What caught my eye this week.
I enjoyed Fire V London’s post this week, although given the title – Feeling Broke – it sounds sort of cruel to say so.
Schadenfreude isn’t really my thing – unless it’s just the whimsically-named accompaniment to a pork schnitzel at the Munich Octoberfest.
No, on the contrary I felt seen.
Fire V London’s article captures a mood I’ve felt too, but I haven’t really shared as much as I might have on Monevator. Which is that while the tiny violins are definitely called for given the genuine hardship so many are suffering in the UK nowadays – let alone in Ukraine and beyond – the past 18 months have felt like a hangover for the ages.
As Fire V London writes:
I no longer feel as financially independent as I’d like to.
Right now, I would struggle to give up earned income; in principle I could probably cope, but on a monthly basis I would feel like I was haemorrhaging cash.
Same bro, same.
Money’s too tight
In not-even-really hindsight, 2021 was truly some sort of Bizarro World.
The pandemic still rampaging around us, millions of people getting paid for literally doing nothing, lockdown anxiety rampant and your neighbours furtive in masks, broken companies going to the moon – and yet our portfolios at an all-time high.
It was bonkers and I kind of miss it.
On paper I’m not even nominally down that much since then. And I’m still well up on where I was when Covid first hopped across the channel (and/or the Nothing To Declare line) in early 2020.
But in real terms – in both the financial sense and the ‘real world’ sense – it’s a different story.
My monthly interest-only mortgage payments have doubled. Everything from utilities to cheese to a decent bottle of wine costs a lot more. Some of the crowdfunding perks I got for making fun-sized investments in cafes and restaurants in 2018 and 2019 now barely cover brunch. A few years ago they paid for two.
Some of those might sound trivial, but they’re just a few things that came to mind on a list that’s endless.
Like a character revived from the dead to put the spark back into an ailing movie franchise, inflation came back with a vengeance.
Holding back the years
As for my portfolio, the wheels came off in 2022 and I’ve stubbed my feet several times since then as I’ve been running along like Fred Flinstone.
Perhaps we all make money in the same basic ways, but we feel hard done by in infinite variation.
Clearly I’m still in a pretty privileged position. Financially independent if I pay attention, portfolio well-diversified and essentially intact, a home of my own. Although I would argue I saved hard for years and invested wisely to get here, as RIT used to put it back in the day.
My position isn’t entirely a fluke, in other words. The sun was shining for years, and I put something aside for these rainy days.
Maybe that’s why I feel my pride is more wounded than my net worth?
Active investing hasn’t delivered for me for nearly two years now.
And I’d claim that I foresaw what we’ve since been living through back in early 2022 – and flagged up my concerns – but the truth is it didn’t help me much.
I was even talking mortgage stress a year before it was fashionable ubiquitous. My mortgage still doubled!
Harrumph.
Yet I also know we’ve been here before. It’s darkest before the dawn and all that.
As FireVLondon points out, those of us with financial flexibility are meant to be feeling this way:
I also realise that psychology changing over the last two years is Exactly The Point.
This is why base rates are increasing – to increase the cost of financing things, and thus reduce the disposable income left for everything else.
I haven’t found myself existentially exposed by interest rates reaching hard-to-remember levels, but nonetheless my psychology has changed.
True. But this too won’t last forever.
Sooner or later interest rates will have their effect – curbing inflation and probably also economic growth – and asset prices will soar.
Unless inflation has really become unmoored, which I doubt, this will include beaten-down fixed interest, too. Long bonds will leap, for all they look today about as lively as Pete Marsh.
Portfolios will be re-upped.
Weenie’s submarine will be a rocket ship again.
Something got me started
When you’re hiking in the mountains but you’ve been stuck in a valley forever, you just keep on trudging.
Eventually you notice you’re actually stumbling uphill. Shortly thereafter the goal comes back into sight.
Until then, simply try not to lose more height along the way.
Have a great weekend.
How are you feeling two years into The Suck? Let us know in the comments!
From Monevator
Is gold a good investment? – Monevator
If you’re a member then you may want to bookmark our Mavens and Moguls archives – Monevator
From the archive-ator: Accounting for big expenses and depreciation in your FIRE budget – Monevator
News
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Higher energy bills forecast for UK households next year – Guardian
US economy grows at fastest pace in nearly two years – BBC
Students have 50p a week to live on after accommodation costs – Guardian
Real living wage now £12, more employers sign up – Living Wage Foundation
New online state pension top-up service to be launched in spring – This Is Money
Argentina faces economic crisis as inflation hits 138% – This Is Money
Comparisons are odious for London’s stock market [Search result] – FT
Products and services
Is there a catch with HSBC’s £205 cashback offer on current accounts? – Which
Beware cheap mortgages that come with hefty loan fees – This Is Money
Get £50 free trading credit when you open an account with Interactive Investor. Terms apply – Interactive Investor
EDF launches new cheap electric vehicle charging deal… – This Is Money
…but surging UK insurance premiums pose risk to adoption [Search result] – FT
Shared appreciation mortgages: the 1990s deals that became a nightmare – BBC
Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Understanding the MyWaitrose loyalty scheme voucher revamp – Be Clever With Your Cash
Not down with the coming Netflix price increases – The Lefsetz Letter
Wilko brand to return to High Street under new owner – BBC
Homes for sale with a basement, in pictures – Guardian
Comment and opinion
Inflation has eaten away at wealth [Search result] – FT
How time horizon affects the odds of equity investing – Morningstar
A disordered mind makes mutual fund salad – Demonetized
Ageing populations affect economic growth but not stock returns – Morningstar
Retirement takes work – Humble Dollar
How to save thousands by overpaying your mortgage – Which
Where is the 60/40 valuation at? [US but relevant] – Morningstar
A bit of a bad thing – Mr Stingy
Don’t forget to forget investment noise – A Teachable Moment
How much time is needed for stocks to outperform bonds? – Best Interest
Dollars are for spending and investing, not saving – The Big Picture
No more income tax cuts – Simple Living in Somerset
Naughty corner: Active antics
The risks of missing moat, management, or valuation – Flyover Stocks
Aswath Damodaran: making sense of the market [Podcast] – I.L.T.B. via Spotify
US IPO market teetering on the brink [Again…] – Bloomberg via Yahoo
Galaxy Digital predicts 74% rise in first year of Bitcoin ETF – Coin Telegraph
Shorting socialism – Verdad
Don’t worry about money market funds [Nerdy, search result] – FT
Kindle book bargains
The Panama Papers by Bastian and Frederik Obermaier – £0.99 on Kindle
The Simple Path to Wealth by JL Collins – £0.99 on Kindle
Mastering the Market Cycle by Howard Marks – £0.99 on Kindle
The Power of Moments by Chip and Dan Heath – £0.99 on Kindle
Environmental factors
UK rewilding brings endangered species back from the brink – Guardian
Nigeria to receive 500 mini-solar grids in renewables push – Semafor
Government heat pump grants raised by 50% to £7,500 – This Is Money
Texas bets big on undersea carbon storage – Hakai
Warning over ‘eco’ cups that pose risks to health with toxic resin – Guardian
Robot overlord roundup
Why one author let an AI chatbot train on his book – Vox
Off our beat
America’s unique, enduring gun problem explained – Vox
The scientists looking for extraterrestrial plant life – BBC
Finding Los Angeles with Anthony Bourdain – Current Affairs
Cracking the key to a $231M Bitcoin fortune on a USB stick – Wired
A second 20 years’ crisis? [Heavy] – Phenomenal World
Little flaws [Podcast] – Morgan Housel via Spotify
A better way to ask for advice – Behavioural Scientist
The subprime attention bubble – Hot Takes [via Abnormal Returns]
And finally…
“Money doesn’t mind if we say it’s evil, it goes from strength to strength. It’s a fiction, an addiction, and a tacit conspiracy.”
