What caught my eye this week.
I kept coming across inflation articles this week, and tried to be judicious about what was earmarked for Weekend Reading. Yet I still ended up with all those below and more on my shortlist:
- Rising fuel and food costs push US inflation to 7.9% – BBC
- Analysts predict year of 7% inflation for UK – FT Adviser
- Petrol hits new record above 160p per litre – BBC
- Higher inflation is increasing the cost of servicing Britain’s public debt – Economist
- An energy shock and high inflation: are the 1970s reborn? [Search result] – FT
- UK farmers warn rocketing gas costs could cut food production – Guardian
- Hedging future energy costs with shares in a Ripple wind farm – DIY Investor UK
- Energy bills are forecast to double, but switching is pointless – ThisIsMoney
- Netflix hikes prices for the second time in 18 months… – Guardian
- ..and other subscription fees are rising too. Here’s how to save – Which
- Typical payments on cheapest fixed mortgage deals rise by £840 a year – ThisIsMoney
- Are we heading for recession? – A Wealth of Common Sense
This list could have been five times as long. It could be the same next week.
We are facing a hyper-inflationary environment for articles about inflation.
War footing
Of course it’s a trivial concern compared to actually suffering an invasion from a waxwork germophobe gangster armed with nuclear weapons, but it’s the war in Ukraine that has turned our inflation expectations up to eleven.
And it could get even worse.
Only a few weeks ago I was expecting inflation to start to roll over about now. Investors would have to be ready for quantitative tightening, sure. But interest rates would probably be rising against moderating inflation, as supply chains righted themselves.
Weaponising the energy market has changed all that. Higher oil prices could continue to juice – both directly and indirectly – the inflation statistics. A few pundits see oil doubling to $240 a barrel. Russia is warning of $300.
Saner voices anticipate demand destruction well before we hit those levels. Yet that means using less energy – just when the global economy was meant to be rebooting after Covid.
Dear oh dear
Could Europe see fuel rationing, no-drive days, and other throwbacks from the energy shocks of yore? It’s not impossible. Indeed it’d be a righteous thing to do, compared to spending hundreds of millions of dollars a day on Russian energy that further funds its war effort.
However in the short-term choking off energy use could hurry along a recession, even as rising prices force central banks to raise interest rates.
I raised the dread prospect of stagflation before Russia invaded Ukraine earlier this year, though I mostly waved it away as an outlier. That was because I didn’t think inflation would become embedded.
But war has changed the odds. All kinds of commodities – from oil to wheat to nickel – are being disrupted by the war. We may yet see something of a wage spiral. (I still believe recovering trade and technology and productivity gains can take the edge off.)
The end of super-low interest rates has meant tweaking our investing expectations. It now looks like everyday earning and spending will be worth reviewing, too.
Have a great weekend!
From Monevator
Our updated guide to finding you the best broker – Monevator
The social care thresholds and allowances – Monevator
From the archive-ator: Financial goals: sticking to the plan when the funk comes to visit – Monevator
News
Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1
Pension transfer costs soar after 60% of advisers quit [Search result] – FT
London Mayor Sadiq Khan repeats call for private rent controls – Guardian
850,000 families missing out on £1.7bn in pension credit – Which
Covid infections rising again across the UK, says ONS – BBC
At 18 million, global Covid death toll three times the previous estimate – The Lancet
Some alternative approaches to often-overlooked sequence of return risk – Wade Pfau
Products and services
How to make charitable support for Ukraine go as far as possible – Which
The popular Marcus savings account has raised rates, but its not a table-topper – ThisIsMoney
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Index providers react to Russian turmoil [US but relevant] – Morningstar
How will new ‘no fault’ divorces affect couples splitting their finances? – ThisIsMoney
Homes for sale that qualify for Help to Buy, in pictures – Guardian
Comment and opinion
Great racer, great runner – Fortunes & Frictions
Big financial commitments? Step away from the spreadsheet – Morningstar
I won’t be selling – Humble Dollar
Honorarium – Indeedably
Why can’t we stop making short-term market forecasts? – Behavioural Investment
Four big lessons for getting the most out of a career change [Search result] – FT
Listening to perma-bears is bad for your wealth – The Reformed Broker
A review of Trillions, the brief history of passive investing – Enterprising Investor
Retail investors still pay too higher fees for their ETFs – Klement on Investing
Crypt o’ crypto
Should you generate income via stablecoin lending? – Think Advisor
