Here’s to interesting times in 2015

Ah, New Year, a time for revolutionary change? Sophie Heawood has some point that January is a bad time to start anything new in, we really should have gone for September. It’s brass monkeys out there and the cruel coldest month of February still awaits. The fire festivals of the shortest day have passed. Heck, after the excesses of Christmas we could at least have advanced the 28 day shortest month to January to give wage-slaves a mini-boost. Mind you, when we look at the results in places with “Doros”, a double salary at Christmas maybe that’s not such a good idea. The WaPo is uncharitable about these things, and Fortune magazine is particularly cutting about giving wage-slaves festive breaks

The 14th salary works like this: Greek workers get their annual salary in roughly 14 instalments. On top of 12 monthly payments, employees receive double their paychecks in December, right in time for Christmas consumerism. They also receive half of their monthly spending in the spring to shell out on goods for Easter. Then they get another half-salary boost in July, before their traditional summer vacation.

In the interests of balance, Slobber takes this kind of thing to task, but hey, never let the truth get in the way of good journalism I say 😉

Glastonbury Tor in the mist
Glastonbury Tor in the mist

The Ermine spent a while mulling things over the Winter Solstice in Glastonbury, and read a lot. Reflections and ruminations are not the things for a New Year. It’s about carpe diem, the opportunities on offer, and what with the return of the Eurozone crisis, an election here in the UK and the Russian brouhaha there is the scent of hazard and opportunity in the air. We haven’t had a good rumble in the markets since 2011, and it’s getting harder and harder to turn a decent yield with high valuations.

It’s a funny old world – the price of oil, for instance, is lower than the marginal cost of new production. UTMT has a nice piece on this. There’s a link to the old boy Tim Morgan, he of ex Tullett Prebon fame and the report “Britain – Armageddon – there’s no way out of here’. Tim’s in a new guise and brings us the pithy summary

what we are witnessing is not the dawn of an age of cheap energy.

Low oil costs look like good news but when it’s lower than the cost of new production then it isn’t. Unless we’ve all decided to use a lot less energy, and lest we forget just how hard that is, the humble refrigerator in your kitchen is consuming the rough equivalent of the daily output of two horses.

after a long glide, it’s time to see if the engine of finance starts again for me…

This could be the year that I return to having an income. I will have have coasted on savings and investment income for three years since leaving work – that’s 10% of my working life before I draw a DC pension, which is indeed made up of more of those cash savings. One of the bizarre things about financial independence is how everything is set up to qualify someone’s financial probity in terms of their income. With no income I am a financial deadbeat in the eyes of banks. At least I didn’t have trouble switching energy provider, but I struggled to borrow money and probably wouldn’t get a credit card, a mobile phone contract or a loan. Most of what I borrowed has come back to me now and the rest is coming it over time. but as usual you can’t do anything with cash these days…

The Lorax. He's a fellow who can tell you a thing or two about buying thneeds on your credit card
The Lorax. He’s a fellow who can tell you a thing or two about buying thneeds on your credit card

It’s perfectly understandable to banks, apparently, for you to want to spend money before you’ve earned it, particularly for your consumer thneeds – but have assets in the wrong place or tied up in pensions or an ISA and lenders aren’t interested. So I am finally returning to the salaried – or rather the pensioned, maybe, and cease being a financial unperson, when I get my cash savings back from those nice fellows at Hargreaves Lansdown with the Chancellor’s 20% bung on top.

I was/am a salaryman at heart

The Ermine is a maverick, but I have to say I was entirely conventional and non-entrepreneurial in that I hate not having an income, even though I had enough savings to cover the intercession. Spreading out previous savings, indeed making one ad a half years savings stretch to three years just doesn’t feel like a stable situation. For starters, how the hell do you qualify the answer to the Micawber question – am I spending less than I earn? I could do this as a logical and arithmetical exercise given the time before I could sensibly draw my pension, but if you have no income then the gut feel is always

‘spend as little as possible, this sucker’s going down, play for time’

It made me over-cautious in spending, particularly in the early days. Unlike the salaryman, there’s no easy way to qualify a good rate of spending with no income. You have to take everything with you once you leave work – and your savings need to address not only your running costs but also the risk of the unknown unknowns. Those risks are much higher at the start of the journey than at the end, so it is rational to minimise spending at the start of any period of living off fossil savings[ref]cash savings are non-renewable, unlike a share portfolio in drawdown over decades, but the stock market is unsuited to hold savings for a non-earning period of two or three years because of its high volatility[/ref]. Playing for time sounds okay and sort of fail-safe, but time is also a fossil resource – they ain’t making any more of it.