– Martin Amis, Money
Like these links? Subscribe to get them every Friday. Note this article includes affiliate links, such as from Amazon and Interactive Investor.
@TI
Editing note: The final paragraph of the Money’s Too Tight section appears incomplete. It peters out as “It was”. Oh, and the following section has a few oddities (feel for feet?, horizon back, affect/effect).
@Curlew — Eek, somehow it reverted to an early draft version and I didn’t notice.
I’ve done some (imperfect!) late night running repairs. 🙂 Thanks so much for flagging.
This month was the first where I made a pension contribution but my pension pot fell more in value month to month than I added this pay day.
I started a new job in October 2021 and the workplace pension pot is nominally worth less than I’ve contributed. Worse than 0% on cash!
It sucks.
You called it right @TI on Dec 4 2021 in “First they came for the growth stocks” (as with your Mar 2009 ‘stocks now going half price’ piece, and @TA’s Mar 2020 ‘Do Not Sell’ call). So don’t be so hard on yourself. NASDAQ peaked Nov 2021, and the S&P 500 in Jan 2022. You were spot on.
Never have been more optimistic myself. Value everywhere now. Much less nonsense.
In 2021 we lived through ‘Peak insanity’.
A crumby, cynical clone (Shiba Inu) of a parody (Dogecoin) of a digital nothing (Bitcoin) contrived to become the fastest appreciating thing in history, outstripping Buffett’s 60 year returns inside the year. Madness, unmoored from any semblance of reality or sense.
It had to end. It needed to end. It did end.
People were paying the price of a good house for a crappy JPEG of a rock. How was that ever going to work out? Just from Jan to Sep 2022 NFT sales fell 97% from $17 bn to $466 mm. In Sep 2022 some 95% (69,795 out of 73,257) NFT collections were listed at precisely zero value. The Forkast 500 NFT Index of the 500 highest ‘value’ NFT collections is now down 94% from peak.
Instead of crazy everything, we’ve finally got some meaningful yields on proper risk free assets again. Annuity rates are well up. Pension Funds (after the LDI fiasco) are out of the hole. 60/40 works again.
These look more like the best of times than the worse of ones to me.
Zombie businesses have been allowed to hit the buffers, which is sad in a way; but, OTOH, it releases both financial & human capital for more productive endeavours.
Inflation is on the way out. Wages are now outstripping it. The lowest earners are getting the largest rises, helping reduce inequality. Putin’s energy gambit failed.
In the closed end space, deep discounts abound on ITs where before there were only persistent premiums, creating a margin of safety of sorts for investors.
Honestly, from a pure investment perspective, I don’t think that things are all that bad.
Hey, and we got rid of Bo Jo the Clown along the way! 🙂
– No debt so not feeling that pain.
– Since FIRE’ing in late 2018 Real wealth in GBP down about 2% and in AUD up about 18%.
– Nothing financial keeping me awake at night so must have my portfolio positioned about right.
– Working a few days a week from home on my terms, with no BS and no stress.
– Living in a beautiful part of the world and making the most of it.
– Relationship with Mrs RIT as strong as it’s ever been.
How are you feeling two years into The Suck? Fortunate.
You ended with that wonderful hiking metaphor and started with a moan that brunch…..(?!) was getting a bit pricey.
Fun 🙂
@TLI > and we got rid of Bo Jo the Clown along the way!
You know what the Terminator said though. He’ll be back, with his gobshite amplified by the massive toilet bowl that is GB News. SOSDD
Still, I’m with you, ain’t a terrible time to buy some sorts of assets. Whether it counts as the darkness before the dawn remains to be seen.
@TLI. I tend to agree. I always had this view that it was purgatory or hell. We had purgatory (financial represssion) for over a decade, basically after the Euro-area crisis. Low inflation, very low/negative policy rates, every asset artifically high due to discounting effects from very low long-term rates. It felt nice because asset prices kept going up but much of it was just the impact of a PVing upfront of income streams. The result was no yield anywhere. Just limbo.
Now, assets do yield something. To get there though we have to accept a measure of hell. Some of those upfront gains have to be unwound. We’ve has a burst of inflation to reduce real returns. With the S&P only 15% off it’s highs (perhaps 25-30% in real terms) then nobody should be complaining. That is a cheap price to pay for 5% long bond yields, a doubling of annuity rates etc.
I expected the pain to be worse. Perhaps there is more to come. Either way, it’s a price worth paying for a real business cycle.
Not sure when it started but I have been embracing the suck of late, the small stuff like cycling to work in the rain or setting foot ‘Spoons for the first time since 2016. Neither action will shift the dial on my savings plan but it feels like the right thing to be doing.
It been an interesting few years!
5 years of easy Fire and 3 of WTF.
