≡ Menu

The contrast effect: Post-FIRE life vs old life

A graphic illustration of the contrast between pre-and post-FIRE life.

This is about a day in my post-FIRE1 life and how achieving financial independence changed everything.

So it begins

Pre-FIRE
The summer holidays are over. It’s nose to the grindstone now from late August until late October. Day in, day out.

Post-FIRE
A friend wonders if I’m around for a bike ride next week? I can do that!

Just another day

Pre-FIRE
I internally rage at the injustice of a September day drenched in sunshine when I’m stuck in the office. Too many of my August days off were just drenched.

Post-FIRE
We’re not tied to a schedule, so we pick the best day of the week for the ride. This is how to play the British weather lottery…

My favourite waste of time

Pre-FIRE
I’m stuck in the meeting time forgot. Theoretically it’s about strategy. In reality, a higher-up is chucking time on a bonfire, talking about things that will never happen, because they want to feel in control.

Post-FIRE
I’m cycling through a sunny country lane with a good friend, gassing about nothing. Occasionally we’re stunned into silence by the views.

This is a crisis!

Pre-FIRE
A client sends cryptic feedback. Our work isn’t impactful enough. Can we make it pop? They want something more viral. (I’ll give them something more viral.) The day is derailed. I’ll be dealing with this long into the evening.

Post-FIRE
We’ve dragged our bikes halfway up a muddy hill when some cows want their cowpath back. Fair dos, they’re bigger than us. But the embankments are choked with man-eating nettles. We curse, slide, and laugh our way back down.

Mothers shepherd their newly minted calves past us. The babies are cute as buttons! One little nipper springs by – full of beans on slippery stones. You go girl. Another’s very cautious and needs a nudge from mum. Aw.

Losing it

Pre-FIRE
A member of the team has lost their confidence. Another has lost their password. Still another their laptop. I’m losing my mind.

Post-FIRE
I spot some tasty-looking blackberries. Sweet! What’s this? A wee calf abiding in the undergrowth. Oh, hang on. She’s separated from the herd we met earlier. Where’s her mum? The calf is still, silent, and breathing very fast. Does that mean she’s stressed?

We wander about and find some people: “Do you know anyone from the farm? There’s a lost calf.”

They call the farmer. The calf is only two-days-old and not in a good place. The farmer arrives on a quad bike rescue mission. Cheers all round.

Refuelling

Pre-FIRE
I bung some batch cooking into the office microwave. Ding!

  • Sit down at desk.
  • Triage emails.
  • Shovel in food.

So fast, I don’t even taste it.

Post-FIRE
We find a cafe. Coffee and cake you say? Okay, I reckon we’ve earned it. The weather is perfect. One of those warm, late summer days you could sit in forever.

We share some banter with the people at the next table. They’re cyclists, too. Lovely couple, we swap stories and spin yarns. I’d never have met them in my old life.

One last push

Pre-FIRE
It’s late afternoon. There’s still an email mountain to climb plus the work I was actually meant to do today. The deadline is as immovable as those cows will be in my future.

I text Mrs Accumulator to say I’ll be back after she’s gone to bed. I’m not sure I can keep going like this.

Post-FIRE
My friend says: “I’m not sure I can keep going.” The gradient hurts like a chemical burn.

I can see on the GPS that flat land is just around the bend:

“Not far now…” [Gasp]
“Keep going…” [Wheeze]
“You can do it…” [Kill me now]

My companion takes the lead. God, if he’s going to do this then so am I.

We made it! We’re cackling like eejits.

Who cares that we got to the top? Only us. We’re not setting any land speed records but we didn’t give up.

What a day: pre-FIRE vs post-FIRE

Pre-FIRE
I’m back home in the dark. The gauge on my spiritual oxygen tank hovers in the red zone.

My mind has been sand-blasted to sterility. I don’t want to talk. Which is lucky because Mrs Accumulator is trying to sleep.

What kind of life is this? I suppose I’m fortunate to have a job.

Post-FIRE
I’m back home in the sunshine with loads of energy still in the tank. My mind is buzzing and my spirits soar like a gospel choir.

I tell Mrs Accumulator about the cows. And I tell myself to remember.