Naughty corner: Active antics
Autocracy is a bad investment – Morningstar
Why is the UK stock market so cheap? [Search result] – FT
The new Credit Suisse 2022 Yearbook summary edition is here – Credit Suisse
Lessons from the rise and fall of ARK – Validea
The contrarian magazine cover indicator is ruled by hindsight bias – Ritholtz
Zeikel’s rules – The Reformed Broker
Russia-Ukraine war
The hunt for Russian crypto is on – Protocol
How much Russian money is there in the UK? – BBC
How UK consumers can help phase out Russian oil and gas – Guardian
Ukraine food giant warns its collapse will hit troops – BBC
Will the war in Ukraine finally unite the EU? – Uncharted Territories
Ukraine’s top trading partners and products [Infographic] – Visual Capitalist
Are arms shipments from the West making a difference? – BBC
The Russians using emojis to evade censors – BBC
Kindle book bargains
Hacking Growth: How Today’s Fastest-Growing Companies Drive Breakout Success by Sean Ellis and Morgan Brown – £0.99 on Kindle
The Almighty Dollar: Follow the Incredible Journey of a Single Dollar to See How the Global Economy Really Works by Dharshini David – £1.89 on Kindle
Invisible Women: Exposing Data Bias in a World Designed For Men by Caroline Criado Perez – £1.99 on Kindle
Posh Boys: How English Public Schools Ruin Britain by Robert Verkaik – £0.99 on Kindle
Environmental factors
Greenwashing fashion firms to be named and shamed – Guardian
Amazon rainforest reaching tipping point, say researchers – BBC
Visualising the global landfill crisis – Visual Capitalist
Critics brand plans for octopus farming as unethical – Guardian
Off our beat
Of course we’re living in a simulation – Wired
Low expectations – Morgan Housel
The office is fine but the commute is still atrocious [Search result] – FT
How IKEA tricks you into buying more stuff – The Hustle
Why novelists have been starting Substack newsletters – Esquire
Quality time – Get Rich Slowly
And finally…
“Look at your cash everyday if you wish, your bonds every couple of years and your equities every ten years! Really, do not look at your performance more than once a year.”
– Tim Hale, Smarter Investing
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2 B52,s seen over Orkney today
All roads around Faslane and Glen Douglas (where nuclear weapons are stored) currently closed
An aircraft carrier due in for rearming
Putin,s bluff to be called?
Nuclear Armageddon or living under Putin -some choice!
The real world rears it (ugly?) head again
Tin hats and sitting tight -worrying about investing seems rather irrelevant at the moment
xxd09
If Mr Khan gets his way and introduces private rent control, won’t we just end up in an energy cap situation?
Virgin wanted to put our broadband up, we just negotiated it down from £63/mo to £36/mo. Netflix are putting up the subscription, so we’re downgrading to the standard HD package.
But what’s the point? My landlord is putting up our rent £90/mo in June, our energy bill is going to go up £50/mo in April, and interest rates on mortgages are rising, undermining our ability to to get a property, shaving £50K off our house budget over the last 2 months (when capping monthly payments) on a 5 year fixed term basis.
I have read a lot from Wade Pfau in recent years on the use of reverse mortgages to mitigate sequence of returns risk. Do any readers know if this is applicable to the UK situation?
I have not explored this in depth as I am fortunate that this is unlikely to be needed by me as I have enough secure income. As I understand it, the Wade Pfau strategy is to establish a reverse mortgage credit facility, but only draw on it if needed when the investment portfolio is down. The nearest UK equivalent seems to be equity release, which is heavily promoted by sections of the financial services industry. However, this seems to involve taking a once-and-for-all lump sum, with interest immediately starting to roll up. Can the Wade Pfau reverse mortgage strategy be employed in the UK?
@DavidV:
Before worrying whether or not the UK has an equivalent reverse mortgage product (FWIW, I do not think it does) I would be much more interested in knowing how you could reliably “know” to skip the 1970, 1974, and 1975 withdrawals without the benefit of hindsight?
I believe the proposal is to skip an annual payment if your portfolio has fallen by x% the previous year.
Deciding on that percentage is the tricky bit and would never be perfect, but it’s definitely possible to implement.
@Al Cam (4) Haha, good question. I also wonder if the beneficiaries left to pay off the reverse mortgage in his example will fully appreciate how much larger the investment portfolio legacy is than it would otherwise have been.
@DavidV @Al Cam
To me the whole pay your mortgage as quickly as you can, always sounded like religion than rational thought process.
Pay your mortgage quickly by over paying, most ppl reduce 25 hrs down to 10-12 hrs. But while doing that miss out on the all important compounding effect of investments. Only to think about sequence of return risks and reverse mortgages later on.
