Retirement income

I read this article on Bloomberg today. All good stuff about increasing retirement savings, but the most interesting thing for me was the subject's target of replacing 100% of earnings because of expected older age retirement care costs, rather than an expectation of spending like a demon in her golden years.

Thankfully in the UK the NHS provides an excellent safety net for health requirements, but is clearly undergoing change. Whatever your political persuasion, baby-boomers are starting to retire in big numbers and even for the so called 'gilded generation' with their massive pensions and mansions (!) they will lean on the state's infrastructure like never before. This means either higher taxes, higher borrowing, both, or a zero sum game where other departments lose out... oh and that generation are those who are most likely to vote, so they may plump for higher borrowing since, you know, in that respect, time or the lack thereof, is on their side.

But it makes you think - with the above pressures how will you pay for your old age, not just your early retirement?

Perhaps the answer lies within the FIRE community? If you are following this path you're more likely to be fitter. It's notable how many FI bloggers are active people generally, not just cycling to work to save cash. You're more likely to eat better - more home made meals, fewer pre-fab sandwiches chocked with salt and processed meat. When you've hit your escape number any work you do will be because you want to and because it makes you happy, so throw in greater levels of satisfaction and lower stress.

Finally, when you achieve FIRE you're spending will probably drop - see The Escape Artist for proof of that - so as a FIRE devotee you continue to add to your savings pile as you spend less than your passive income streams provide. Combine that with a few more decades of compounding on top of those already accrued and the ability to generate income rises in the period between early retirement and older age.

So, maybe in pursuing FIRE you are more likely to delay incurring those costs because of a longer more positive work life balance and self-sufficient attitude, and then be more likely to meet those costs when they do need to be incurred because you will have been adding to and compounding your wealth for longer.

Seeing red

So the stock markets are busy at the moment, maybe the traders need to top up their children's school fee accounts? Those lifestyles don't maintain themselves you know!

Up and down, up and down - according to Reformed Broker in the US they are seeing a significant increase in the number of days when the market is up or down over 1% - I haven't totted up how the FTSE is doing, but if feels like it can't be far behind.

So what now after the c.15%  fall I was looking for - well, seeing red is never great when you log into your trading account, but there it is, about half of my investments are under water. Some by a few pounds, others by reasonably significant percentages. This makes me feel uncomfortable, obviously, I don't like it at all, but it's worth sticking with because it's caused by and will be helped by reinvesting the dividends.

I generally stick to ticking the box that reinvests the dividends, which means all through the time when the FTSE was going from 6,200 - 7,050 roughly two years from 2013 to early 2015, before tumbling down to where it is now, I was buying shares. These are the ones that are now underwater by a few pounds as more expensive versions of the same shares were bought, taking the average price per share up. The larger losses arise from purchases where I felt I needed to act, bought too quickly and without enough thought - hopefully they will come back and I'll be able to get out of those holes and learn some lessons!

Pre-correction I was earning a yield of just over 5% in good blue-chip, main-stay companies which I bought and add to during dips. I feel this compensates me for my lack of knowledge and skill and increases my chances of avoiding capital losses whilst receiving an above market income return - nice and simple! That yield will now be boosted by the falls through new purchases and top ups along the way.

A slow recovery / this current bouncing about gives me time to think and hopefully act more rationally - my musings on buying shares in the oil industry show just how long I can take to think about things! I'm happy with that as my personal share dealing account is not my main investment pot, across them all I'll be buying more shares and units all the time at, hopefully, discounted prices supercharging future returns - from that point of view, it's all good, but that doesn't make seeing the losses any easier to bear.

I do also genuinely see these as paper losses, crystallised only if I hit the sell button. Since the money invested is surplus to everything else I spend on, I don't need to sell, which generally puts me in a decent position mentally.

So I'm okay seeing red at the moment. Deals are hopefully on offer, rather than "correct" valuations. I've bought Vodafone and the Vanguard worldwide high yield ETF during the slumps, so we'll see what else is out there in the next few weeks...

House price bubble?

Okay, this may seem obvious, housing in the UK is way too expensive, but is it entering bubble territory with the potential to deflate in an uncontrolled way.