Once I have an income the answer to Wilkins Micawber is easy – as long as my spending minus my dividend income is less than my pension income then old Wilkins will be happy[ref]There are cases imaginable where this wouldn’t hold, but they probably don’t apply to me[/ref]. I had no mental model of living without a steady income because all my adult life I had had one. Unlike most UK personal finance folk, my retirement was an unceremonious scrabble for the exit rather than a carefully planned strategy.

But it worked in the end – I can see my way to getting access to my savings. It was overly pessimistic to assume I would have zero income across the intercession between finishing work and drawing a pension, although I do appreciate the changes that made it possible to swap savings for an income boost, and hope they aren’t rolled back by the new Government in May. The changes in the workplace that turned what had been an interesting career for the most part into a gamified paint-by-numbers miasma of mockery, metrics and mendacious quarterly ‘evidence’ for the performance management system is also providing new routes to market and ways of microselling niche content that offer occasional opportunities for a more creative Ermine following my interests. I don’t chase work, but I don’t turn down sales if I’ve already done the work 😉

In the Economist’s The Future of Work series there is an interesting throwaway line about the looming future of work

The on-demand economy is unlikely to be a happy experience for people who value stability more than flexibility: middle-aged professionals with children to educate and mortgages to pay.

though it will be great for those who haven’t picked up financial commitments like mortgages, children, dogs, tastes for fine living and debt. Provided they have talent, that is. Indeed the drumbeat of the changing world of work is getting louder, and it favours the opportunist and the unattached/uncommitted. It makes it easier for a retired Ermine to turn recordings into dollars where previously they would have been accumulated as reels of tape, but it seems an increasingly rough ride for many. Which is presumably why we Brits thrashed seven bells out of our credit cards in November. To the tune of £1.25bn. The Ermine has a confession to make – I was part of the problem that month. In my defence I bought productive assets and breathing space with the money, and I have half of it back as cash. No consumer goods were bought with it, but I fear that is not the case for a lot of that £1.25bn.

So I’m looking for opportunities in 2015. Maybe this is the year that the Euro blows, and those oil prices may offer opportunities for buying oil firms and service companies at lower prices. I can’t see the world living without conventional oil for a good time yet. I’m not doing shale, but although Vlad’s always got a really sourpuss look on his face these days he’s in charge of a lot of real fossil fuels. Dude, you need to lighten up.

Vlad on the horn, irreverently swiped from UTMT
Vlad on the horn giving some poor blighter the Third Degree, irreverently swiped from UTMT

2014 shares review

Looking back, overall 2014 wasn’t that bad for me, the Ermine annual unit value[ref]unitisation is a way of tracking your ISA performance that works with the fact that most of us drip money into an ISA year on year,  which terribly complicates other ways of doing that. It is explained in this Motley Fool post. I had to repeat the exercise pretending to only unitise as if I had stayed in cash because I didn’t believe the result at first. The arithmetical result is quite counter-intuitive, compared to simply taking the ISA provider’s total market value divided by book cost after you have run for a few years[/ref] is up over 15% (the FTSE100 total return is up 0.72% in 2014 despite all the bitching that it lost in SP terms). This is despite clocking up two definite cock-ups in retrospect – following my old mate Warren Buffett into Tesco and jumping the gun on the deeply troubled Vladimir Putin’s operation. However, I am saved by the power of diversification – TSCO can go down the pan and I’d still easily be in positive territory for the year. I am mulling over whether I should short the rouble to the tune of that HRUB holding.

Before I slap myself on the back too much, any Brit sat on their backside with a decent exposure in GBP to the S&P500 via an index fund would have had a better ride this year at 20%, they would have got the USD forex boost as well. Although I have deliberately avoided the US market (their TR was 29% in 2013 which I thought was outrageous and setting up for a fall) the Americans have served me better outside my ISA when I exchanged a load of The Firm’s shares for a load of Vanguard FTSE Dev World ex UK which is 50% US. They also did better than I did in my ISA this year 😉 So you pretty much only needed to have a pulse and be in the market with a bit of US exposure to do okay, indeed the surprise in the case of the ISA is how I survived my anti-American bias. Don’t get me wrong, I’d love to have more exposure to the dynamism of American capitalism. I just don’t want to pay the currently exorbitant prices of getting it!

