Good reads from around the Web.

Back before we argued about Brexit, we used to debate whether young people were being shafted by the oldies. Perhaps in the years since you’ve become an oldie yourself?

For my part, I read articles about middle-aged men having a mid-life crisis and desperately hope the author will have thoughtlessly jotted down an age that’s somehow a couple of years older than my own. Clearly this is evidence that I actually am having a mid-life crisis, but let’s leave that for another day…

I’m still down with the kids, of course. Not only because I still have all my hair (touchwood), I’m prone to pretentious hipster-style urban foibles (discuss), nor even because my serial monogamy has left me washed up in the Tinder-era like Charlton Heston stumbling awake in The Planet of the Apes.

No, my calling card of solidarity is I never bought a property.

That’s my own stupid fault, as I’m old enough to have done better. But as I’ve said many times, it’s almost impossible to overstate what an issue it now is for 20-somethings in the South East without sufficiently wealthy and generous parents or City salaries. I still believe many older people who long ago made the leap simply don’t understand the gulf.

I was at an office recently where the Spice Girls came on the radio, and I lamented to the room in general that I remembered being in an office just like that one when I first heard the song playing some 20 years ago. (You’ve got to love the creative industries, in case you’re wondering why there’s a jukebox in every office I’m at…)

A passing Millennial shot back that she was three-years old when the song first came out, which made us all feel so ancient we could barely retort. After a few snarky comments from the others about her inexperience at life, I reminded my peers that she’d likely have 20 years after we were cold in the ground to get that fixed.

“True,” she conceded. “But at least you had the chance to buy a house.”

What a telling comment. Can you imagine a woman in her early 20s engaging in banter based around home ownership even a decade ago?

She didn’t riff on her expansive romantic possibilities, her health and youthful looks, or her freewheeling lifestyle compared to the shackled 40-somethings shambling around her.

Not sex, drugs, and rock and roll. Property ownership.

Just a little comment, but I think a revealing one.

The numbers of the beast

The good (bad) news is we don’t have to rely on anecdotes from 60-year olds about how when they first bought a house they had to sell a kidney and eat their dinner sitting on packing crates – and that yes, the three-times salary multiple on their mortgage then for a three-bedder in a nice part of town is somehow directly comparable to your ten-times salary multiple for a bedsit – because the numbers are proving the inter-generational divide is real.

Sticking with property, an article in The Telegraph this week cites LSE research that found:

Homeowners in their 40s and above who hold on to former homes and rent them out are largely to blame for Britain’s crisis in housing affordability, an academic report has found.

Research by the London School of Economics found that older people are keeping previous homes when they move on, leading to a lack of availability at the bottom of the housing market.

…which has long seemed obvious to anyone watching the market.

I do understand why this buy-to-let phenomenon happened – and I certainly don’t think landlords are individually greedy parasites or worse, as the extreme rhetoric runs – but I do think housing is a special case asset, given that there’s a fixed supply of it and that, rounding up, everyone would like to own their bit of it.

Governments should I think therefore favour owner-occupiers over cultivating a landlord class (already numbering two million as of 2014, and owning on average 2.5 rented properties each, on top of their own homes).

Happily there’s been some movement on this since I gave my own ideas on fixing the housing market in February 2015, including higher stamp duty and a change in the rules for tax relief.

But I wonder if the new chancellor Phillip Hammond will bottle it in the face of Brexit in the upcoming Autumn statement, and reverse George Osborne’s buy-to-let tax changes? Changes that were long overdue, in my view, but that are much reviled by those affected.

Fantasy land house prices are the biggest bugbear of the under-35s, but you also hear them complain about the impossibility of saving a pension. I’ve less sympathy here, given how little research the ones I’ve talked to have done into what’s possible. But new numbers from the Institute for Fiscal Studies (IFS) suggests there is some truth to this lament, too.

Indeed The Guardian reports:

The IFS said that less than 10% of private sector employees born in the early 1980s were active members of a defined benefit scheme, compared with more than 15% of those born in the 1970s and nearly 40% of those born in the 1960s.

Recent changes have seen workers automatically enrolled into defined contribution schemes, which has meant younger cohorts have higher membership of pension schemes than their predecessors, but on less generous terms.

And adding it all up, the IFS has put figures on the gap in wealth accumulation:

People in their early 30s had average net household wealth of £27,000 from equity in their homes, the value of their pensions and other financial investments.