Definitely feels like a new world now – even applied for a perm job! (Half heartedly and unsuccessfully – I was frankly amazed at the the base salary v 8 years ago)
IO mortgage increasing from ~£400 to £2500 pcm is/was character building..recently paid down £80k/15% to see how it felt. It appears my wife was correct- I’m dead inside and don’t have feelings!
Sold a BTL in 2021 which helped, sat on cash too long and eventually dumped it in pref shares (down 11-15%). On a positive note I have around £23k pa dividends from them, virtually all in ISAs now.
Also grateful that inflation appears to be improving – concerns over future real value of DB pensions
My DC is accessible in less than 2 years so that is reassuring – lump sum will cover half my os residential mortgage.
Focus for next few years is to max ISA pot – then draw at around 6% pa tax free!!! No way the ISA will survive in its current generous form.
Finally and positively I now can see the HRT limit of £50k being increased – which creates headroom and flexibility.
Any predictions for 2024?
Aliens, asteroids, a serious/proper pandemic, civil unrest, hopefully not a Labour govt- nothing too surprising there given the last few years
No it’s great for anyone really looking for financial independence
Annuity rates now look saneish
FIRE is a lot easier if you can backstop the last thirty years or so
If you can make a decent return on your money you need less money to become financially independent
It’s like running up the down escalator right now – hard work, but eventually we’ll get to the top.
Agree with much of what’s been said above, especially @TLI’s take on it.
Other than your own valuable perspectives @TI in earlier articles, as noted by @SLIS, I also refer back to articles by @TA on comparisons to the 1970s. Right now, we’re in the equivalent of ‘73-74 and that mess lasted for most of those 2 years so mentally I’ve switched off until the turn of this year. That’s helping me to get through without much stress.
And also very grateful I’m not in a war zone and can still afford to turn on the heating, as you’ve pointed out.
Had a big bonus at work this year – stuck most of it into my SIPP. The SIPP still ended that month lower than before I invested my bonus in it.
That was quite the bummer.
ATEOTD I just have to remember that a) I am still incredibly fortunate compared to most in our society (let alone the world) and b) buying assets when they’re cheap is the best time to buy them.
I feel poorer, figuratively and literally. Assets essentially flattening, sometimes backwards – my net worth overall is the same as 18 months ago, although feels worse. Positives, in this time I’ve had a pay rise, my % of cash savings is the highest ever (somehow – not deliberately), but my 0% historic consumer debt %:total assets ratio is down to the lowest its been in a decade following some overpaying of the minimum, which I know is silly given inflation and cost of things in real terms, but the psychological aspect is worth it. Ditto mortgage with the end of cheap term looming in August (gulp), so shifting away from S&S isa focus for a bit, all things considered. Having solar panels (hence the consumer debt) on the old FiT rates have really been a good move since 2015, given inflation and energy costs recently.
It *feels* demoralising doing the monthly updates at the moment, but I know, as others have said, I have it good compared to many, and I know buying cheap is good in the long run, where I can.
Oh yeah, as well as assets being (hopefully) cheap right now we are also likely to have a Labour government soon – and that almost certainly means unfavourable changes to SIPP investing limits. So, fill your boots now if you can.
As an aside, in the wider context, Labour would at least provide a level of competent governance which we have lacked for at least five years. Swings and roundabouts.
I have been putting 30 percent of my wages in to my pension for the last few years along with my companies 11 percent, also 3 years bonuses straight in. End result I’m am at the same level as 2020, Isa is down from max by 12% . Nearly crawled back to max earlier this year but then bang, back down again. Works pension is a glide path so heavy in bonds. My mate whose 7 years younger than me same company pension but obviously heavier in equities retired yesterday as his hasn’t been battered as much. Still going Xmas or just after as had enough.
Bought a newish car yesterday but, pension and savings down that much I could have bought 4 or 5 new ones in 2020 and still be in the same position. Only thing up in my ISA fundsmith, and a ftse 100 tracker.
Excellent point @Anaplian. We’re blessed with good fortune. By wealth, earnings or both, I’d dare say a considerable majority of readers will be in the top decile of the world’s population, most in the top 5%, and many within the top 1%. We should count ourselves lucky. And that’s before we even consider that those alive today are objectively better off than those alive in any previous historical era (and the dead outnumber the living nearly 14 to 1).
@ermine: I only watch TV about 4 or 5 times a year (YouTube has a lot to answer for), which is insane as it costs £159 p.a. (and as also as we managed without a TV for years before moving out of London); but I would probably tune into GB ‘News’ (a misnomer hiding in plain sight) just to have a laugh at BoJo’s demise/diminished status. To quote the Disposable Heroes of Hypocrisy: “Television, the drug of the Nation. Breeding ignorance and feeding radiation”.
@ZX & @All: Yield. Changes. Everything. 2021 was not so much the climax of the 1634-7 Dutch Tulip Bulb Mania and the 1720 South Sea Bubble rolled into one. Rather it was one multiplied by the other, and then the product cubed. No more ScamCoins and ludicrous SPACs. We’re back now into serious investment, with sensible (albeit, as always, quite difficult) choices.
The problem, if you can call it that, is that in 2 years we’ve transitioned from having v. few attractively valued assets to having a great many. I have only a very limited circle of competence (if any at all), and certainly no edge in evaluating which opportunity set is likely to work out better than the next along. I have some views of course. How can you not have those? But these views are not informed ones.
Only yesterday, I was thinking about EM Sovereign Debt, after @TA’s super 2021 article, but now see that the margin of the yield increment of the two main EM Sov Debt ETFs over T-Bills is barely over 1%, as against ~3% just two years ago, even though the absolute distribution yield had gone from ~4% to ~6% in the same time. So I won’t be touching that one.
Similarly, high quality CB’s are on a solid ~6.5% yield, but that’s still only 1.5% over Treasuries, and doesn’t feel quite enough compo for the extra risks.
HY Bonds are interesting. US issues aver’g 4.5% over spot Treasury curve. Eyeballing the ICE BofA US HY Index Option Adjusted Spread 1997-2023 chart on the FRED / St. Louis Fed website, a 4.5% spread looks close to what might pass for equilibrium; but this spread was as high as 10% in the early 2000s, and it blew all the way out to 20% in Nov/Dec 2008. OTOH, this spread has compressed to 3% or less on several occasions.
