Early Retirement Dude

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Alchemy

I’ve been reading Memiors of Extraordinary Popular Delusions and the Madness of Crowds (free on Kindle!) and I’ve got to the chapter on alchemy, the philosophers stone and the water of life… one paragraph in particular stands out:

“Three causes especially have excited the discontent of mankind; and, by impelling us to seek remedies for the irremediable, have bewildered us in a maze of madness and error. These are death, toil, and ignorance of the future”

Alchemy, or the means to turn base metals into gold and silver, was a big thing for a long long, long, time only moving out of favour as the rigours of scientific endeavour starting making their presence felt. The book lists lots of people who wasted their lives seeking a means to allow them to cast a magic spell and have gold appear instead of toiling for it. The book also goes into the tulip mania, the South Sea bubble and other cases of mass hysteria when companies offered the impossible in the markets, amazing riches in short spaces of time, with surely no risk.

To ask whether we are in the middle of a stock market bubble is not a new one reading this and a couple of other things made me wonder about the passive debate and whether it’s creating its own passive bubble.

Firstly what is a bubble, google will provide some good alternatives, I’ve heard that its irrational exuberance or fundamentals getting so far out of whack that the mean reversion is hideous. Or long dated exposures on short term money. Others will be able to explain better than that and everyone knows a bubble after it bursts!

Is this a stock market bubble? Are we in the midst of a passive index mania? Can anyone get rich quick? Is the popular delusion that you just need a simple tracker and that’s it, let riches come your way?

The S&P500 is very high, the Shiller PE has only been higher twice and that was before the Wall St crash and the dot come boom. The Reformed Broker said: http://thereformedbroker.com/2017/05/09/into-the-teeth-of-the-next-bear/

If we are in the midst of a mania that implies lots of people involved who have no idea and simply participating gets them rich. If so, and when therefore markets correct, those people will be burned and will not come back to the market for some time. That implies lower returns for longer and potentially the comeback of actively managed funds, even if that is only a reaction to people rotating out of passives.

No matter I hear you say – periods of lower performance are find because that means I’m buying cheaper units so my future returns on those units will be higher, so fine. However, I was also listening to the podcast (by Capital Allocators) where they discuss the 'Bet with Buffet', you know, the one where he bets a hedge fund guy they can’t beat the S&P500 over a ten year period. Well, in that there are a few excuses for losing but equally there was the assertion that the S&P hasn’t had such a strong run over such a sustained period.

This isn’t to say simply following the market and using passive indexes won’t continue to work and outperform a multitude of active funds, but has this period of outperformance been artificially driven? If it's artificially driven up, can it be artificially driven down? If you’re wholly passive and expecting a 7% or 8% total return and that falls to 4% or 5% for a similar period, 10yrs, how does that impact your retirement plans?

It seems that as soon as something is entirely assumed in the market such as; “passives are the only way for performance, everything else fails”, it seems the rug will be pulled out from under you. Maybe I’m just reading too much about the markets at the moment from a FIRE lens which applies the passive approach a lot more than others, however it seems unlikely that markets can continue on the winning streak and the above is a possible outcome following a big drop.

When thinking about all this I remember a sketch from Mitchell and Webb. Webb asks Mitchell about alchemists. Mitchell, a stockbroker, provides an explanation and then asks if Webb had ever thought about the coincidence that the allure of alchemy faded away through the 17^th and 18^th centuries just as stock exchanges came into being across Europe…

I’m not, and can’t, suggest an appropriate alternative for you, nor can I reveal the future, but like most things it pays to keep an open mind and a check on your emotions.

Great post

http://tonyisola.com/2017/05/the-ultimate-alternative-investment-happiness/

A lot to take from this and a lot is easy to forget when climbing the slopes towards financial independence.

Tips and tricks

I started writing this in a longer format and it sounded terribly smug, so I'll provide the short version. If you're reading this, you'll have a good idea of what's what anyway;

Assumed income - I travel a fair amount with work so my pay is never static, always different with expenses. It's further skewed by the pension contributions and healthcare etc, so it's a bit all over the place. To this end I started assuming my actual pay was what it was prior to my last raise. This means there's always a little more at the end of the month to put in savings!

Net worth - really glad I started monitoring this. It's not like I've suddenly saved a load of money, but it really keeps the discipline on watching the pennies as I found I was tricking myself to the upside and didn't necessarily deserve the pats on the back I was giving myself.

Savings targets - If I take the free money my company gives me towards my pension as free money (not unreasonable) then my automatic savings rate is just under 50% pcm using post tax income. Having learned the sky doesn't fall in if you push yourself a little more I've bumped up the pension contributions to hit this level. Now I'll take a pause and even, whisper it, maybe treat myself with whatever is left!