Wouldn’t a better way be, don’t over pay your 1-2-3% mortgages, invest in pensions/LISAs/ISA, in that order to recover taxes, get govt bonus, let 7-8-9% rate of return compound over 25 yrs such that you have 20% more than needed at 5% div on bond + stock investment trusts? Given their stellar record of maintaining div payments through thick and thin, you can forget about the sequence or return risk as you don’t have to touch your capital ever after.
My point is by sticking to the religion of paying of mortgage ASAP (some wierd version of Lanisters always pay their debts … pronto) ppl are giving up on tax-backs and decades of compounding of that money.
Remember you still own the house for 25 yrs of mortgage, so house price rises are your to keep.
I am following this line of thought for the last 7 yrs. Maxing out my pensions and Lisa’s (last 4 yrs) and letting it all compound.
@Rishi (7) I think you will find that most retired people now in decumulation, and possibly worrying about sequence of returns risk, were paying a lot more than 3% when they took out their first mortgage. Two months after I took out my mortgage in 1982, I found myself paying 15.75% – and yes I did pay this off well before the end of the 25-year term. I would not have trusted my ability to invest and beat those sort of rates.
And remember, even if your proposed strategy does equate to ‘rational thought process’ in the current financial climate, successful investing is as much about psychology and being able to sleep well at night, so will vary for everyone.
I’m glad @Andrew is posting about housing so I can take a breather. I don’t even know how to reason about inflation when the entry cost to home ownership here has risen $200k in 2 years. If you think double digit inflation is bad, consider triple digit.
Two things on this situation that I can’t quite get my head around.
1) If soaring inflation is going to thrust us into recession as everyone cuts back on discretionary spending, are significant interest rate rises actually required? Could we potentially see only limited rises before a recession hits and they’re paused or even reversed?
2) Vaguely linked to the above, I notice that Inflation linked gilt bond funds don’t particularly seem to have soared since the invasion began, which I had thought they might do given the inevitable unexpected new inflation caused by the war over and above the inflation already baked in to the price.
Given that, and 1) above making interest rate rises maybe less certain, would that make a diversification into an inflation-linked bond fund not a bad idea? Or, what am I missing?
@DavidV
I’m not sure exactly what a reverse mortgage is, but I would have thought an offset mortgage could be used in a similar way – provided that it was taken out before retirement, and you were young enough that any upper age limit for repayment didn’t come into play.
For example, just before retirement, take out an offset mortgage for maybe 10 years, for an amount that would cover a few years’ worth of living expenses. Put the money in a savings account linked to the mortgage – it won’t earn any interest, but you won’t be paying any interest either. Then just leave it there in case you want to use it instead of selling investments one year. Once you start using it, you’ll have to start paying interest on what you’ve taken, of course. And you’ll need to repay anything you’ve used before the end of the term. But it could be a valid way of mitigating sequence risk in the early years of retirement.
I’m certain that First Direct offset mortgages offer that sort of flexibility; not sure about other providers.
@far_wide (10) I have a short-duration TIPS ETF (TI5G) and an all-durations inflation-linked gilts ETF (INXG). The TIPS ETF has shown a small but steady increase over the last month, so I surmise that this is a reaction to the unexpected inflation not already baked into the starting price. The inflation-linked gilts ETF has a much longer average duration and has been more up-and-down over the same period. For this ETF I surmise that the effect of unexpected inflation is being counteracted by an expectation of higher interest rates for longer than initially thought.
So I guess the answer to your final question is how confident are you that inflation will remain high versus your confidence that interest rates will remain low (or quickly decrease from a temporary high).
But bonds are fiendishly unintuitive for the lay investor (and inflation-linked even more so) so please take what I say with a pinch of salt – I’m fully expecting ZXSpectrum48 to pop up and tell me I’ve got it all wrong.
@Dave S (11) Yes, I think you are correct that an offset mortgage taken out before retirement could be used in a similar way to a US reverse mortgage. The hazard that I can see is that if you needed to downsize or buy into a retirement complex or similar you would have to pay off that offset mortgage and would not be able to obtain another once retired. Luckily, as I mentioned in my original comment (3), my interest in mainly theoretical.
@DavidV , thanks.
Yes my lay take is similar to yours, it seems to be a clash of opposing forces. It would certainly be interesting to see what Mr ZX reckons if he’s about.
I suspect that, as ever, the answer really will boil down to “what makes you think you might know better than the highly liquid expert bond market?” .
By the way, I don’t think it made ‘the list’ this week, but Occam investing has been doing a great series on bonds recently for the UK investor, well worth a read for anyone who’s interested.
@Rishi #7
> My point is by sticking to the religion of paying of mortgage ASAP … ppl are giving up on tax-backs and decades of compounding of that money.