I’m quite persuaded by, and v. grateful for, @LondonYank’s analysis (both here and over at CityWire) that, maybe, it’s the infrastructure trusts which are the best value of all. If rates do now fall, then they have a sensitivity of 5x to 9 x depending on the trust in question; they’re typically yielding 5-7%; and many of them have yields closely coupled to inflation, which is obviously a v. big plus over a pure fixed income play.
Also thinking that:
– small cap is cheap compared to large cap;
– value is cheap compared to growth; and
– ex-US is cheap compared to US;
such that maybe European and EM Small Cap Value are cheapest of all.
Whether that means that they’re now a buy is another (and very interesting) question entirely.
Another omy (one more year) to pulling our trigger then me thinks before stepping out the FT work force, before peaking through the fog and finding ourselves at the top of Pen-y-ghent hopefully 🙂 will keep plodding and shoring up the haystack
I usually think of myself being rather indifferent to market turbulence but did feel a pang of suckingness when my portfolio valuation went from £x00,005 to £(x-1)99,995 yesterday, having been (X+1)00,000 not that long ago. Ah well.
I’ve been drawdown Territory for 6 years now so the puzzle I’m facing is whether I should over balance into bonds or alternatively equities. As they’ve both been crushed it doesn’t seem to matter so I’m probably going to sit on my hands and twiddle my fingers if that’s possible and not too uncomfortable.
#Boltt(10):
Re: “Finally and positively …..”
Maybe, but poor optics may IMO lead to favouring an increase in the personal allowance. Which would also push up the HRT starting level if BR band left unchanged. Who knows, but I also hope that something might just give thereabouts too!
I wonder how different you (and of course fire v London) would be feeling if instead of taking out a mortgage you’d bought in cash? (As I know you could have).
I haven’t had a mortgage for about 10 years and absolutely love the security of having no debt at all. While I’ve noticed things getting more expensive in the last year, I can’t say I’m feeling poorer. I’ve even let go of the last little bit of paid work I had. Maybe I’ve stopped checking and thinking about it so much…Maybe my spending is just very habitual.
I do find it interesting how hard we (people generally) find it to envisage things changing. Inflation, interest rates, energy prices, tax rates. It always comes as a surprise.
(Actually, maybe I’m just being complacent and the next ‘unexpected’ thing will knock me off my smug pedestal 🙂 )
@TLI, thank you for the kind words. I’ve been filling my boots with infrastructure trusts since they moved to discounts. While it’s been somewhat painful to catch the falling knife, it feels like every purchase is adding to a rubber band that will violently snap back once the market gets confidence that rate rises are over. In the meantime, we’re being paid to patiently wait while the Boards start to take more dramatic actions to close discounts. It was interesting to see UKW’s results this week, with a large dividend increase and £100m buyback:
https://otp.tools.investis.com/clients/uk/greencoat/rns/regulatory-story.aspx?newsid=1728234&cid=2184
More broadly, I certainly feel adrift from a FI perspective since the mania of 2021. Our NW is at the same level it was in April 2021 thanks to options/RSUs in an employer that were 7 figures at one point, but crashed 90% as the pandemic stock bubble burst. Fortunately we sold some of that position and our high savings rates has pretty much offset the write off of the remainder, but painful nevertheless. Oh well, our FIRE plans will have to take a few more years!
As comment on FvL’s blog. Its been an expensive couple of years of life (childcare!) for us as well as the coincidence with this last few years inflation and volatility. I’ve managed to carry the extra load for the most part by career progression and salary increases but it certainly feels like I’m doing an awful lot of peddling and not really going anywhere.
To use your trudging up a mountain analogy, I’m hoping it’s a case of keeping my head down for a few years and by the time I look up there’s a wonderful view to be admired. Always clouds on the horizon granted, but that’s why we pack the waterproofs!
The above presupposes that the middle east will not reciprocate the destruction that is about to be unleashed, adding to market turmoil.
As for bonds and borrowing, Andrew Neil’s stance is here.
https://www.dailymail.co.uk/debate/article-12681499/ANDREW-NEIL-era-cheap-money-no-longer-politicians-Left-Right-able-promise-moon.html
There was a columnist in The Times Money section writing about the same thing this morning. She was moaning about a pint of Guiness that cost seven quid (in her London local, natch) and I smiled at a lot of the Comments telling her to go and drink in ‘Spoons instead. I’d agree it’s been a grind recently though, with investments in a Slough of Despond while the cost of the nicer things in life seems to be ever upward. Let’s hope it sorts itself soon.
Yep it’s all a bit drab but not checking values too frequently helps. I knew you youngster’s didn’t understand the pernicious effects of inflation. All I wanted was cpu +1% (and I didn’t get it). Still on the bright side I went to another funeral yesterday ( would you be surprised if I said it’s an age thing ?) the plus side being that I wasn’t the focus of attention with the added bonus that, unlike weddings,you don’t have to take a gift.
I’m feeling temporarily broke after selling to downsize and go into rented in the meantime. Due to some challenging timing we were forced to go overbudget on the rental, or be homeless, and it really hurts.
Yes, I am making a nice amount on the house proceeds in gilts but it is tied up for a bit.
But there is light at the end of the tunnel, it should only be another few months before moving again and becoming a mortgage free homeowner for the first time. One of the biggest single steps towards Financial Independence.
@Griff, my new works pension had some glide path fund of funds by default but I’ve come out of it and picked a couple of bond index funds instead and will be piling into them and massively increasing my salary sacrifice % next year.
I have avoided losses on bonds simply due to not holding anything other than a limited amount of short dated stuff, but have had the collateral damage on my infrastructure trusts which have been battered this year.
But things are really looking up now. It is now quite possible to build a balanced, diversified portfolio that kicks out 5-6% in natural yield even if 40% of it is in bonds.
As for tax policy, my biggest wish is for Labour or the Tories to unfreeze and increase the Personal Allowance significantly. If Prada Pants Rishi increases the 40% income tax threshold (tbh it wouldn’t benefit me now as I salary sacrifice under it anyway) without raising the Personal Allowance then it can hardly be seen as progressive taxation.
I’m not sure if Labour will reduce ISA and pension subscription limits, you have to bear in mind their base includes senior public sector workers with whacking great pension contributions. So they may just leave things as they are, although they may reinstate the LTA.
My bet is they will hike Capital Gains Tax considerably rather than meddle with tax wrapped investments.
Thank you for penning that article, it feels like the article I’ve been hoping to read for the last year, and appears, by the comments, to have captured the Zeitgeist!