The thinktank said that those who were born in the early 1970s had accumulated household wealth of £53,000 by similar stage.

It added that children of the 70s were themselves notably less wealthy than those born in the early 1960s.

All somewhat depressing given our society’s presumption that we should be getting richer through the generations. With higher education fees making university unaffordable even as the triple-lock makes pensioners richer, I can’t help thinking more levers need adjusting. Brexit could be the tip of the angry iceberg, otherwise. ((Yes, I understand you voted for Brexit for right-minded constitutional reasons. But I don’t believe the majority of the 52% did.))

Of course, I’d happily trade my entire portfolio to be 20 again. So if you’re young and miserable reading all this, please remember you’re already rich.

The game is trying to stay that way, by building up your financial and other assets as time slowly takes its toll.

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When The Accumulator opened his Investing Confession Booth a few years ago, I didn’t know where to look.

Having started my investing journey as a more or less passive investor, I’ve sinned, sinned, and sinned again.

Still, it’s all relative. My active investing exploits make sense to me, and whether or not they’d find my decisions advisable, investors like Warren Buffett or Neil Woodford would recognize what I was doing, were they unluckily enough to be trapped in a lift with me and my laptop.

However, I’ve also got what we might call ‘off-spreadsheet items’.

These assets are part of my net worth, but for various reasons I don’t include them in my tracked and benchmarked investment portfolio.

For instance, I’ve socked away a big chunk of cash for a house deposit. Who knows if I’ll ever buy my white elephant, but I don’t want this six-figure sum dragging on my portfolio’s returns, since I’m not sitting in cash for reasons of investment judgement. Rather it’s for time horizon and real-life reasons.

I also keep my NS&I index-linked certificates to one-side. Usually these are lumped into my house deposit in my thinking, but sometimes I judge they’re too precious for that. Anyway, they’re also off-spreadsheet.

Illiquid/unlisted equities lurk outside, too. More on those another day.

And then there are things that are really risky, silly, or unjustifiable – or all of the above.

Things like my (mini) mini-bond portfolio.

Mini guide to mini-bonds

I don’t have a vast amount of money in mini-bonds. All told around 1% of my net worth.

That’s my main defence out of the way! (One can easily argue that it’s still 1% too much.)

But what, you might ask, are mini-bonds?

The cynical answer is that they are the junkiest of junk bonds – pseudo-corporate bonds issued by companies so risky that professional investors wouldn’t touch them with a barge pole taped to a barge pole.

But I am not (quite) so cynical.

A mini-bond – like any corporate bond – is effectively an I.O.U. from a company in return for your money. An I.O.U. with legal obligations wrapped around it.

What it boils down to is you give your money to the company in exchange for the promise that your money will be returned to you at some point, with regular interest payments until then.

So far, so much like a corporate bond.

However there some differences:

• Mini-bonds are aimed at retail investors (i.e. Joe Schmoes like us).

• They are not traded on exchanges, and so they cannot usually be bought or sold. Rather they are illiquid. You invest in them when they’re issued, and you hold them to maturity.

• The fixed lifespan of a mini-bond is short, with terms typically three to five years.

• You are not covered by the Financial Services Compensation Scheme.

• Some issuers have claimed they will allow existing mini-bond investors to rollover their bonds at the end of the term, which could be attractive depending on the environment (and the company’s fortunes).

• Yields are far higher than what retail investors are accustomed to getting from conventional investment products these days, especially from savings accounts. However the risks are different, and much higher.

• Mini-bonds are invariably issued by smaller companies – often barely start-ups.

• You usually get perks for being a bondholder, dependent on the issuing company – discount cards, free coffees or cakes, that sort of thing.

• The prospectuses are thinner than typical corporate bonds, and presumably legally less potent. (I suspect most people read neither anyway, and as a small investor, realistically speaking you’re relying on others in either case.)

So far so dubious, but these characteristics interact to make mini-bonds even dodgier investments than you might think, for an easily overlooked reason.

Your word is my bond

What mini-bonds most remind me of are investments from the old days – and by the old days, I mean the 16th and 17th Century.

Old, old!

Back then merchants and the occasional outré aristocrat would band together to put money into ventures untroubled by anything so futuristic as regulators, compensation schemes, or a transparent market.

This meant the soundness of an investment had to be entirely decided upon by the individuals.

Now you might think that still happens when a stock picker like me decides to buy, say, shares in Apple or IBM.