‘cos as any fule kno through 25 years of paying your mortgage back on the nail you will never face the sort of slings and arrows that people experienced in the past:
Losing their job
divorce
negative equity
having to move for personal reasons
interest rates of >14% – I paid that in my time
I’m sort of with you, trying to pay off a mortgage in 10 years at lowish interest rates and very high earnings multiples is a tough game. But events can derail the best laid plans. It’s OK if you take out a mortgage and keep it for 25 years, but the general vogue of taking a succession of 2-5 year fixes exposes you to affordability tests on three of those four events every few years. Losing your job and having to move (to take another) tend to happen more often in recessions. The discount/premium mechanism tends to amplify the effect of recessions on those investment trusts you favoured.
Keeping your mortgage for the full term is all peachy. As long as most things go right 😉
Quite, I grew up in an extremely financially insecure household – complete with long spells of unemployment, illness, and literally counting pennies in order to decide whether to go food shopping or not. And prior to that my father was doing pretty well in his 30s – reasonably well paid job and no idea of what was to come. It all fell apart in his 40s.
With a chronic illness since my teens, and that background, there was no way I wasn’t going to pay off any mortgage asap.
@ermine (15)
14% rates-had tax breaks … so almost a third was saved via unpaid tax (?) Still high none the less. It has happened once in last 200 yrs (and lasted less than 10 yrs) over which ppl in UK have typically taken what could be called traditional mortgages.
Also, in todays context rates going up above even 5% would result mortgages being unaffordable to the bottom 20-30% of income earners. Given subprime crisis was caused by 5% of defaulters, I would give it a less than 1% chance of happening over next 5 yrs. If it does happen, all bets are of and nothing in my earlier comments matters any more.
In terms of divorce you lose the house, mortgage or no mortgage.
In case of negative equity, if you haven’t overpaid and instead invested that money, then you should have it to keep the house. Having said that I would rather let the house go than give up my pension (like) investments. I can always rent, but living penny less in my 70s is an extremely scary thought.
As to your comment about investment trust discounts during recessions, my whole strategy is about ignoring the capital and just living of divs. The whole point is to compound invested capital for the longest duration so as to be able to avoid sequence of return risk. As my strategy suggests, dont retire until the divs are comfortably over (at least 20%) your annual expenses. For most ppl it will take 20-25 yrs to get to that stage. Hence my comment, don’t over pay mortgage, just pay it.
My logic is that a fully paid for house is not what keeps you out of trouble. Its the ability to avoid margin called (In this case, job loss, negative equity etc) that causes problems. And the solution always was and always will be to have debt but stay liquid.
All good companies no matter how great a cash generating machine they are (apple, Matt, Google, Berkshire Hathaway) employ the same strategy. They all maintain cash reserves and still have debt. The logic always is the same. Have debt, let investments compound over time, stay liquid to avoid margin call.
Hope that explains my strategy slightly better. Its working for me. But do want to see holes poked in it to make it more robust.
@DavidV @Rishi
Something I am thinking about to mitigate Sequence of Return Risk is borrowing against assets (shares/funds) via margin loans. For example, Interactive Brokers let you do this for <2% interest (variable though). I have recently FIRE'd so I'm funding my living expenses by selling shares/funds. But this makes me vulnerable to SRR in the early years. In theory, should there be a crash, I can borrow at a low interest rate to fund my living expenses for a while, without having to sell shares at a loss. Then wait till markets recover and pay off the loan. There are also other scenarios where this type of loan would be useful – see https://www.masononmargin.com/borrow-against-stock-portfolio/
A big advantage over a mortgage is that it is much quicker and easier to arrange – no fees or eligibility tests. Also, FIRE'ers such as myself may have assets, but no regular salary, in which case standard mortgages are hard to secure.
However, words like 'margin' and 'loan' go against my instincts, even though on paper it seems like a very workable strategy.
@Rishi #17
> Its the ability to avoid margin called (In this case, job loss, negative equity etc) that causes problems. And the solution always was and always will be to have debt but stay liquid.
Crikey, you make me feel old. I just about remember a time when I was going to live forever and nothing would ever get me down 😉
But in my experience debt always trumps liquidity. Financial events are fat-tailed, they have a higher kurtosis than normal chance. That is because in good times the central limit theorem sort of holds and people sort of decide independently, but when things start going titsup every man and his dog run in the same direction, so the assumption the variables are uncorrelated breaks down. In short, shit happens in finance more often than people expect.
Now if everything goes right, for sure, arbitrage is a great thing. But no man is an island, and life tends to have margin calls, because shit happens. In my working life two lots of big shit happened – one was the negative equity at the start, and the other was the GFC, which meant I wanted to retire about ten years early. Overall, it was a relatively charmed working life – after all, no wars or global pandemics happened in it, and I didn’t fall ill.
