor is about to become that little bit more taxing.

Oh I know, there’s now a Starbucks in Hartlepool. I appreciate, too, that maybe you voted Leave even though you live in a nice house in the Home Counties.

I wrote about some such voters, remember.

Indeed back in the earliest Days After Brexit Day, there were a lot of clashes here and elsewhere due to Leave voters feeling misunderstood.

So while I think generalizations can be helpful when studying broad trends such as how a country voted, it’s true they can be superficial and perhaps misleading.

Getting personal

To that end, there’s a developing view that aside from ethnicity (the elephant in the room, maybe) a big predictor of how somebody chose to vote is how socially conservative they are.

According to a London School of Economics blog:

Britain’s choice to vote Leave, we are told, is a protest by those left behind by modernisation and globalisation. London versus the regions, poor versus rich.

Nothing could be further from the truth.

Brexit voters, like Trump supporters, are motivated by identity, not economics. Age, education, national identity and ethnicity are more important than income or occupation.

But to get to the nub of the Leave-Remain divide, we need to go even deeper, to the level of attitudes and personality.

These personality factors include attitudes to immigration and – most strikingly – whether a particular voter thinks we should bring back the death penalty.

• In polling before the referendum, 71% of those who said they were in favour of bringing back the death penalty said they would vote to leave the EU.

• This falls to 20 percent among those most opposed to capital punishment.

Now, you might argue we’ve just swapped one stereotype for another here. It certainly won’t tell you every nuance behind a Leave vote – or necessarily describe YOU.

Some 29% of people who want to string ’em up would prefer to remain part of the EU, remember. And 20% of Remainers quite fancy a hanging.

Yet as we struggle to reconcile a new relationship with Europe in the light of this vote, it’s going to be vital to tease out the real motivations behind the decision to Leave.

No side is going to get everything it wants from any negotiation. We’ll need to get the best political and economic bangs for our buck from the compromises.

Identifying this conservative Leave instinct – which I tactfully personified as 50-something Barry Blimp in my piece, and which the LSE researchers more kindly refer to as the ‘Settler’ personality type – could be valuable.

It may also point to why the debate has been so ill-tempered, especially as the researcher adds:

By contrast, people oriented toward success and display (‘Prospectors’), or who prioritise expressive individualism and cultural equality (‘Pioneers’) voted Remain.

If pitting these kinds of people against death penalty supporting Leavers doesn’t sound like the classic ingredients of a family punch up, then you clearly haven’t been to my house at Christmas.

Incidentally, don’t get caught up on “success” there, Barry. We know you did very well for yourself in your career and you have a big house to prove it.

The question is how to reconcile Barry’s stance – maybe your stance – with the more disenfranchised and widespread Leave contingent, given the economic interests seem so very different.

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I have been in a state of shock since the Brexit vote. Urgently consuming the latest news and opinion like a soap opera compulsive.

• Who’s in charge?
• What’s the plan?
• What does this mean for our society?

Answers: It changes by the day. There isn’t one. Who knows?

When uncertainty abounds, instinct takes over. What’s the threat? Who’s the enemy? How bad can it get? Should I get outta here?

Can someone please tell me what’s going on?

Explanations abound. It’s rich versus poor. Old versus young. Metropolitans versus provincials. The informed versus the ignorant.

One thing’s for sure, our political elite aren’t ones to let a good crisis go to waste. They’re setting about each other like competitors in a new and deadly Olympic biathlon. It’s the 400m hurdles followed by a Wild West shoot-out.

My best hope is that we don’t just leave it to the remains of the top tier to repaint the playing field to suit their game. When society’s dividing lines are thrown into stark relief, the best thing we can do is cross them.

We need to understand why those on the other side think the way they do. We need to stand against hate. We need to be more engaged and involved than we have been. We need to spend more time with people who don’t think like us. Few of us are as informed as we thought we were.

Recrimination or retreat from what’s happened or trying to roll it back with second referendums can only deepen the divide that weakens us.

And now for some investing

Our doughty passive portfolio has been an island of calm amid the uncertainty. In fact, if you own a globally diversified portfolio you were probably as relieved as I was.

Everything went up:

The Slow & Steady portfolio is Monevator’s model passive investing portfolio. It was set up at the start of 2011 with £3,000 and an extra £880 is invested every quarter into a diversified set of index funds, heavily tilted towards equities. You can read the origin story and catch up on all the previous passive portfolio posts here.

Our bond funds swung first to the rescue, and our standard issue UK government bonds put on 2.8% in the week since the vote.

UK inflation-linked government bonds did even better, up 3.8%.

But they were the laggards. Our overseas equities took us even higher:

• Developed world ex UK up 6.1%
• Emerging markets up 7.8%
• Global property up 8.5%

But what’s this – even the UK’s FTSE All-Share ticked up 6.2%?