Also great to get everyone else’s perspectives on what’s been happening and how to think about it.
I think we’ve been very luckily positioned, with >90% of our portfolio being in indexed shares and both of us working. So if anything it’s been the doldrums rather than panic stations. We’re still saving, but the portfolio is growing slower than ever, and it rarely gets checked. I seldom read the financial press, and neglect portfolio optimisation opportunities. Meanwhile I’ve been wondering about the point of having a large trove yielding nothing rather than a large house with all it yields.
Thanks for the motivation. I’ll now consider balancing the portfolio to more of a 60/40 shape, and enjoy the yields while we wait for the next s-curve to play out in the equity markets.
“Sooner or later interest rates will have their effect – curbing inflation and probably also economic growth – and asset prices will soar”
If interest rates stay at about their current level I don’t see why this would be the case. If asset values follow discounted future cashflows (I’d guess pretty true for bonds, not sure about equities), then this would require interest rates to fall below current expectations – and by definition, there’s no reason to expect that. Or do you have some other model for why curbing inflation on its own would make asset prices rise?
Thanks @TI, interesting read.
Nominally, I’m above my Jan ’21 high water mark, with no new contributions. Gold has been good and the short-ish duration of GIST/G limited bond the bond carnage. Inflation however…
Now I’m sitting on 4% cash in my SIPP wondering if it’s time to get into long-ish bonds or something else? Since I have no idea – and I suspect infrastructure trust might get hammered by increasing interest rates maybe – I’m staying put. iShares Edge MSCI Europe Quality Factor ETF is a candidate and will dilute the US focus of World Quality Factor I hold. But idunno…
As @Marcus mentioned above, this post seems to capture the Zeitgeist very well and in style. Thank you for another great weekend piece, TI.
From my obscure corner of the investing world the perspective is a bit different though. A few weeks ago, my total portfolio reached another all time high and right now is only down by 1.48% from that all time high. Unfortunately, that is only nominally. In real terms it is a little bit underwater.
What cheered me up a bit was this: Recently, due to some changes I’ve made in one of my portfolios, the P/E went down to 11.02 and as a consequence my favourite ball park measure of safety withdrawal rate got slightly above 3% for the first time ever.
@Tom-Baker Dr Who: What’s your “favourite ball park measure of safety withdrawal rate”?
“New online state pension top-up service to be launched in spring”
Finally! Right now the only choices are 1) waiting for a letter from HMRC, then write a cheque (!) with a hand written note asking them to apply it to a certain year/s and then wait months (!) checking the bank balance to know if it has been cashed then the hmrc site to see if they got the year right.. or 2) make a bank transfer, with no ability to nominate the year (once this resulted in the funds being held in limbo for six months without notification because they didn’t know how to allocate it).
From FvL “I can’t remember a month in which my earned income has covered my outgoings.” This has been true for me for almost 2 years now, albeit at a few orders of magnitude smaller scale. Fixed irreducible costs (including adequate/modest retirement and housing savings) would be 122% of income if met, so I’ve been working on increasing that income with a job switch – it is the only option.
@PeterW (#32) – It’s a very naive and simple formula: (1/PE) * decimal percentage of equities in the portfolio + 4% (now!) * decimal percentage of bonds in the portfolio + 4% (in my case) * decimal percentage of alternatives in the portfolio – 3% (what I am expecting my personal inflation rate will be).
It’s a very handwaving ballpark measure. It is just a rough guide, a rule of thumb. For a start, I should be using the CAPE rate (Shiller PE) for my equity allocation instead of the PE but the PE is a reasonable zeroth order approximation for the CAPE. The 4% for the alternatives comes from an academic paper where the long term return of my alternative investment has been inferred to be 1% above inflation. The 3% for inflation is the long term inflation I expect to experience when we finally manage to control this high inflation we are living through now.
@Tom-Baker Dr Who – thanks for explaining. Though that looks like a calculation of expected return rather than a safe withdrawal rate? Except for not including growth in equity earnings.
@PeterW (#35) – Yes, it’s a handwaving estimate for the real expected return. It gives you a rough upper bound for the withdrawal rate, if you want to keep the real value of the portfolio unchanged (assuming the volatility is low enough for you to be able to neglect sequence of returns risk).
A great article and comments section. It’s been a pretty dispiriting 2 years drip feeding into the portfolio every payday and observing that the dial is just stuck.
That exciting year when the investments earned more than me and Mrs Mike combined and suggested we were at the threshold of FI seems a way off now.
There’s no lost sleep as we’re still working but the emotions from knowing (logically) that we’re currently buying cheap and will see the benefits later is not quite the same as that excitement of those days where the portfolio seemed turbo charged.
Yep, the pension is going nowhere despite regular contributions, but the house is bought and paid for so there’s no debt. Reducing my hours last year and upping the spending in targeted ways remains a sensible choice as I’m still spending less than monthly income – and treating others and being more spontaneous is a lot of fun.
Interesting to hear others position. I’m heavily in equities, so rode the dragon on the way up and now seeing the other side of the coin.
The S&P500 still looks very expensive on a CAPE analysis with bonds yielding more so my base case is another double digit drop and will be happily surprised if that doesn’t happen. It’s the best long term offset I have against inflation though. TIPS look interesting though too.
I felt the ftse 250 was cheap 12m ago and have been dripping in, ahem. Not a great call so far but now it really does look much cheaper than it did.
Whilst I’m still working full time the natural yield on the investment portfolio (albeit including the SIPP which I can’t withdraw) covers annual expenditure and so both a) it makes me psychologically more immune to falls b) I can continue to add. Which given increasing levels of poverty in the UK and the current issues overseas means I am in a very lucky position relatively speaking as are most people reading the blog.
The other thing I’d point to is no uncovered mortgage (I was lucky enough to take a five year fix at 1% and not pump it into risky assets so am just taking the yield spread on gilts – lucky as I could easily have been dense enough to go more into risk assets…). Anyway point being, debt juices your returns but this is the other side of the coin (uncertainty, rising cost of carry). No debt means you can sleep much easier at night.
Life is definitely more expensive than a few years ago. We generally live quite frugally and then yesterday, filled the car up with petrol, took the bike to the repair shop as fitting a new chain is beyond me, took the kids swimming, went to watch the rwc final at the local and bang that’s the best part of 250 gone in a day without blinking.