Financial independence, to me, means carrying no debt and having income enough to live life and having some in reserve. Even that’s not true financial independence, it’s possible to envisage scenarios which would overwhelm my resources. So even FI is an uneasy truce…
I wasn’t challenging the theory of arbitraging a big mortgage against investment. It’s your risk assessment that strikes me as over-optimistic. There’s a big difference between having £x, as opposed to having £2X of value at risk and owing £X, though arithmetically it’s the same. Indeed, our host makes most of your points in Why I’m not scared of my interest-only mortgage. However, you will note that he prefaced his article with
in a hat-tip to the fact that there be dragons either side of this route, and it is probably not for most. He doesn’t say that those who don’t choose that way are milquetoasts for not having his cojones 😉
> All good companies no matter how great a cash generating machine they are (apple, Matt, Google, Berkshire Hathaway) employ the same strategy.
One of the great innovations of capitalism was the limited liability company. But you are being selective with your choices. Over half of startups fail in the first five years, the LLC is what prevents that ruining the founders’ lives. Usain Bolt can run a decent 100m. Just because he can, doesn’t mean you and I can.
> my whole strategy is about ignoring the capital and just living of divs.
Yup. As I said earlier, peachy if you and yours have a charmed life over the term of the mortgage. Divorce and Disease (of you or loved ones) can mean you need to realise that capital, possibly at an inopportune time.
But sure, it may not happen to you. It’s the nonchalance of declaring the ambition to become debt-free as an irrational religion that I have issue with. Perhaps those guys are just more mindful of the vicissitudes of a working life?
> 14% rates-had tax breaks … so almost a third was saved via unpaid tax (?)
No. In the past UK income tax thresholds were nowhere near as generous as they are now, when I started work I paid tax on a much higher proportion of my salary than at the end of my working life, despite earning quite a bit more in real terms. So no, it was a bastard, arguably harder than irrationally paying down one’s mortgage in half the time at today’s currently low interest rates 😉 After all at 14% you are paying well over a tenth of the mortgage principal in interest each year, with nothing to show for it. Worse than that, I was paying from post-tax income. It sucked, in spades. I saw both neighbours repossessed. The low-water mark was 1992, and the first practical web browsers came along in 1994 or thereabouts, so this is before the collective memory on the internet, there were three million mortgages in negative equity at the worst point, according to newspaper reports.
Good luck in your enterprise. By no means am I saying it won’t work, it is the blithe confidence which I found arresting, not the theory. However, if your theory doesn’t allow some of the variables (interest rates, long-term expected return on equities) to change adversely then you have a setup that is is needlessly fragile in the face of change.
@far_wide. Returns on UK inflation linked bonds are complicated by several factors (1) they respond to *unexpected* inflation (ie to the extent that inflation is priced-in by the market they won’t rise when inflation goes up) (2) They have very long durations – so prices to a certain extent reflect market expectations of interest rates far into the future (3) the market is skewed by large pension funds which are obliged to invest to hedge their long-term liabilities. There’s lots of stuff on Monevator about them but the headline seems to be that they are a very imperfect hedge against inflation for private investors.
Interest only mortgages are tools of the rich. A complete fantasy to todays FTBer in their 30s
You won’t get one with higher than a 75% LTV, which means you’re looking to save 2x your gross income for a deposit (when houses are 8x), and the banks expect you to have a guaranteed repayment plan beyond “throwing the difference in to a s&s ISA”
Not to mention the rates on interest only deals are so much higher that you can actually be worse off than on repayment!
@ermine (19)
It’s not blith/blind confidence, it’s just a strategy.
Personal finance is personal and what you think are debilitating risks are par course for me.
In general, I prepare for the worse (liquidy) and hope for the best (no margin calls). I believe if I can do that, stock market history and maths suggest over longish period (25 yrs), I should be handsomely rewarded for my patience and perseverance by having a bigger than usual nest egg and a fully paid for house.
Risk management teaches me that I cannot prepare for all fat tail events, but that does not mean that I shouldn’t take risks. You plan and strategise to minimize their impact. Could it still go wrong, hell yes. Should I not do it, of course not! Every so often someone dies crossing the road, I don’t think that is a good datapoint to point to and say stop crossing the road. But that seems to be the rhetoric. Hence my comment of paying mortgages ASAP sounds like the new religion (accepted unquestioningly). It was perfectly sound advice 40-45 yes ago, when rates were 14-17% and it was near impossible to beat those rates. But scaring ppl today when you can beat 1-3% rates by 2-3x over a longish horizon of 25 yrs or so doesn’t sound like good advice.
Then again its personal finance, each to their own.