I have the good fortune to live in a beautiful part of the world and have friends and family to share it with. What more do I need?

Take it steady,

The Accumulator

  1. Financial Independence Retire Early. []
{ 66 comments }

The investor’s lifecycle

The investor’s lifecycle post image

The following article on the investor’s lifecycle is an extract from Invest Your Way To Financial Freedom – the new book by popular bloggers and friends of Monevator, Ben Carlson and Robin Powell. Invest Your Way to Financial Freedom is out on 28 September, but you can pre-order your copy at Amazon today.

As we write this book, Ben is feeling very sensitive about an imminent landmark birthday. Robin, meanwhile, would love to be 40 again so isn’t as sympathetic as he might be.

One thing we can agree on, though, is how quickly the years go by the older you become, so be sure to make the most of life whatever age you are.

Even in retirement, most people tend to have some exposure to the stock market. Depending on the actuarial charts you use, current life expectancy in Britain for someone in their mid-40s in 2020 is somewhere around 84 for men and 87 for women. So, if we live to that sort of age, both of us expect to be investing for several decades yet.

Realistically, Ben will be investing for another 40 years or more. In that time he’s expecting to experience around ten more bear markets, about half of which will constitute a market crash in stocks. There will also probably be at least seven or eight recessions in that time as well.

Can he be sure of these numbers? You can never be sure of anything when it comes to the markets or economy, but let’s use history as a rough guide on this.

Over the 50 years from 1970–2019, there were seven recessions, ten bear markets and four legitimate market crashes with losses in excess of 30% for the US stock market. Over the previous 50 years from 1920–1969, there were 11 recessions, 15 bear markets, and eight legitimate market crashes with losses in excess of 30% for the US stock market. The figures for European markets, including the UK, are fairly similar.

Bear markets, brutal market crashes and recessions are a fact of life as an investor. They are a feature, not a bug, of the system in which we save and invest our money. You may as well get used to dealing with them because they’re not going away anytime soon. They can’t go away, because the markets and economy are run by humans and humans always take everything, both good times and bad, too far.

The risk of these crashes and economic downturns is not the same for everyone though. How you view the inevitable setbacks when dealing with your life savings has more to do with your station in life than how scary you think those times are. Risk means different things to different people depending on where they reside in the investor’s lifecycle.

When you’re young, human capital (or lifetime earning potential) is a far greater asset than your investment capital. If you’re in your 20s, 30s or even 40s you still have many years ahead of you as a net saver and earner, meaning market volatility should be welcomed, not feared.

There’s an old saying that the stock market is the only business where the product goes on sale and all of the customers run out of the store. Your actions during down markets have a larger say in your success or failure as an investor than how you act during rising markets.

Down markets lead to higher dividend yields, lower valuations and more opportunities to buy stocks at lower price points. It may not feel like it at the time, but if you’re saving money and putting it into the stock market regularly, more opportunities to buy stocks at lower price points is a good thing.

The problem is during a market crash, it will always feel like it’s too late to sell but too early to buy. If time is on your side, you shouldn’t worry about nailing the timing of your investments, especially during down markets.

The good thing about being a young person is you don’t need to worry about timing the market to succeed. You have the ability to wait out bear markets since you have such a long runway in front of you.

The important thing for you is to keep saving and investing regularly, no matter what is happening in the stock market.

People who are nearing the end of their working lives, on the other hand, are lacking in human capital, but they should, in theory, be sitting on plenty of financial capital. People are living longer, meaning the management of your money isn’t over when you retire.

But you have to be more thoughtful about how your life savings are invested at this stage of life because you don’t have nearly as much time to wait out a down market, nor do you have the earning power to deploy new savings when stocks are down by buying when there’s blood in the streets.

Market risk not only has different connotations depending on where you are in the investor’s lifecycle, but also how your personality is wired. Your risk profile as an investor is determined by some combination of your ability, willingness and need to take risk. These three forces are rarely in a state of equilibrium so there will always have to be some trade-offs:

1. Your ability to take risk involves your time horizon, liquidity constraints, income profile and financial resources.

2. Your willingness to take risk involves your risk appetite. It’s the difference between your desire to grow your wealth and your desire to protect your wealth.