Looking back, it was the years when I didn’t do so well that the seeds for better performance was laid. 2011 wasn’t a great performance on my unit price, a 2% fall. But some of what I bought then did the heavy lifting in 2013 and 2014. I’ve also started to see very high levels of volatility – they aren’t proportionally particularly outlandish but the absolute levels of the changes wrought get larger as time goes by, because the capital base is rising. The salaryman measures things against the yardstick of my erstwhile annual salary, and as capital appreciation and a little inflation pushes the capital base the volatility increases to a very significant part of that annual salary. Put it like this, the difference between the high-water mark this year and the low-water mark is a sum that would have seriously pissed me off to lose as a worker bee. That sort of rudeness is just what the stock market does, and it’s why it flames out most private investors (and yes, I could yet be one of them in future – nothing is guaranteed). I have to use the intellect override this  – I didn’t earn or have the high-water mark and the sun will rise again from the low point. Such is the conundrum of investing – you always have to fight some part of yourself in the endless battle between fear and greed. The only imperfect defence against the myriad of cognitive biases is to inform, to understand more, but also to know thyself.

I’m gradually losing the HYP yield fight as my yield falls as a percentage of the total capital – the annual return is shifting in the direction of capgain rather than dividend income. Some of this is because I am deliberately diversifying away from the UK as the total stake gets larger, which drops my yield (the UK is a relatively high-dividend market), and some of the index funds are accumulation funds so they are total deadweight from a yield point of view.

But then jolly good downturns are the time to build one’s HYP, whereas frothy markets pumped up with QE are the time to either diversify or sell your own unwrapped shares back to yourself in an ISA wrapper to bloodlet some capital gains allowance. Every dynamic system has its systole and diastole, and it’s better to roll with the cycle of opportunities than fight it.


15 thoughts on “Here’s to interesting times in 2015”

  1. Hi Ermine

    Happy New Year to you and congratulations on the “looking back, overall 2014 wasn’t that bad for me, the Ermine annual unit value is up over 15%”.

    I’m still waiting for some fund laggards to sort their end of year out but provisionally 2014 looks to have me on a total portfolio return of 5.6%. So pretty poor compared to your good self.

    Let’s see what 2015 holds…



  2. @RIT Happy New Year! In the interests of balance I am probably taking more risk and have a less well diversified portfolio than you have – after all going backwards in 2011 shows there’s more volatility. I could still get slaughtered.

    Interesting that you’re running the other way and adding a HYP string, the similarities in HYP contents are uncanny, 6 are the same and the other half are questions of style not sector, different telcos, retailers and insurers.


  3. As a comparator I managed to squeeze a small positive 2.6% in 2011.

    Your probably right on the risk front. In addition to a fairly diversified portfolio which is only chasing 4% Real pa my mechanical method is currently forcing me to de-risk as each day passes. My current portfolio is only carrying 51.6% equity. This is caused by my CAPE calculations suggesting:
    – the US is 62% overvalued;
    – the UK is a small 7% over valued; and
    – Aus is 17% over valued;
    all of which force me to be underweight across all equity classes except EM’s where I always target a 5% holding.

    Only time will tell if I’m smart or foolish.


  4. Hi Ermine
    I’m going into 2015 unemployed for the first time in thirty years. I was made redundant in December and, frankly, was ecstatic about it. I was given a nice package and looked forward to a new life. I still am, to an extent, but not having that salary comfort blanket is quite scary. And I’ve worked since I was a paper boy at fifteen! What will I do now? Do I manage my investments, pay off my mortgage, do voluntary work, write a blog, a spot of gardening, get back into cooking, read decent books, take time to pick up with friends and family, get in shape? And then what will I do tomorrow?
    Whatever, I’ll continue to read your blog for advice and support!