Looking at it another way, I am automatically saving two and a half months of spending every month. So, say my average personal spend per month is £500 - lunches, the odd drink or night out, new tyres for my bike, take aways etc, I'm automatically saving £1,250pcm. It's not just going to cash, I wouldn't be able to call on the money that goes into pensions etc if I needed it, but it's a nice way to think about it!

It's clearly massaging the numbers for impact, but when I think back to where I was a few years ago, it's a massive difference and goes to show what can be done when you focus.

Tie the above together and hopefully the snowball will grow just that little bit quicker.

The return of Gordon Brown thinking?

The more we get into this, the more that Brexit seems like a bad idea. The more the Tories obfuscate and delay, the more it seems they are either rubbish and ill-prepared, or realise just what a bad hand this is. I say Tories, what I mean is those having to deal with it, not the gang who are so fixated on leaving they would seemingly be happy to impoverish the whole country to prove a point, or increase their perception of self-worth.

Anyway, I’ve been thinking about the relatively infamous session of the select committee where David Davis said the dog had eaten his homework  when asked what the cost to the UK would be of leaving the EU without any sort of deal. He, sort of, admitted that crashing out in this way would mean, amongst other issues, loss of passporting rights for financial institutions, loss the European health card, open skies as well as a range of tariffs on goods and services. All things that would hurt us, but, you know… #takebackcontrol

His excuse to the teacher was that he needed to consider department by department, industry by industry what the impact could be and how it could be mitigated. One example of such mitigation was the a new computer system would be able to authorise goods moving across borders in a matter of seconds, not days or weeks as might otherwise happen, which to some companies would off-set any issue of tariffs which would also be imposed.

I see his point, I’m sure it would help and might even make the difference when it comes to a 10% additional tariff to sell into the EU. Would it against a 30-40% tariff as agriculture would get hit with? I don’t know, I don’t run my own international business, but it seems like a much larger hurdle to offset.

The other issue is you’re still selling into the EU so you have to meet the standards and rules set by the EU and a system which allows access into the EU in seconds, can also reject it in seconds too. So if you don’t meet the requirements, no trade, oh and we won’t have any say on those standards either, but, you know… #takebackcontrol

So how else could the Government mitigate these tariffs?

Something along the lines of the Government rolling out the lower corporation tax regime they are touting? The idea of lowering it would be to help attract companies to set up here and offset the tariffs raised from being outside the single market. A low rate also aims to reduce the benefit of legitimately avoiding paying tax. Apparently lowering tax rates, and presumably being consistent about their level into the future, increases the tax you receive as companies and people pay fewer accountants to find schemes to shelter their income from the taxman. The UK corporation tax level is currently 19% - too low, too high? Who knows, lower it further could see an increase, or it could start to reduce the tax take if it’s currently at the right level.

The other fiscal levers the government can pull is personal tax rates. They’ve already raised the tax free rate to £11.5k pa and you can stick £20k into an ISA.  There was a promise in the 2015 general election to raise the level where you pay the higher rate to £50k, though I imagine that might get lost in the upcoming manifesto.

If the government lower tax rates for the rich to incentivise them to stay in the same way as for companies, then the issue is what happens when the next recession occurs? Unemployment is very low, participation rates are really pretty high, tax rates are low and potentially going lower, but the deficit isn’t forecast to be gone for another few years.  

If something were to trigger a recession in those next few years, like, I don’t know, a botched negotiation by May, then how does the government stimulate without borrowing massively? What other levers are there to pull – interest rates, not at the moment, cutting taxes, apparently not, more government austerity, after 7yrs, seems unlikely to be successful. So they would have to borrow and spend, currency goes down further, inflation goes up more, but if taxes have to rise it removes the incentive for international companies to base themselves here anyway further reducing the tax take.

The UK leaving the EU might not trigger a recession by itself, it could even see the wonderful outcomes promised by team Leave… but it won’t mean there won’t ever be another recession, and to pretend otherwise makes you Gordon Brown. To go ahead with a hard Brexit and the fiscal measures and mitigation which have been hinted at in order to retain competitiveness is, on present course, leaving very little room for manoeuvre for when the next downturn comes.

To get a decent deal with the EU, whilst being able to trade freely with the rest of the world will require a level of skill in negotiation and diplomacy which seems utterly beyond the current government on current performance.

It was the best of times, it was the worst of times

This time a month ago was Christmas Day! I know, seems like longer.

In some ways Christmas is the perfect storm of conspicuous consumption, socially obliged spending and unnecessary unhealthy excess. On the other hand it’s a way to get two to three weeks off work easily with all the bank holidays and if you manage your family duties then you can spend a good majority of that time doing whatever you like.