But that’s not really the case.

When I invest in publically listed shares, I am freeloading on the thinking of thousands of investors who’ve previously weighed up the pros and cons of the company concerned.

All their deliberations are (theoretically) in the price.

And when a passive investor buys the market via an index fund, they’re benefiting from this “wisdom of the crowd” writ large.

But mini-bonds (unlike conventional bonds) are not traded on markets. Because professional investors are not their target market, even the initial yield can be set without having to worry about pleasing the world’s smartest bond investors.

Indeed, to bother with the fuss of issuing a mini-bond, a company may have already been turned down for a low-hassle loan from a bank or a specialist investor – entities that know rather more than most of us about evaluating debt-hungry smaller companies.

No, mini-bonds only have to appeal to the hoi polloi like me.

In fact it’s even worse, because false modesty aside I’m surely at the more sophisticated end of the potential mini-bond buyer spectrum.

Indeed I sometimes suspect pricing might just come down to figuring out what’s the lowest yield the company can get away with to attract retail punters – with a few free donuts thrown in.

Reader, I bought some

It was this unattractive proposition that kept me away from mini-bonds when they first showed up. I even wrote a couple of strident posts warning of the downsides.

But over time, I’ve softened my stance a little.

I noticed early issues from brand-driven consumer-facing companies seemed to do well. In contrast, a couple of the more opaque financing-focused ones defaulted.

There was something to learn here, so I decided to invest some money.

I didn’t do so completely witlessly. I spread my modest mini-bond allocation among multiple issues to reduce company-specific risk. I read the prospectus and the business plans. I avoided mini-bonds that smacked of financial engineering.

In particular I concentrated on companies where I could see several reasons to raise money via mini-bonds, rather than going to a bank.

For example, consumer-facing companies might see the bond as a publicity boost, or a way to recruit thousands of advocates who will act as unpaid marketers in directing their friends and family towards their products.

Finally, all the bonds I’ve bought were via crowd-funding platforms. While this is no substitute for a true market, my feeling is there is potentially a wisdom of crowds effect here, or at the least a lot of people who can give a potential mini-bond a sniff test.

And I have seen several mini-bonds rejected and withdrawn.

That suggests you can’t just flog any old nonsense as a mini-bond. (At least it has to be a certain kind of nonsense!)

My mini-bond portfolio

I am not going to name specific mini-bonds. Rather, here’s my portfolio in abstract terms, which I built up over a couple of years:

Company / sector	Yield
Fast casual dining	8%
Coffee chain	8%
Property firm	7.5%
Speciality coffee chain	8%
Craft brewer	6.5%
Fast casual dining	8%
Coffee chain (2x position)	11%
Speciality food retailer	8%
Energy infrastructure	8%
Property firm (5x position)	10%
Average	8.9%

Source: My off-spreadsheet records

So, fairly diversified in terms of company specific risk, but not so much in the bigger picture, as it’s clearly a bet on the consumer economy, principally in London. (You probably won’t be surprised to hear I was happier with this before Brexit!)

More positively, you can see the yield is quite attractive – though probably not enough to really compensate for equity-level risk for fixed income returns.

What do I mean by that?

Simply it’s very possible that one or more of these bonds could default and see me losing some or all of my investment, without the compensation that others could go on to deliver years of “multi-bagging” returns like with shares. My upside is capped (the interest payment, plus my return of capital) and the downside could be 100%.

I’ve not had any bonds default yet – and I’m past the halfway mark for my oldest mini-bond. But I’m prepared for one or perhaps two to cause problems. Beyond that and this ‘fun’ mini-bond portfolio will become an expensive headache.

Regardless, my 1% net worth exposure is not going to change my world. Putting money into a mini-bond is not like buying the lottery ticket of shares in a small cap stock that could become the next Microsoft.

The most I can do is grow my 1% to 1.5% or so over 3-4 years.

Big whoop!

So why, really, did I bother?

Well one reason is that I don’t call myself The Investor for nothing.

I am interested in investments of all kinds, and I have a very high risk tolerance.

Shares, corporate bonds, unlisted companies, spreadbets, venture capital trusts, EIS schemes, National Savings certificates, fixed interest savings bonds, overseas stocks, options, investment trusts, funds, trackers, subscription shares, warrants – I’ve owned them all.

It also doesn’t hurt that I have a website that’s dedicated to this stuff.