Maybe the world isn’t ending, after all.

Sure, UK equities have hardly covered themselves in glory through 2016 so far. They’re up 5.4% while the portfolio as a whole is up 14.5%. The gift of diversification just keeps on giving.

Our bonds compensate for the uncertainty in our domestic market, and the falling pound is partially offset by global assets valued in rising foreign currencies.

I’ve already noticed a couple of items being more expensive in the shops, but my portfolio acts as a natural hedge against my declining purchasing power.

Is this an argument for doing nothing?

Definitely not. It’s just we’ve already made the right moves. Our passive portfolio is a solid, all-terrain vehicle – well capable of dealing with uneven ground like this.

I’m not saying it’s indestructible or can’t get bogged down in quicksand. But because it’s built from parts sourced from around the globe, it does a good job of absorbing domestic shocks.

Brexit is a timely reminder that any one country can be tipped into turmoil. Our global outlook spreads that risk. If your job is tied to the prospects of UK-focused companies, a globally diversified position furthermore acts as a partial hedge against any misfortune you might face when recession stalks the land. And should the shock waves ripple out across the globe, our strong position in the US (about a quarter of the portfolio) takes advantage of the US dollar’s tendency to appreciate when global markets recede.

Meanwhile, our anti-inflation, index-linked bonds will respond well if UK inflation rises and hurts our UK equities and nominal bonds.

You could tinker with your asset allocation in the light of Brexit, but why?

Nobody knows how this is going to play out, and the impact will take years to unfold. This is probably one of the reasons why markets bungeed back up after June 24.

‘Positioning’ yourself in the face of such uncertainty is like letting a monkey pilot a spaceship.

The best you can do is adjust to defend against specific, personal risks. For example, if you’re particularly vulnerable to rising inflation then up-weighting your cache of inflation-linked bonds is justifiable.

Personally, I am going to make one change with my own finances.

I’ve been slowly building my emergency fund over the last few years. It now equals six months worth of expenses should both Mrs Accumulator and I be axed simultaneously. I was about to redirect those funds into equities as part of my drive for financial independence, but I think I’ll leave things as they are.

There’s no harm in plumping up the cash cushion given the odds have just shortened on a recession.

New transactions

Every quarter we push another £880 into the market’s slot. Our cash is divided between our seven funds according to our asset allocation.

We use Larry Swedroe’s 5/25 rule to trigger rebalancing moves, but all’s quiet this quarter. So we’re just topping up with new money as follows:

UK equity

Vanguard FTSE UK All-Share Index Trust – OCF 0.08%
Fund identifier: GB00B3X7QG63

New purchase: £70.40
Buy 0.432 units @ £163.12

Target allocation: 8%

Developed world ex-UK equities

Vanguard FTSE Developed World ex-UK Equity Index Fund – OCF 0.15%
Fund identifier: GB00B59G4Q73

New purchase: £334.40
Buy 1.311 units @ £255.13

Target allocation: 38%

Global small cap equities

Vanguard Global Small-Cap Index Fund – OCF 0.38%
Fund identifier: IE00B3X1NT05

New purchase: £61.60
Buy 0.287 units @ £214.75

Target allocation: 7%

Emerging market equities

BlackRock Emerging Markets Equity Tracker Fund D – OCF 0.25%
Fund identifier: GB00B84DY642

New purchase: £88
Buy 73.272 units @ £1.20

Target allocation: 10%

Global property

BlackRock Global Property Securities Equity Tracker Fund D – OCF 0.23%
Fund identifier: GB00B5BFJG71

New purchase: £61.60
Buy 32.489 units @ £1.90

Target allocation: 7%

UK gilts

Vanguard UK Government Bond Index – OCF 0.15%
Fund identifier: IE00B1S75374

New purchase: £132
Buy 0.811 units @ £162.83

Target allocation: 15%

UK index-linked gilts

Vanguard UK Inflation-Linked Gilt Index Fund – OCF 0.15%
Fund identifier: GB00B45Q9038

New purchase: £132
Buy 0.765 units @ £172.57

Target allocation: 15%

New investment = £880

Trading cost = £0

Platform fee = 0.25% per annum.

This model portfolio is notionally held with Charles Stanley Direct. You can use that company’s monthly investment option to invest from £50 per fund. Just cancel the option after you’ve traded if you don’t want to make the same investment next month.

Take a look at our online broker table for other good platform options. Favour flat fee brokers if your portfolio is worth substantially more than £20,000.

Average portfolio OCF = 0.17%

If all this seems too much like hard work then you can buy a diversified portfolio using an all-in-one fund such as Vanguard’s LifeStrategy series.

Take it steady,
The Accumulator