I have an offset mortgage of about 30%LTV which is pretty much fully offset with cash. The cash is my emergency fund but also in place if I want to invest in something at short notice without new borrowing arrangements. I plan to keep this sort of arrangement in place for the foreseeable and likely post retirement.
@AndyP
> Something I am thinking about to mitigate Sequence of Return Risk is borrowing against assets (shares/funds) via margin loans. For example, Interactive Brokers let you do this for <2% interest (variable though).
Variable interest is the least of your worries here. The problem with this strategy is that IBKR don't provide any guarantees about the margin requirements. So one day they might say, "Oops the margin requirement will now go from 25% to 100%. Find the cash or we'll start liquidating your positions".
Sadly, this happens when you need the loan the most – during market crashes. This depends on the stock, its liquidity and who knows what factors IBKR look at. So one to watch out for if you plan to use it in an emergency scenario (particularly if the market keeps dipping!).
I’ve done an io mortgage fixed until 2027 at 0.99% but am mindful of all the risks ermine has outlined.
For me it’s just not taking it to excess . My mortgage is about 2 x joint income and 50% ltv If I lost my job I am confident my worst case would be 50% of current income therefore 4 x joint income or less which would be perfectly achievable without needing to access capital
I have enough funds in my isa to clear this now let alone my pension. My ‘needs’ including mortgage now total about 20k a year so so am pretty much lean fi at 42 just with my isa investments. I do agree liquidity for me now trumps mortgage free . I had ample money in my house and pension but never really felt ‘wealthy’ until I had a decent amount in isas
@AndyP taking up the point @Foxy rightly says, also you need to be aware that certain of your investments can suddenly be considered non-marginable. It doesn’t tend to happen with the most widely traded and liquid securities, but you need to be very cautious about how much you borrow on margin as it may be that some of your holdings are suddenly excluded from counting as equity. Also Interactive Brokers don’t give margin calls, they can just liquidate your holdings at will.
@DavidV, @Rishi, @Ermine, @Andy P, @MRN, et al:
This post may be of some interest:
https://firevlondon.com/2022/02/06/jan-2022-the-long-overdue-correction/
For those of you not familiar with FvL: this is not his first use of leverage to purchase family property.
@MrPungus(24)
This is exactly our position, well except that I’m actually retired now and the LTV is about 12-14%. I can clear it tomorrow if I need to, and the offset is there for cash requirements in the very short term, but I’d rather keep my hard earned invested, thank you very much.
I’m a young 56yr old retiree, and I can understand the need for more simplicity as one ages…..but not yet. Our income ‘floor’ is covered by DB income and the rest can do it’s thing as far as I’m concerned.
It’s a very sound strategy, even for those in decumulation like me.
some very good and amusing comments here albeit not about the article…
I too took out a 5 year fixed at 0.96% recently to partly to hedge against inflation albeit I haven’t really yet pulled the trigger on the proceeds. I looked at a margin loan but for the reasons articulated above preferred the mortgage. Each to their own.
Each to their own with regards to paying off the mortgage vs investing. Neither is absolutely right or wrong – there are clear risks with both strategies and the pros and cons are well articulated above.
Current events keep reminding me how futile predictions by anyone are generally anyway…..
Wondering whether the Investor is mulling over triggering his bug out plan, not entirely a joke more inappropriate gallows humour. Generally, historically people don’t head for the exit until it’s too late it seems. Of course that then means sometimes you have to exit without needing too which is painful, annoying and expensive. fingers x.
Thanks for the great discussion all. I’m away from my desk this weekend but I’ve been checking in and moderating comments or whatnot as usual.
My bug out plan is more an escape hatch on homegrown problems than a way of avoiding Europe being reunited as a continent forged of slag. That worst-case scenario would really need a new life in the off-world colonies to be on the menu; I’m not convinced it’d be better or worse to be anywhere on this planet, given the long-term consequences.
But that’s for another day, or perhaps just for the serenity prayer.
@TI (#31):
For some reason your comment reminded me of two great pieces from Bill Bernstein, specifically: http://www.efficientfrontier.com/ef/901/hell3.htm and https://www.morningstar.com/articles/717871/how-to-fortify-your-portfolio-against-deep-risk
Now where can I buy a second hand spaceship in good working order?
Thanks for the post TI, quality as always.
When Russia was building up its forces along the border with Ukraine and in the Crimea, I really did think that it was all a bluff personally, a show of force and nothing more to achieve whatever his aims were. I was incredibly wrong on that front. I did not expect an invasion to occur and have been mortified to see the last couple of weeks unfold. It really is just plain awful and it seems the scenes and devastation will get far far worse in the weeks to come.