  5. @RIT although I didn’t have your depth of analysis I came to a similar conclusion re dev world overvaluation, and targeted EMs and Africa. I still got somewhat soaked on those this year (bar Africa)

    @UTMT January is a rum time to do that as it doesn’t really fit in with the tax year. Still, it’s the traditional time to take stock. And unitising probably doesn’t care that much about when – the rest of this year’s ISA period should get rolled into the Jan 2016 snapshot.

    @Jim McG – Congratulations! Time to take a well earned break. If there’s one thing I’d recommend to the newly retired, it’s take about 3 months to settle before taking on any major commitments like paying off the mortgage. Or indeed making big travel plans – you change, and the retired you doesn’t necessarily dream the same dreams of the wage-slave you.

    @EarlyRetirementGuy I’m all for moving the new year to September – it would be great. Or even one of the Spring festivals – the Vernal Equinox or Beltane would be a more cheery time.


  6. Hi Ermine
    Love the photo of Glastonbury Tor in the mist.
    Also enjoyed checking out The Lorax – I had an argument a couple of weeks ago with a developer who is chopping down trees and hedgerows to build more houses. Our small market town is getting 1000+ houses this year on greenfield land.
    I’m glad I followed your advice and did nothing major in the 3 months post retirement – at first I was guilty that I hadn’t decorated, but now my ideas of what is good is so different (and less expensive!)
    Still not sure where my interests will lie in retirement, but I’ve learned that I don’t want to spend much time on financial analysis, don’t enjoy it enough! (Spent yesterday online struggling with several websites, then phoned 0845 numbers to be told their computers have a problem…) Grateful to you and other UK PF sites keeping me an efficiently passive investor, and as always, an interesting read…Thanks!


  7. “these areas were nuked by Mrs T in the early 1980s”: oh come off it. The South Wales coal industry was in precipitate decline long before Thatcher. It’s an extractive industry: eventual you run out of economic reserves. Harold Wilson closed more pits than Thatcher, but for the same reason. The game was up.


  8. Another good post Ermine and yes, you’re right that it’s difficult if, like you, one has been a “salaryman” for 20+ years. The lack of consistency makes the income vs outgoings difficult at times. Although at the moment, thanks to our craziness, our outgoings are clearly > income, but this should be temporary.

    2015 will be interesting, Greece is wobbling, oil is at new lows, interest rates are at all time lows (and likely to be there for at least another year), we have the possibility of deflation in the UK – already there in the EZ of course.

    There’s no doubt in my mind that QE has inflated asset prices (as that’s kind of how it works) and we see that in equities, bonds even, and certainly property.

    For highly-leveraged folks in the UK, the low interest rates are benign, but at the same time with inflation so low it’s going to be a long, long, struggle to inflate away that debt (unlike previous years).


  9. @TFS it’s not actually my best of the last three. But 2011 stank – but there again it’s in 2011 that I bought some of what’s worked since. I think you need an ebb and flow to swing with the flows of the markets 😉

    @RowanTree I had the flu for the first three days down there, but the flat had a fabulous view of the Tor, so I watched the light change and the character of the Tor change over the day. So being stuck indoors wasn’t all bad. I passed on taking on the climb, however!

    > Still not sure where my interests will lie in retirement,

    Just as in your working life you will change and as different things and people move in and out of your life. You do not become frozen in aspic with that valedictory lunchtime beer on the last day 😉 And so your interests will change. Glad the pause for thought worked – it’s a new phase, and many important aspects of life change on retiring. It would be surprising indeed if aims and goals were the same as those of the wage-slave!

    @dearieme yeah, it was a cheap and easy shot. Some attempt and regeneration might’ve been nice, though…

    @mistersquirrel – that variability is hard, indeed although I register variable income in Quicken it doesn’t feel like income – indeed I am almost variable-income blind when it comes to planning. I consider that sort of income as a succession of arbitrary windfalls, and toss it in the DC pension pot to avoid ending up getting taxed on it. One day I will have to make peace with this, as some of it is starting to look repeatable, but it’s royalty income so pseudo-passive.

    Should be an interesting year, as you say. Greece really does need to go one of these days, but then will it bring the edifice down with it?

    And as for the punters with their overpriced properties, yes, they will love the low interest rates at the mo. But it will make them able to overpay.

    That assumption of debt erosion may not hold in a low-interest low-wage growth world, and if we end up with deflation those debts will start to run after people snowballing in real terms 😦


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