Speaking from my narrow accumulator perspective, market going nowhere for 2 years is a good thing. I could only hope this will continue for a while or we even get a recession on the way.
I’ve lost nothing over these 2 years because I did not sell.
I actually think things are looking much better – it is hard for those of us (which includes virtually all of you) in shall we say fortunate positions to feel good about people living with their parents into their 30s or buying a one bed flat as a couple as lots of my staff do, despite earning ‘good’ money, delaying or raising children in cramped conditions. I’m glad assets are coming back into line with income.
It’s a painful lesson for people who retired in their 40s when interest rates were on the floor… but I’m not sure that was ever sustainable. People now seem anchored to interest rates going a little bit down, but there’s as much chance they’ll go a little bit up – ask anyone predicting the direction of world interest rates what their prediction for 2023 was in 2021. Fire’s going back to or taking on some work will boost productivity and widen the tax take. Rather than virtue signal about how other people’s taxes are spent, they’ll have the opportunity to contribute to ‘our nhs’ and double digit percentage rises in benefits themselves.
@Andrew – past three decades shares have gone nowhere for long periods before going on a tear for long periods… your pension pot not moving for two years is surely a good thing ? More units for when they do go on a tear ? I’m similar age to you, we have a very long time before we need that tear to come
@Seeking Fire:
Do you have a plan for when your 1% fix ends?
My best stroke of luck was fixing our gas & electric prices for two years in Q3 of 2021
I received the annual update for a company pension policy (one from a previous job), a normally very dry and cautious document oozing with professionalism. On this occasion they revealed that the AUM had fallen in value by 35% over the course of the last 12 months, as if this was the most normal thing in the world! Interesting times.
@TA & @TI: I almost forgot! I came across this well deserved, very complimentary and positive review of Monevator this week:
https://www.financial-expert.co.uk/a-celebration-of-monevator/
There’s no date on it (or if there is one, then I missed it), but it’s clear that it must have been written sometime after 2021.
@All: re the This is Money Argentina piece – I’d recommend both the Caspianreport (geopolitics) and Economics Explained channels on YouTube for their respective pieces on Argentina. In many ways, it is the paradigm, textbook example of how a very promising country (one of the most prosperous in the world in 1914) can blow it’s chances by a series of mistakes over a protracted period.
@T-BDW: CAPE does seem to be much more useful as a SWR indicator for the equity limb of a SIPP than it is as any sort of valuation tool per se (and less still as a market timing indicator).
As I understand it, Robert Shiller agreed in the end that CAPE ratios needed to be modified to reflect current interest rates.
One perpetual SWR rule of thumb that I’ve seen using CAPE ratios on a 50/50 equity/bond split portfolio has been:
1.5%+(0.5*(100/CAPE)%).
1.5% is, I think, based on an expectation of 3% for nominal long term bond yields (so, a fair bit below where we’re at just now, at 5% ish).
If CAPE was ludicrously high at, say, 50 (which would be wholly unprecedented for global equities) then the SWR would be 2.5%. If, OTOH, CAPE was extremely low at, say, just 10 then the SWR would rise to 6.5%.
@all — Wow, an overwhelming response, clearly this post – and more to the point FireVLondon’s – touched a nerve. Please do keep the reflections coming, we’re all enjoying sharing each other’s pain I’m sure. 😉
@TLI — Wow. A nice review that gets pretty much everything right, especially the bit about being emailed daily by people offering money for this or that promotion or link and us turning 99.9% of it away to the extent of being almost heroically under-monetized for this sector haha. (Please become a member if you’re not, dear reader! I know @TLI already kindly did that deed). Thanks for flagging it up, looks like it was written in Autumn 2021, which has rhymes with the post above actually.
@TI. It seems to me that if the last year or two has touched a nerve then people really were far too complacent.
Now I admit my portfolio is still 30%+ over it’s end 2021 level. Plus my comp has been very high now for a number of years, so I’m not feeling any pain yet. I’m sure I will. Nonetheless, with the Nasdaq still up 80% from end-2019 levels (16.75%/annum) and the S&P 35% (8.3%/annum) it’s hardly a crisis. Equity volatility is 15-20%/annum so the losses in 2022 were totally par for the course. It was bonds that were out of sample. With 30-year index linked Gilts yielding -2.5% at end-21, then, by construction, you could not expect to make money investing in Gilts. It was a trade. Trades do go wrong and that one did.
The average equity-bond type portfolio is probably still up modestly in real terms since end 2019 but look what that asset base now buys? Over 2x the income. CPI-linked annuities at 3.5% CPI-linked for a 55 year old. That was 1.6% in late 2019. It’s a massive win. Everyone should be deliriously happy.
The problem is that a decade of no inflation meant that everyone forgot that both assets and liabilities go up. Not just the assets. Suddenly with a burst of inflation, everyone is being reminded that liabilities also rise. Plus, the FIRE types still had bonkers SWRs of 3-5% with bond yields at zero and annuity rates sub 2%. It was a fantasy. The SWR was probably sub 2% in 2021. Now it might well be 4%+.
Really, those with assets have absolutely killed it over the past two years. It’s those without assets that are still screwed.
@T-BDW & @ZX: you called it right in the comments (at #6 and #34) on @TI’s Jan 2021 Game Stop piece linked to by @TI above. As T-BDW aptly noted there under #6:
“could this be the 21st century equivalent of spotting the shoeshine boy giving stock tips?”
As it turned out, it was the indeed the shoeshine boy moment, indicating that the time was coming round for a rethink if you were then still long negative or sub-trend yield assets, like long duration fixed income, or expensive ones like both fixed income again and US stocks. It certainly wasn’t a reason to abandon gilts or stocks. That’s market timing. But it was maybe a sign to start to pivot towards shorter average durations on gilts and/or global bonds to reduce rate and duration risk, and to crystallise some profits from growthy NASDAQ and S&P 500 tracker ETFs in order to put into value factor, quality factor and perhaps more defensive plays. Tinkering with asset allocations; rather than a binary in or out. Same now, but in reverse. Not going in 100% on long duration, but rather recognising the yield opportunity is there now, and that it makes sense to have some exposure to it unless you have a strongly supported credence that rates are going to keep rising, and that better opportunities will be there for bonds in the future.
@ZXSpectrum48k — You’ve consistently made the point for several years about the interrelationship between assets, liabilities, and withdrawal rates and it proved commentary very much well worth listening to. 🙂
Additionally, you write here: “It seems to me that if the last year or two has touched a nerve then people really were far too complacent.”