3. Your need to take risk involves determining the required rate of return necessary to reach your goals.

Those who are unprepared for retirement may need to take more risk in their portfolio to achieve their goals, but they may not have the willingness or ability.

Those who have more than enough money saved may have the ability and willingness to take more risk to grow their wealth, but they may not need to because they have already won the game.

Rarely do the planets align when it comes to figuring out the right investment mix, but the good news is there is no such thing as the perfect portfolio. The perfect portfolio only exists with the benefit of hindsight. And even if the perfect investment strategy did exist, it would be useless if you couldn’t stick with it over the long term. A half-decent investment strategy you can stick with is vastly superior to an extraordinary investment strategy you can’t stick with. Discipline and a long time horizon are the big equalisers when it comes to financial success.

Your ability to withstand losses in the market and stay the course with your plan come hell or high water comes down to some combination of time horizon, risk profile, human capital, temperament and ego. If you don’t understand yourself, your circumstances and your deficiencies when making decisions about money, it’s impossible to truly gauge your tolerance for risk.

Invest Your Way to Financial Freedom by Ben Carlson and Robin Powell will be published by Harriman House on 28 September. But you can pre-order your copy right now!

{ 4 comments }

Weekend reading: DIY disaster capitalists

Weekend reading logo

What caught my eye this week.

When I began investing in the early 2000s, the September 11th attacks still loomed large in investors’ minds.

Of course, that shadow extended everywhere then. The West was at war in Afghanistan and soon Iraq. Terrorist plots exploded or were foiled with numbing regularity. It all hogged the news like Covid or Brexit.

In investing circles there was seemingly an extra moral question, too.

Was it right to try to profit from the share price moves that resulted from this chaos?

I spoke to some investors who had lost friends in the attack on New York.

Others had been able to profit from the gyrations – although the slow, grinding bear market of those years hardly gave one FOMO.

Welcome to the Terrordome

When equities moved in response to this advance in the conflicts or that hideous attack on civilians, vocal investors were split.

One camp believed life – and investing – went on.

We live in a capitalist economy, and markets are vital to its functioning. Giving up on making a profit and improving our lot was what the terrorists wanted. If you didn’t scoop up a bargain due to moral squeamishness, someone else would.

The other camp basically reacted as many of us do when faced with sudden, horrible news: really, is that what you are thinking about right now?

For the little my pennies mattered to the world, I was in the first camp.

I didn’t wish for more ghastly opportunities that scared investors witless. But I stood ready to act if they did.

After all, who knows or cares now who bought or sold shares during the Cuban missile crisis or on the eve of World War 2?

This too shall pass.

I also find it hard to believe that the world would be a better place if markets went haywire and prices crashed towards zero every time something awful happens. Quite the opposite.

And it’s not like I was being torn away from important official business as these dramas unfolded. Making my little trades to support efficient markets maybe even felt like a small contribution from the Home Front.

Convenient thinking, no doubt.

Many did – and do – disagree.

Public Enemy No. 1

The Covid pandemic has been interesting to watch through this lens.

Firstly, you can definitely believe that terrorists want to stop life going on as normal – and that we all need to resist this where we can.

The virus, however, ‘wants’ life to go on as normal, so it can replicate and spread. This time it really was in our interests to disrupt our everyday life.

Then there’s the lockdown trading boom that has taken off with nary a word of ethical debate.

Sure, some wonder what manipulated meme stocks mean for markets, or whether crypto speculators will end up millionaires or bankrupt.

But we saw little if any push back urging today’s bedroom traders to spend more time thinking about virus victims in the ICU.

Maybe the world has gotten tougher, or greedier?

Or maybe we understand that we’ve all had to find our distractions where we could since March 2020.

Either way the explosion in wealth that has occurred right alongside the miserable pandemic has been much reported on – but little reflected over.

Incidentally, I’m sure some of you passive purists out there are now shaking your heads – if not your fists – and grumbling over talk of such greedy opportunism, while you sit sedately in your tracker funds.

Fair enough, but remember the reason you have seen those funds bounce back from the Covid crisis lows is because some active investors looked through the noise and bought back expecting better times ahead.