I can’t pretend to know what Putins intentions truly are, how much of what he says is lies versus actually what he really does believe himself too. As some commentators have pointed out, he really seems to have personalised this conflict and is now almost in a corner. Even if he takes the country militarily which will be very difficult, he has no hopes of holding it. I think what terrifies me more is what he will do whilst in this metaphorical corner he is now in and if and how he we will bite, as this cornered angry animal so to speak has nukes for teeth. He will need to keep face and come away with a win and I am just not sure how he will end up doing that at the moment. It certainly does worry me. I can’t believe this has happened in modern times on the European continent. I thought such things were things of the past, this will create a new normal now internationally as a result and I feel like that’s such a tremendous shame – The fact we are in essence going backwards – it’s quite depressing.
I will finish by saying I feel sorry for all of the suffering in this war, and that includes young Russian soldiers who are losing their lives having to fight for this cause. I have seen countless videos of events and I take no pleasure seeing dead Russians being taunted or prisoners of war being humiliated as I have occasionally saw. It all saddens me if I am honest. I can only hope this all ends as quickly as possible – I just can’t see that happening anytime soon with current events.
I have been mulling over what to do about our mortgage, but from a slightly different angle. We have a flexible interest only mortgage which is due to be redeemed in 2024. It is currently paid off, with the flexible reserve balance just below the mortgage advance. At some point we will downsize, but it could easily be 10 years away. When we do downside I would expect to give away some money to reduce the size of our estate, but if we took out another mortgage, we could get that money out of our estate earlier. We are not talking huge leverage here, with the mortgage amounting to less than 10% of our assets excluding property, so the investment risk would be minimal. We would be looking for a long fix I think as well, 5-10 years, with a portability option should we decide to move before the end of the fixed period.
The difficulty I forsee is in getting a decent mortgage offer. My wife has a very small DB pension, otherwise our income comes from our investments. I tried on-line Nationwide mortgage calculator and got nowhere because it was clear they wanted to see employment income. I tried Leeds BS though and they seemed much more promising, asking about income from pensions, investments, property income, maintenance payments, etc. We easily qualified for the amount we would want to borrow without any employment income. I still have some questions about this though, for example whether they actually count income from SIPPs as “Pension Income”.
Has anyone experience of applying for mortgages once retired? I am sure it is possible through a mortgage broker, but I would want the mortgage to be at a competitive rate in reflection of the very low LTV.
@ xxd09 (#1) – As TI has just pointed out, there is not much we can do if the final nuclear option is exercised. IMHO the best course of action for now is to keep calm and carry on.
@Al Cam (#32) – I had read the first Bernstein’s article you linked but not the second. Brilliant as always. Thanks for the links!
An alternative to borrowing through a mortgage or using a broker’s margin facility is to use a spread bed account. The advantage of a spread bet account compared to a margin account is that all returns from spread betting are tax free.
I would add that this is all entirely theoretical for me. Not something I do and probably never will, but I do know people who do and is something I am exploring as an alternative way of borrowing. Please feel free to comment or pour scorn on the proposal, I will not take offence!
Spread betting can be reasonably cheap to very expensive, depending upon what you are betting on and how frequently you trade, but for long term investors, quarterly rolling bets can be reasonably cheap. FTSE 100 index futures fall into this category. You could sell your FTSE 100 fund, transfer some of the money to a spread bet account, bet on FTSE 100 futures for equivalent exposure and free up some money for other investing or spending as an alternative to the “Reverse Mortgage” idea.
As an example, IG offer bets on FTSE 100 futures with a spread of 4 points, currently 7164 for March long bets, 7160 short (or to close out a long). If you go long the future you can instruct IG to roll it over each quarter, so that would be 4 points per quarter cost, or about 0.22% per year. Added to that would be the risk free rate incorporated into the price of each future, roughly BoE base rate. You would have to put up 5% initial margin costs as a retail investor (£5k for £100k exposure) and would need additional cash on top for variation margin. You would receive no interest on this cash, which is definitely a negative now that interest rates are rising, so maintianing a £25k balance for a £100k bet would be about another 0.25% cost, assuming you could make 1% on that cash. Overall though it looks as though the borrowing rate would be comaparable or lower than broker margin for retail investors.
It is possible to make a bet to 2 decimal places, so for a £100k exposure to the FTSE 100 with a spot price of 7175, you would bet £100,000/7175 = £13.94 pounds per point on a FTSE future.