I don't know if we're about to hit 2007/08 again. As a home owner I hope prices don't collapse and you can draw your conclusions of my ability to forecast on a macro level from the below - I'm an ordinary bloke talking about what I see. In any case the Government has shown a deft hand at re-inflating asset prices - particularly house prices - when it looks like negative equity might hit voters.

As things stand interest rates are rock bottom with no official pressure for them to go up - inflation is low, there are economic concerns abroad / at home, the Government has a massive debt pile to deal with and a little inflation would actually help them quite a lot (but I'm sure that's only a small consideration for the MPC!)

So debt is cheap and the house price Ponzi scheme has been boosted by the Government with help to buy and other bribes. Another factor to consider is lending standards. I personally thought the Bank of England did a good thing 18months or so ago - they tightened the criteria lenders had to follow to approve lending - I've been through it, it's hellish, long and tedious. You get asked how much you spend on clothes and shopping and gas and water, presumably you can stop your water intake to pay the mortgage...

Anyway, instead of using the sledgehammer of interest rates to knock down house price growth, and everything else in the economy, they just focused on telling banks not to lend lots of money to people who can't afford to pay it back. Well done.

Are those standards slipping? Something which would indicate an unseemly bubble. Have the rigorous controls become a tick box exercise more than actual review? This could provide a third leg to the bubble theory.

To conclude my summary of thinking on this I bring in my Kev "Grand Designs" McCloud Housing Index*. Have you seen any of the present series? The houses are monumental which suggests a fair amount of Hubris, but the amount and ease with which people are taking on debt is the issue. The one with tax accountant was great - this poor chap had a brain hemorrhage and having survived it decided to build a massive house without a proper budget. It ended up costing several million, that's million, with an m, pounds. It was "paid" for with over ten different loans including bridging finance at one point.

Ignoring personal decisions about how the house was supposed to make life better for the family involved, though how mountains of debt makes life better I don't know, it's interesting to see the houses built over time against the backdrop of the health of the economy.

A couple of series ago, the projects built between 2009-2012 ish, it was all highly energy efficient, smaller more innovative designs. Now that's all out the window - so far big is back and only the best concrete will do (paraphrased, but the sentiment was used in this show, it's insane.) A few series before that, projects being completed c2006, were mostly very large and paid for with easy loans from the banks...

Clearly this is not scientific and I don't want to be a perma "we're doomed" bear about the housing market, but its interesting to draw the comparisons. Maybe Nemesis is waiting round the corner to bite?


*not a real index

Further reading:
http://alephblog.com/2011/11/05/bubbles-are-easy-to-spot-well-almost/

I wish I'd written it....

I really like this post, it sums up the majority of my motivation for seeking FI.

There are a lot of posts written about reasons why people seek FI - sticking it to the man, quitting the rat race, giving the finger to a boss, company or industry you don't like. I'm in a lucky-ish position in that I have nothing to complain about, I am pursuing FI in the most part for reasons neatly laid out in this post:
http://www.beardeddragonfinance.com/borrowed-time/

Oil revisited

Since the last post on this things have been "interesting" in the markets and I'm getting tempted by the oil majors.

In the blue corner:
- http://www.reuters.com/article/2015/08/29/us-berkshirehathaway-phillips-idUSKCN0QY0L120150829
- http://theconservativeincomeinvestor.com/2015/09/01/royal-dutch-shell-from-one-correction-to-the-next/
- http://alephblog.com/2015/08/30/we-still-have-a-buck-in-the-till-were-solvent/

In the red corner:
- Me.

I get tempted to go for it and then think about how the market has changed now from 2008/09. OPEC seem to be washed up and the ability of US frackers to gear up when the market picks up should keep prices lower for longer.

Recognising my lack of knowledge is why I keep reading, generally and specifically. In this case, there is a fair amount of information pointing to the plunge and a 7% yield would be rather nice to complement the portfolio.

The current correction seems like it's not as V shaped as in the US, so I can deliberate a little longer...

As always DYOR.

FTSE correcting rapidly

So the market is crashing down to the 15% reduction I said I was hoping for... I would like to take this opportunity to confirm that I am not part of the Bilderberg Group, Bullingdon Club or an Illuminati puppet master setting global stock market prices!