A lot of the focus of PF blogs is about what you would do with the extra time if being a wage slave wasn’t a necessity. Well, what did you do over Christmas? Have a nice long break at home, not spending much by seeing friends for walks in parks or taking advantage of the quiet time by going to the gym when you want and taking in some free museums or other attractions in town? Did you work? Aiming to add some extra capital to add to the freedom fund?

Or did you go for it a bit and think, well, it is Christmas after all? Some FIRE’y types might say it should be cheap outings, enjoying the down time doing things in your way. Others might say unless you’re already rich you should stay working as hard as possible.

Assuming that you’re on The Path and have a good knowledge of personal finance I say, for what it’s worth, that you have to do what you want to do whether working or early retired. Taking Christmas as the example, if you are a massive fan then why deprive yourself of the things you love doing? Surely the point of aiming for an early retirement is to be able to focus on the things you love.

Not only that, but as I’ve said before, it can be counterproductive. If you’re driving your spending so your savings hit x25 annual costs but in so doing deny yourself the pleasure of those interests it means you will face extra costs post work… so your x25 figure must get bigger and  you risk running out of capital sooner.

I think you need to continue to indulge and work on your hobbies, interests and passions during your work life so you are better set up for your post work life and in a better place to pay for it. What would be worse; thinking you're signing out of the office for the last time, only to realise a year later you actually have to go back to work as you don’t have enough cash? Or working a bit longer, knowing really what makes you tick and that all your costs are genuinely covered allowing a smooth, stress-free, transition to early retirement whilst having enjoyed life more in the lead up?

So if your credit card bill is a bit bigger than normal, don’t let it get out of control, but don’t admonish yourself either, just factor it in to the bigger plan.

Is solar worth it?

Feed in tariffs, low or no electricity bills, limited reliance on the grid and ample opportunity to be a proper smug so and so to your friends! What’s not to love!

I’ve briefly looked into the possibility of solar in the past but it’s never been the slam dunk it’s advertised as, so I thought I would lay out my thinking here to try and get it straight and come to a conclusion, for now.

Previously I’ve gone so far as to have a couple of quotes put together, so the amounts below are roughly right tweaked for simplicity, and give a decent indication of the way the wind is blowing… or which way the sun is shining, to butcher a metaphor!

Assume we have a total gas and electric cost of £100, of which £70 is electricity, that’s £840 of electricity costs per year.

Against that we assume that however many panels we can cram on the roof will account for 65% of that cost, so a saving of £546, say £550 a year.

On top of that you get Feed in Tariff and export payments of maybe another £180 a year, so a total benefit of £730 per year (£550+180). Sounds good!

A couple of years ago the approximate cost was £8k to have this all installed, but a bit of a search on line shows the cost coming down to maybe £6k.

Some basic maths says £730 / £6,000 = 12% yield – again, pretty good, much better than the FTSE!

So, if you stop there, that’s all good. Money invested £6k, return 12%, lower bills, greener planet.

Reversing the maths (6000 / 730) gives 8.2, ie, just over 8yrs to get your money back on the initial outlay. However, whilst this is an investment, in that it provides a return, it is not one which can be assumed into perpetuity because this is a piece of machinery which will fail.

So, if you want perpetually low electricity costs you would need to save the money from the reduced bills for 8yrs to pay yourself back for solar kit number 1, and then wait another 8yrs until you have enough to replace the system… in theory, 16yrs until you actually realise your “free” energy…

If the system can run perfectly for 20yrs, and some give guarantees for 25yrs to match the feed in tariff contract, then you’re looking at 4-8yrs of free energy.

Is it worth it?

Maybe, but life may get in the way. You probably won’t stay in the same house for 20yrs. You could keep all the savings looking to move after 7 or 8years hoping the person buying your house will be happy to inherit an aging solar system and happy to pay for replacement kit when the time comes… but that’s not the reason why you move house is it. Ignoring general house price inflation do you get premium for having solar and cheaper energy bills… maybe… enough of a premium? Who knows. But what happens when you move to another place with no solar – do you give up and pay more or shell out again for another new system?

The alternative to subsidise your bills would be to put the same money in the market and use the dividends to pay the electric bill. But you aren’t going to get 12%, or not sustainably anyway, so to get the same reduction to your bill (£45pcm) you would need £18.2k (assuming a 3% yield and no tax), or £13.6k if you’re happy with the 4% rule. Or live in darkness in the winter…

The initial fag packet conclusion is either the cost of the panels has to drop a lot more to a pay-back period of 5yrs or less, or it’s simply better to save the extra and stick it in the markets?

I would certainly be interested to hear if anyone has looked into it more closely, or thinks any of the above is wrong. Please let me know!!!