Indexing is a great strategy – one driven by the decisions of active investors.

911 is a joke

I thought about all this as I found myself enjoying – literally – a recap of the early days of the Covid crash in The Atlantic.

An extract from Adam Tooze’s new history of the Covid era, Shutdown, it’s a reminder of how crazy things got in the early days of March 2020:

The trillion‑dollar Treasury market, which is the foundation of all other financial trades, was lurching up and down in stomach‑churning spasms.

On the terminal screens, prices danced erratically. Or, even worse, there were no prices at all. In the one market where you could always be sure to find a buyer, there were suddenly none.

On March 13, JP Morgan reported that rather than a normal market depth of hundreds of millions of dollars in U.S. Treasuries, it was possible to trade no more than $12 million without noticeably moving the price.

That was less than one‑tenth of normal market liquidity.

This was a state of financial panic, which, if it had been allowed to develop, would have been more destabilizing even than the failure of Lehman Brothers in September 2008.

This all happened little over a year ago, yet I’d almost forgotten how mad things were for a few weeks back then.

I do remember huge chunks of value falling off my portfolio early on, like sheets of ice shearing off a melting iceberg.

But in the rosy afterglow of Central Bank intervention and the bull market that followed, my memory of the initial drama has faded.

Don’t believe the hype

The truth is I had a good pandemic, trading-wise. I sold down into the falls and mostly bought back before the climb.

By 22 March I was pretty sure the sell-off had become a headless panic and tweeted as much:

Yet re-reading that is suitably humbling. I got some things right but many things very wrong.

Remember when just two weeks of self-isolation seemed worth fussing over? I recall a bunch of Hollywood stars singing that we could make it through – and that was about three days in.

My prediction of the death count, even if I was only thinking about the UK, was also woefully short.

In some ways, however, that’s the point.

When investors lose their bearings you can afford to get a lot wrong and yet for it still to be right to invest.

That’s because at such times your ‘margin of safety’ – typically squeezed dry by today’s mostly efficient markets – becomes a chasm. If you’re brave and you have the spare capital, you can bridge it with some confidence.

Or at least you always have been able to in the West, so far.

Maybe someday you won’t, and such a Tweet will look like hilarious hubris.

(But by then you may well have bigger worries on your mind, if so.)

Brothers gonna work it out

Thinking about how mis-priced securities were in early 2020 makes me wonder if I should simply sit in trackers until such times roll around again.

Remember, I’m the naughty active investor here at Monevator HQ. And a lot of the time my activity feels like running on a hamster wheel for just a few basis points of out-performance.

Maybe I should just wait for those rare moments when the markets go back to the 1950s? When Warren Buffett’s golden apples lie all around on the floor, ready to be scooped up?

Well perhaps, but again that’s probably hindsight speaking.

What’s more, the reason I have hitherto had the confidence to buy stuff that others are throwing overboard in bear markets is because of the months and years of trying to understand where the value was beforehand.

Fight the power

I do feel sheepish about admitting I now look back to March 2020 with a sort of grim fondness.

Only from an investing perspective, obviously. But I appreciate it’s still not a great look.

I saw the same nostalgia in the aftermath of the financial crisis. Indeed people today watch The Big Short not to be horrified but to laugh and toss popcorn into their mouths and remember how insane things were.

One thing is certain, as a potted history of the 1792 crash at Investor Amnesia this week showed, financial panics are old as markets.

So we’ll all be tested once more – on whatever axis of character you believe is most important – before too long.

For now though, have a great weekend!

[continue reading…]

{ 21 comments }

Which portfolio tracking tool to use

New Monevator readers often ask what’s the best way to track and manage their portfolios.

Old hands may rock a custom spreadsheet. One that’s more sophisticated than the software aboard an Apollo spacecraft.

However I’d happily recommend Morningstar’s Portfolio Manager. It’s a free online portfolio tracking tool that does the important things well.

This portfolio tracker automates returns for a wide range of investments. You can easily dial-up funds and ETFs, shares, and investment trusts from its enormous database.

All you have to do is input your trades.

With Portfolio Manager you can track your performance in XIRR money-weighted or unitisation time-weighted mode.