Given the sell offs I am looking to Vanguard high yield ETF as a default buy when there are falls like this. The FTSE100 is so commodity / energy heavy that all the highest yields are related to those sectors, so I'm looking about for companies hit simply because they are listed - Vodafone looks interesting with some heat taken out of their share price given the amount of investment and their general business model.

The opportunity to bag some bargains is quite exciting!

As always, good luck and DYOR...

To BP or not to BP?

BP currently yield just under 7% and a market cap of c£70bn, it’s a global, vertically integrated company who generated $32.8bn in operating cash flow in 2014. Share prices across the industry have fallen significantly recently providing a potential chance to buy slices of companies at multi-year lows – what’s not to love?! The world needs oil and they’re providing it!

There are two issues at the moment – the first is the oil price, crashing through the floor as Saudi / OPEC do battle with the US shale producers, the glut builds, supply and demand do their dance and we, the consumers at the pump see little change in the price being paid… but this puts pressure on those dividends. As a contrarian you might take it as a bargain and the best time to get in. The oil industry is used to shocks and upheaval and this is no different, buy on the cheap, wait for the rebound and off you go, capital gains and a strong, high dividend.

Hopefully a period of low prices will help stimulate general economic activity and prices will drift upwards, all your shares follow and all is well. Except it’s not because the second issue and elephant in the room is the fact that oil will become economically unviable.

There are two ways this could play out; Mad Max style, or like the gradual replacement of steam locomotives, with change coming quietly and without revolution, no one will really feel any difference because you’re still getting a train, it’s just running on different juice.

So, should I invest in an oil company? I’ve no doubt that the larger companies will survive, and may be a profitable bet in the short term and they are used to dealing with the fluctuations of a volatile market. The question is whether I could fire and forget for 20+ years.

In considering this and keeping an eye out in the press I wonder if it is with deep irony, crystal clear foresight or a sense of moral imperative that the likes of the Rockerfeller investment arm and Norway’s sovereign wealth fund are divesting from fossil fuels? Is there a still a business for the likes of BP and Shell in 15yrs? The pace of change and the ability for individuals to create products that change the world combined with the fact that climate change risks seem to be more mainstream means there may be a snowball gathering pace, coming to wipe out our dependence on fossil fuels.

We may already be witnessing the first revolutions – it is not inconceivable that in 10yrs you will have a solar array on the roof and a battery pack in the garage allowing you to draw only a small amount of electricity from the grid. This would mean the current lot of power stations don’t need to be replaced with such urgency. Electric cars may become the norm, congestion falls, oil consumption drops and car ownership in general becomes the equivalent of owning a horse, a pleasant pass-time for those who can afford it, but not actually practical or cost effective as a means of transport for the majority. Perhaps 3D printers become standard kit in everyone’s home and the waste associated with current production and distribution methods falls away, further limiting demand for oil products.

The above is science fact, not fiction, these and many more will disrupt different industries, the question is how much. Oil companies are also threatened from more conventional areas such as state backed companies of nations who may not have governments or judiciaries that are beyond reproach.

How is big oil responding? A number of European oil majors including BP backed plans to introduce a “substantial” deal for energy efficiency recently, and websites include references to renewable energy generation. However, these are not anywhere close to replacing, or even hitting parity with oil revenues, so you could say it’s just lip-service to keep the active investors happy and keep the CSR / PR team in business. The Shell deal with BG gives them “cleaner” reserves, but that’s prolonging the status quo, not leading the industry into the solar powered uplands. Maybe they are secretly developing the renewable sources of energy, seeking to corner the market and nimbly outflanking the still fledgling renewables sector ensuring their ongoing cash and profits for generations… I hope so, they have the clout to at least go some or most of the way to doing so.

I fear it may be death by a thousand cuts, of Porter’s classic five forces model, they could be said to be facing all five. Which brings me back to the main question – take 7% income now, but risk the industry declining into dwindling profits, or look to invest in companies that will have a viable model in 15yrs time (potentially when I’ll be hitting FI if things go well!) I suppose the answer is both. I can’t see BP ceasing to be, but will it go nowhere over the next ten years and will the dividend be cut reflecting a lesser company? The thinking continues!