I’m really not sure it was complacency. Of course to some extent this is semantics, and there was complacency around.
But I think it was closer to greed and maybe even magical thinking, and I’d count myself as one who was touched by the former towards the end at least.
I think investors were more complacent pre-Covid. That was when I really noticed comments on Monevator that seemed as benign as back in 2007. Indeed I wrote a short note in February 2020 with the express aim of trying to remind people that bear markets happen, and will again:
https://monevator.com/remembering-bear-markets/
Of course that warning was rendered unnecessary just a month later as prices and confidence collapsed as Covid gripped the world.
However so unexpectedly rapid and strong was the recovery from that crash that I think it made even many old investors sort of delirious, at the margin. I mean I wrote the article about the madness of Gamestop that @TLI links to above. I was very well aware valuations were frothy and new investors especially had gone bonkers. I even — as noted perhaps too often — sold by far my biggest tech positions in Spring 2021. But by the end of 2021 and early 2022 I was already buying broken frothy growth stocks, about 50% of the way down to their ultimate 80-90% declines in the worst cases.
Why was I doing so, given that the correction up to that point had hardly undone the valuation extremes and that as @TLI also kindly notes I’d (perhaps just through luck and writing enough articles, as always) called the first wobbles of what has become a two year bear market?
I think it was at least to some extent greed. I think I’d come to believe I had a (mildly!) golden touch and I really was earning my excess gains. Even as I knew the folly of that thinking and read and link to articles about it each and every week. And I definitely don’t think I was alone.
Of course at the time I thought I as doing something different. But it sure looks that way now…
Thanks for the mention, TI – I’m not optimistic enough to think that the rocket will make another appearance any time soon, unless it gets dragged up in the wake of a Santa Claus rally!
Next month will see the first of my newly increased mortgage payment being whipped out of my account, so I’ll be feeling some pain for a while and then hopefully I will adjust (mentally and financially) and will settle into a ‘new’ financial normal.
With my investments just moving sideways these past couple of years, it’s just a case of head down and keep plodding on.
It has not been a pleasant period but it is surely the price we must pay for a more sensible investing environment going forward.
I have spent much of 2023 looking with dismay as the US market in particular focused on the short term information such as next earnings releases and failed to see the larger context such as the surely inevitable compression of equity values in a higher longterm yield environment. Too many daytraders who had no experience of higher bond yields? Things are perhaps beginning to correct.
I have spent much of the year amassing what looks at least like a solid bond portfolio with some decent duration. Do I expect trouble there? Yes – rate and/or 10 year yield increases may not be over, the US treasury position has poor governance, and Japan may drop a bomb on the rest of the government bond market by releasing yield control. But on balance I expect my government bonds to do well in the long term.
On equities, I had moved a small amount out to build a reserve to buy cheaper stuff later. I have consciously kept some Emkts, Apac and smaller company stuff which may recover well eventually.
It has been a difficult time but perhaps it is just the price we have to pay for a more normal investment environment.
I watched with dismay as the US market in particular rallied while the spectre of inevitable compression in equities values due to rising bond yields waited in the wings. Perhaps too many day traders who had never seen increased 10-year bond yields before?
I have spent a lot of 2023 building a substantive bond segment. Do I anticipate problems in bonds? Yes. The US Treasury market is threatened by poor US governance, interest rate increases may not be over, and Japan could drop a large bomb on the global bond market as it abandons yield control. But nonetheless, I think the position will do well over time.
In equities, I had shaved a little bit off to build a reserve to buy cheap stuff as the value compression plays out. I have consciously kept positions in Emkts, APAC, and smaller companies since they may recover well at some point.
An answer here:
https://t.co/urE9glrddG
@London a long time ago: fascinating. Watching now. @18-22 mins in, where his 1st hand knowledge demolishes 12-14 years of macroeconomic forecasting error, is esp. eye-opening. The policy-academia-finance group think, willful amnesia and disjunction from the reality of decline resonates.
Postscript to #52: Something alluringly in the clarity of Garys Economics’ argument that if combined government and central bank policies keep, in effect, removing assets from the poor and transferring them to the very rich (nine and ten figures), whilst paying the poor off using deficit spending in lieu of taxing those rich (wealth tax please Rachael Reeves), and – at the same time – not actually growing the real terms output of the economy; then, in the long run, we will be heading for a new form of feudalism where, after the immiseration of the poor, the only assets left for the reverse wealth pump to work upon to further enrich the very wealthy will be those of the middle classes – i.e. people with from five to low seven figures. He’s a trader and, as he puts it, as a trader, you don’t make money just by being right, you make money by being right specifically when other people are wrong.
@London a long time ago (#51) and TIL (#52):
That youtube link is interesting and certainly makes for “entertaining” viewing, but a few things strike me:
1. Novara Media – a left wing news outlet, supportive of Jeremy “Jezbollah” Corbyn and at least one of whose contributors has described herself as “literally a communist”. Even wikipedia manages to get that right! Gary’s interviewer gives the game away with “Marx” on his T-shirt too. 🙂 Not saying they or Gary are necessarily wrong, just be aware that like everyone else, they will have an angle and an agenda.
2. Gary is certainly an engaging and entertaining interviewee, clearly riffing off his “wide boy” image (If you’re from Ilford, you’re still an Essex boy Gary! 🙂 ). Of course, there’s a hint of John Perkins (of “Confessions of an Economic Hit Man” fame) here – “I made squillions doing a despicable job and I hated myself for it so much that I took up activism, but didn’t hate it enough to actually give away my squillions”.
3. I see he’s joined “Patriotic Millionaires” – campaigning for a wealth tax for the wealthy like him and the PM. Of course, wealth taxes have been discussed on this website before but my own view is that they will always fail, because as others point out, once you’ve excluded people’s houses and pensions (and there are sound, moral reasons why you might want to do that (e.g. a lot of people with a mortgage are (i) paying it out of already taxed income, (ii) have been whacked for stamp duty, (iii) continue to get whacked for Council tax and (iv) due to borrowing costs, are repaying anything from 1.5x to 2x or more what they’ve borrowed, so taxing it again seems “unfair”, and on pensions, well, that’s deferred gratification which is always a good thing supposedly and we’re supposed to be getting encouraged to save for our old age, but there’s no point if your contribution limits are restricted, you’re subject to arbitrary taxes on investment success if you go over a certain pot size (or at least, you are in the private sector) and you then have to face a “wealth tax” on top)), the vast majority of people have no other real assets and there aren’t enough squillionaires who will actually stick around or structure their wealth so that they pay maximum taxes.