You can also assess your progress against an index, and ever-popular time-frames, such as the last ten years, year-to-date – or even yesterday.

The tool comes courtesy of Morningstar – the financial data powerhouse. It’s number-crunching is widely white-labelled1, including by a number of UK platforms.

Portfolio tracking features

Let’s run through the main features of Portfolio Manager. (You can see Monevator’s Slow & Steady portfolio in the pics below).

Snapshot

Portfolio management tool: snapshot screen

Behold the at-a-glance overview screen! Here you’ll find your investments’ price, market value, number of shares, and asset allocation percentage.

This snapshot lets you maintain a unified view of your investments. Especially handy if they’re diversified across multiple brokers.

Now check out the ‘Add a Transaction to This Portfolio’ zone towards the bottom. Woah!

This is where you fill in your latest trades from your contract notes.

The portfolio tracking tool then automatically updates your portfolio in line with your market machinations.

Performance

Portfolio management tool: performance screen

This is my favourite screen. (Okay, I don’t get out much, pandemic or no.)

With the Performance tab, you can watch your portfolio race your benchmark on the graph at the top.

Here we see the bond-heavy Slow & Steady portfolio (green line) is lagging the FTSE All-Share (blue line) this year.

The same Tron Light Cycle battle plays out in numbers in the Trailing Returns section.

Total Return is your portfolio’s time-weighted, unitised annual performance. The Investor likes this metric. (So does the fund industry.)

Personal Return is your portfolio’s money-weighted, annualised performance. It’s also known as the Geometric Return or Compound Annual Growth Rate (CAGR). This is what I care about.

The Holding section shows the time-weighted return contribution of the individual investments you currently own. It’s fascinating to see how strategic asset allocation decisions have played out over the years.

Some expectations are confirmed, such as equities beating bonds.

Other predictions have been confounded. Like, for instance, prior calls for a decade of poor returns for US equities. (The US market was the driving force behind the stellar results of the Vanguard FTSE Developed World and Global Small Cap funds).

Note, Morningstar’s returns are nominal. Subtract average inflation to get your real2 returns.

Gain/Loss

Portfolio management tool: gain and loss screen

The Gain/Loss tab shows you the contribution made by every investment you’ve ever held. It’s quite the trip down memory lane. Especially if your past is strewn with ten-baggers and questionable buys you regret like kipper ties.

Fundamental

Portfolio management tool: fundamentals screen

Sometimes I check Morningstar’s Price to Earnings Forward guidance (P/E Forward) to see which investments look good value. Lower numbers are better, in theory. But I don’t really trust this metric.

UK equities looks relatively cheap. If nothing else, that makes me feel less queasy about rebalancing into the FTSE All-Share.

Transactions

Portfolio management tool: transactions screen

You can input your trades, review every change back to the year dot, record dividends, split shares, and set up regular purchases.

Tracking device

I’ve skipped past functionality I don’t use, such as email alerts. I’ve also ignored the extended play you unlock with a Morningstar subscription.

The freemium model gives you five portfolios gratis. That’s great if you’re managing multiple allocations on behalf of family members, or you’re juggling different investing objectives.

(You could use a slot to peer into a parallel universe where you didn’t sell that golden ticket. Although that way madness lies.)

Boring!

Staring at the screenshots, scornful of the shabby interface?

Congratulations, you’ve spotted one of Portfolio Manager’s best features.

This tool is not mobile-optimised. Indeed Morningstar hasn’t made a single UX improvement in over a decade.

It’s not compelling, it’s not addictive, and I don’t want to sneak a peek every ten minutes…

…and such old school clunkiness is an advantage when Silicon Valley is using every psychological trick in the book to bend my attention towards its fruit machines.

Portfolio Manager harks back to a more utilitarian Internet age. An era when tools did one thing well enough, and not every app let you order pizza and ethereum.

Anyway, I’ve used Portfolio Manager for well over ten years. I’ve never regretted it. My manual spreadsheet now gathers dust.

Take it steady,

The Accumulator

  1. That is sold to and rebranded by third-parties. []
  2. Inflation-adjusted. []
{ 43 comments }