Betting on foreign indices is a little more nuanced. You can certainly bet on S&P 500 futures very cheaply, with a spread amounting to an annual charge of about 0.1%, so lower than for FTSE 100 shares. But it would not perform the same way as a S&P 500 ETF as it would lack the dollar exposure. It would be like investing in a hedged ETF. Fine if it is what you want, but if you want the dollar exposure as well you would need to short GBP/USD forwards. This would add to the costs and the dollar exposure would go out of line, so the position would need occasional tweeking .
ps forgot to add with respect to this bit “maintaining a £25k balance for a £100k bet would be about another 0.25% cost, assuming you could make 1% on that cash”. The other £75k could of course be invested at a rate of 1% and this investment would reduce the overall cost of running the position by 0.75%.
Little did I know what I would unleash when I innocently enquired (3) whether Wade Pfau’s reverse mortgage strategy included in the links this week had any applicability to the UK!
@far_wide (14) Thanks for the pointers to the Occam bond articles.
@Al Cam (32) I’m a big fan of Bill Bernstein and have a hard copy of his short book Deep Risk – it’s sobering what the post-war generation of UK (or US) investors have until now taken for granted.
The thing about Pfau’s proposal to borrow when the market is down instead of drawing an income is that it is fine when looking backwards and noting that it turned out OK, not so easy when living through it without the certainty of success.
@DavidV, @Rishi, @Ermine, @Al Cam,@naeclue
Thanks for the comments. It was the FireVLondon post that started my cogs whirring. I have looked into IKBR and agree that it’s all a bit opaque, so I can’t see myself using them for this purpose. I have seen M1 Finance (sadly only US based) offering what appears to be a much simpler way of borrowing money against assets.
@Naeclue
The use of spread betting to replicate ‘normal’ investing is interesting. I read the Naked Trader who proposed a ‘Spread ISA’ for tax-free investing when you have reached your annual ISA limit.
I guess you could replicate any standard strategy – like monthly index fund purchases – but the temptation to dabble might be hard to resist.
I’m tempted to try it with a small amount to at least gain familiarity with the concepts.
Thinking aloud here, but wouldn’t a spread bet for an Index ETF include the dividends? If so, would this be better than spread betting the raw index? I assume the spread is higher so this may increase the costs, But for an index that pays significant dividends, such as FTSE100, maybe it would be a better strategy.
@AndyP, there are 2 ways of betting on an index. The first is using daily funded bets. If you do this, you bet on the spot price. Overnight you pay a funding charge which is quite high at interbank rate + 2.5%. The funding rate is high, but the spread is low, eg one point for the FTSE 100. When the index goes ex-dividend you get paid a dividend adjustment, just as you would if you held an ETF. Daily funded bets are more suited to day traders than long term investors due to the high borrowing cost.
The second way to bet on an index is through futures. These do not have an explicit borrowing rate set by IG. Instead futures trade at a price higher than they otherwise would due to the time value of money. The implicit borrowing rate is essentially close to the risk free rate, a consequence of arbitrage, so a fair rate set by the futures market. But the spread on futures is set by IG and they set it higher than the spread on the spot.
Most index futures are “ex-dividend” (the DAX isn’t) and the dividends are in the price. For example, the FTSE contract expiring in June is priced at 57 points below the spot. These are the missing dividends. Futures don’t pay dividends, instead you receive them by buying the index below the price you would normally expect to be able to. In summary, the price of an index future is spot price + borrowing cost – dividends. The futures price approaches the spot price as the borrowing period reduces and the underlying shares go ex-dividend.
This may sound complicated, but essentially you don’t lose out on dividends by spread betting on an index.
You could bet on an ETF instead, eg ISF for the FTSE 100. There is no futures market for most ETFs but IG create their own forward bets, which are similar to futures but have dividend adjustments on ETF ex-div dates. However, the spreads for ETF forwards are much wider than for index futures, so this is not something I would want to bet on. The borrowing rate IG apply to ETF forwards looks fair, but it is IG that sets it instead of the market, so anyone betting on ETF forwards would need to keep an eye on this. I have not found this rate documented, but you can work it out by comparing the forward prices to the spot price.
If you are going to have a play, be careful. Make sure you understand exactly what size exposures you are taking so you are aware of your risk. Check the spreads carefully as well if you move away from index futures. If you are a basic rate taxpayer and not going to use any leverage you are likely to be better off just buying the securities you want to invest in and paying tax on the dividends and gains.
The comments made about the risks of margin loans also apply to spread bets. In market turmoil, a spread betting company can increase their margin requirements and/or widen spreads with very short notice.
I have successfully shorted put options using my IG account, but I would suggest you do a lot of reading before you go anywhere near options. And never bet on binary options! (I think they have been banned recently anyway for retail investors).
ps, Other spread betting companies exist, but I have no experience of them. I have been informed by people I trust though that IG are totally straight, fair and reliable.