I can chalk it up as homework!

Of human bond-age

More seriously, investing in mini-bonds (and in the equity of start-ups) is active investing without a safety harness. You’re pretty much on your own, as I explained above.

There are some upsides. Specifically, you often get to meet the entrepreneurs behind the companies in an informal environment in a way that it’s just not possible with the CEO of BP, say – or even a legally-hamstrung AIM company director.

You can see how they hold their drink when you ask them a tough question and then you can suck on your straw and observe their answer.

I’ve mentioned before that one possible future I see for myself is as some kind of active angel investor, or possibly even the owner of an investment-related company. Long before then, I want to repeatedly test my ability to evaluate whether people, companies, and my money should get acquainted.

I want to improve. Until I get a ticket at the big table, these crowd-funded offerings are one testing ground.

Possibly I’ll lose some money. There’s always a price to an education.

Mini mogul

I must admit I enjoy my mini-bond investments at least as much as my far more sizeable investments in listed shares.

It’s fun using your investor card, for example, at a start-up you’ve put money into, and to have a chat with staff about how things are going.

Heck, it’s nice knowing your money went directly into funding the growth of something new – rather than that you just bought some second-hand shares off another private investor like yourself.

True, it’s not nice enough for me to allocate more than 1% or so of my funds to mini-bonds. But I’m glad to be involved.

Incidentally, I’m especially glad given that the mini-bond opportunities seem to have dried up recently.

From talking to insiders, it seems part of the reason is that peer-to-peer platforms have undercut the yields on mini-bonds. So companies are going to peer-to-peer instead of bothering with the rigmarole of issuing a mini-bond.

Will this end in tears? Will my mini-bond portfolio crash and dwindle, for that matter?

For all the talk of reinventing finance, it’s hard not to believe that the various Fintech ((Financial Technology.)) innovations are being at least partly nurtured by super low interest rates that have encouraged bolder investors to venture into exotic and newfangled products.

And it seems unlikely these will all prove to be a ‘free lunch’ in the wider tale of investors chasing yields.

Time will tell. At least I got a free coffee…

Good reads from around the Web.

I dread to think how many articles I’ve read about retirement spending over the years. Especially as I’m not even personally super-interested in the subject.

I’m certainly not like my co-blogger, who is constantly tweaking his parameters like a SETI researcher who thinks he might just have made first contact but is worried he could have just discovered a bird nesting in his satellite dish.

Many readers also seem to be searching for their perfect numbers, via spreadsheets, the latest safe withdrawal rate estimates, and micro-projections about their portfolio’s future returns.

I simply aim to have enough money to live off the income, whatever it may be, and to cut my cloth accordingly.

I appreciate though that this is a lofty goal for anyone who isn’t an investing fanatic with knowingly Spartan tastes and no spouse or kids (and a quixotic one, given that lack of heirs) and so I am forever reading articles on the pros and cons of this or that withdrawal method, especially when compiling these links.

Every week I come across at least a couple of takes on the subject – old news for most of us, but potentially an eye-opener for someone new to sorting out their finances. Each piece has to go through the sniff test.

All of which is a long-winded way of saying I actually read something a bit different this week in a Wall Street Journal article about the same old subject.

The author, Dr Shlomo Benartzi, is a professor at UCLA specializing in behavioural finance. The article is about how to maximize happiness in your retirement spending, rather than simply how to stretch it as far as possible.

The whole piece is worth a quick skim even if you think you’ve read it all before, but the idea I found most interesting was to include deliberate “spikes” in how you dole out your retirement dosh.

Informed by the way a kid enjoys chocolates as a treat but would grow bored if it was on the menu three times a day, the author suggests that in retirement:

…instead of gorging on candy, people would receive larger sums of money at various intervals, before resuming their regular payment schedule.

For instance, clients might enjoy a “luxury summer,” featuring higher levels of spending that allow them to travel around the world first class.

Although very few financial plans offer such a feature, people seem to know they’d like it. According to a survey by researchers at Harvard Business School, a majority of people want a retirement distribution featuring a “bonus month” every year.

This method provides an important psychological benefit. Because the higher drawdowns are a special treat, we never adapt to the elevated level of consumption.

The luxury summer feels like a special reward.

It’s a novel idea that would surely liven things up, if you can afford to include it in your plans.

Have you any other ideas about how to make your retirement spending more than just one long slog of spending money month in, month out?

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