4. I’d have more time for people like these “patriotic millionaires” if, instead of campaigning for taxes which will ultimately just end up clobbering people in regular employment, they simply just paid money over voluntarily to the government. There’s nothing stopping them doing that – all the details are openly there on HMRC’s website at https://www.gov.uk/guidance/voluntary-payments-donations-to-government – they can even specify if they want it to go towards paying off the debt or spending! So why don’t they crack on and lead by example?!
5. Of course, the real chuckle is at about 23:37 or so in that video where he talks about “not being punished if they’re wrong, not rewarded if they’re right” and “I’m not asking for these guys to be spanked in the street, but at least admit they were wrong”. Of course, if we were really in a capitalist system, we would have that – successful companies / entrepreneurs do well, unsuccessful ones go broke. But of course, we don’t actually have a capitalist system – at least not in the UK – what we have is probably more of a corporatist system where big companies, with links to government, do well and SMEs (the “real” capitalists) find the regulatory and financial deck increasingly stacked against them – HR and other compliance costs and IR35 issues are much less troubling when you’re a very big company with the ear of government. The UK then compounds that by having a very “anti success” mindset and a view that those who are rich can only have gotten rich at someone else’s expense – if not by outright exploitation. At least the USA (for now) still seems to celebrate hard work and making a success of yourself.
6. Not touched upon really in that video, but lots of the major countries in the world had left of centre style governments in place for good periods after the crash of 2008 –
UK – 2010-2015 – Coalition. Centrist at best, but really soft left. Corporatist.
USA – 2009-2017, Democrat under Barak Obama, with the Senate being democrat for both his terms, the HoR admittedly only for the first. Definitely corporatist.
France – Socialist PMs and president from mid 2012 – mid 2017. Essentially corporatist.
Germany – a bit more confused (actually, very!), and a notionally “conservative” Chancellor (Merkel) from 2005 – 2021 but actually, 3 of Merkel’s 4 terms were in coalitions with the left wing SPD, with the vice chancellors in each of those 3 terms also coming from the SPD. If not tacking leftwards, then definitely corporatist.
So, a lot of major economies with at best centrist governments for good parts of the last decade and a half but actually more left of centre or, if you prefer, “social democratic”. Taxes higher, borrowing higher, welfare higher, more corporatism. Now, you may see those as good things, but have they made your average citizen better off, or more “free” during that time? Personally, I don’t think so.
Can’t blame capitalism for that little lot, because it’s not capitalism (note: corporatism is not capitalism, but it suits a lot of people to conflate the two).
7. Apparently Gary predicted the rise in house prices and cost of shopping during when COVID hit. Gee, really? Suddenly, when your movement outside of your own home is curtailed, there’s suddenly going to be a premium on bigger houses with gardens? You don’t say! Demand for online services suddenly goes throught the roof when you’re locked up and can’t go anywhere in person? Or his prediction of the Greek debt crisis in 2011? That one was there from the outset for anyone to see who wanted to – an open secret that the rules were bent to allow Greece into the EU. That one wasn’t hidden knowledge, again, it just suited a lot of people to ignore it (“European solidarity” anyone?) Again, hold the front page. This Gary guy is a genius!
Of course, lets also remember, in the UK at least, the Labour party and its union paymasters campained for longer, harder lockdowns. How’s that for the party of the working man doing their bit to entrench inequality? 🙂
Over in Wales, you also had the amusing spectacle of a very left wing Welsh government putting incredible restrictions on local shops and businesses (those evil capitalist bar stewards!) whilst letting global megacorps like Amazon have free reign! Talk about cognitive dissonance!
And as a resident of Scotland, well, the less said about my home nation, the better!!
Lockdown should have put paid to all the chattering about the benefits of a UBI – in fact, what we saw when it was scaled up from small scale trials funded by philanthropists to a nationwide level, was that it produced galloping inflation. Who’d have thought that “free money” wasn’t actually free? If you pay people up to 80% of their previous wage to do absolutely nothing for 2 years, guess what – production and productivity nosedives but demand holds up amazingly well, leading to, you guessed it … INFLATION!
Now, there’s a separate question about whether it was the right thing to do to support jobs during the pandemic, but people need to be honest that it came with a cost. You can’t blame everything on Liz Truss.
Anyways, for all that, an entertaining hour and a half.
@TLI > in the long run, we will be heading for a new form of feudalism
Yanis Varoufakis also makes a case there is a trend towards feudalism.
Closer to home the massive rise in BTL facilitated by the 1980s selling off of council houses looks like a form of feudalism too.
@Dragon #55: Yes. I think Gary falls into the box marked: high credence that he has something interesting, maybe even useful, to add to the debate; low credence that it’s likely to be provably correct (whether or not it is in fact actually correct); and near certainly that’s it’s very far from the last word on the subject. He’s more persuasive IMO on his own YouTube channel ‘Gary Economics’.
I also think that it’s refreshing to have some attempt at analysis from someone who has had skin in game trading interest rates and who’s also not of the Austrian school of economics, but not necessarily coming at this from a Kenysian or MMT perspective either.
Agree with you that we all have our biases (or priors, if you will) and that Gary’s no exception; but he certainly doesn’t try and hide them.
I suppose that I feel some affinity for Gary here as my head is somewhere to the right of Brown and just to the left of Blair, but my heart is to the left of them both (although I never liked Jezza).
@TI It strikes me that there may be an article or two to be written on some of these comments, many of which bring interesting perspectives and valuable thoughts. For example, I don’t disagree at all with what @ZX says about the likely SWR at the peak of the 2021 mania (#46) but it could be argued that there’s a tension there with the 4% rule, which is supposed to work in pretty much any historical scenario (Monte Carlo analysis), even including getting off to a shocking start.
I think the glib answer would be that the 4% rule isn’t infallible and @ZX has identified one of those occasions when the 99% probability of success isn’t going to pull through. However it seems to be worth exploring, and I’d be interested in @TA’s perspective as a recently-FIREd person who hasn’t had the most favourable sequence of returns from the outset.