Most PF savers have a stock market accumulation horizon measured in tens of years. I don’t – I realised I was going to take the expressway out of the world of work because otherwise it would drive me round the bend. I was James, not Pat, in this story of how to be a wage slave and play the game, so I did the celibate monk in a brothel thing, saved up shedloads of money and jumped out of the runaway vehicle of my erstwhile career and let it crash.
I was dealt a kind hand by the stock market. You didn’t have to be smart in 2009 to do well out of the stock market. You had to get in it, despite everything saying Wrong Way; it wasn’t easy. I started building a HYP in my ISA in the eye of the storm that was simultaneously terminating my career. On a 4% SWR on my HYP investment capital I can make up the damage done to my pension from quitting early and losing a third of my pension contributions[ref]Because of crafty changes made by The Firm to the pension scheme that last third of my working life wasn’t worth a third of the accrual, reducing the amount I had to catch up[/ref]. From 55 which is not so far now I can use a short SIPP to give me a DC pension for five years before drawing my main pension at the NRA for The Firm, so no actuarial reduction for 90% of it.
Nothing comes for free – I had little fun in the last three years of working, and I’ve run down some separate cash for the last two and a half years. Later this year I am probably ready to re-enter the middle class income fray, but hopefully without pissing away my income/wealth on the sort of garbage I used to do when working. I will spend more, but not at wage slave me levels. There is an interesting perspective from one of the Telegraph’s interviewees about realising a pension that is adequate. I shall never be rich or poor, assuming, of course, that society survives reasonably intact. War and hyperinflation can change that in the blink of an eye, of course…
The Coffee Can portfolio and HYP Rule #1 – do not sell
I started off with a HYP because my experience of stocks have shown me I am a rotten seller – jumpy and fearful, I will bail too early. With an HYP one of the tenets is you don’t have to do that. Over the years I’ve also learned how to benchmark a portfolio. Unitise the sucker – compared to XIRR and all sorts of other ways unitisation is simple, it’s the basis of how mutual funds work except you are the mutual fund manager and, although I don’t decumulate at the moment, it can track how well you are doing as a manager even through decumulation. The instructions are here. My aim is to beat VGLS100, over my investment period and with what I’ve put in over time, because that’s probably what I’d have bought otherwise. So far I’ve done fine. And I don’t have to sell units to derive the 4% SWR income.
The Ermine is a capricious investor, many would say irrational. I aim to buy in bear markets and when people are rioting in search of decent trainers at a knockdown price (revisionist alternative view that this was a correct response to Not Having Stuff here) and things that people hate. I try and take breaks in times like the last couple of years, just buying my own stuff back tax-wrapped instead of unwrapped. It’s a messy approach. Observing that most of the behavioural biases that clobber my returns are usually on the selling side and taking that out probably helped me.
The Do Not Sell was inspired when I read Robert Kirby’s The Coffee Can Portfolio from 1984[ref] the formal reference is DOI: 10.3905/jpm.1984.408988 though I am not educated enough to know what the hell to do with that. A Google Search will be a profitable source of PDFs if you want to read the whole thing[/ref]. That sings to me because my errors were in churning, and here was a way to stop that. I like the standfirst
You can make more money being passively active than actively passive
because deep down, I don’t believe the fundamental premises of index investing, that the market is efficient at all times. Jacob ERE outlines some of the issues here, though note Jacob work(ed) as a quant, so at a different level to grunts like most of us. Some Boglehead critique on the other side is here. The perfect shouldn’t become the enemy of the good – steady index investing from income is the recommendation to the young fellow with time on his side over 30 years. It is probably not a bad way to go because of the mahoosive amount of temporal smoothing you have. The way you invest if you need to make it happen in 5-10 years is different. You have to look around you for opportunities and take them. The opportunities vary year to year – 2009 was a great time to start a HYP and people were writing things like “should you swap your shares for an investment trust on a discount?“. I just bought the ITs at a discount. You try doing that now. Since then I have come to the conclusion that while a HYP will do me well for income in the medium term, it will distort my diversification and give me a massive home bias.
Painting around the HYP with a global index portfolio
I started leaning against that home bias with some index ETFs. In my case the HYP is the main part, whereas others usually have the HYP playing second fiddle – RIT for instance runs a HYP as well as a mechanical index fund portfolio. Looking at my portfolio with the cash conundrum post showed me as a whole this looks a mess unless it’s teased out into the two faces. A HYP you must fly on manual otherwise you will crash – the evil attractors of value traps are there to suck robo-HYPers into the mire. See the oddball index fund IUKD for where that leads. You’re being passively active with a HYP
I have nearly diversified that across most of the sectors. I want a yield of 4% from it which I will one day spend – any more I will reinvest; and the moment I reinvest all of it because I have cash, and cash is the ugliest investment of them all, despite its other attractions, like you can Buy Stuff with it and its short term volatility is very low.
Looking at the HYP there’s only one stock that’s an outlandishly large slice and that is The Firm, because I could transfer some of my Sharesave and ESIP shares straight in. I don’t ever expect to be buying The Firm’s shares again, but it seems a waste to sell and then rebuy as the HYP gets bigger. So I eat that imbalance, one day all the slices will be that big.
The variation in pies shows my varying purchase size history (£1000 up to £2500 a pop now) and some of the changing fortunes of the companies. Nothing has totally gone down the toilet or even fallen to half, though kudos to RSA and TSCO for making manful attempts in that direction. In aiming more money I will favour the stinkers if they still meet the criterion of a HYP, and leave the ones that soared alone. There are one or two companies I would like to add, but this is nearly where I want it. It delivers a dividend income over the annual amount I want, and the yield is ~4%. Job largely done.
The index side needs to move from a vague attempt to lean against the home bias into a structured plan:
The global portfolio needs to look roughly like VGLS100 global mix but entirely excluding the UK, because the HYP gives me UK/home bias. This global portfolio will end up about a half of the total given what I have left. The CGT barred section is my unwrapped holdings – a collection of The Firm’s shares and some global ETFs that I can’t move any of until April. Slowly that will shrink and the global will expand as I sell this out of unwrapped back to myself in the ISA. Unless we really do have a crash, in which case I will add new money to the ISA and leave that stuff be. It’s surprisingly hard to run down holdings that would incur capital gains – when times are hard in the market it’s time to put new cash into the ISA, and when times are good the number of shares I can shift out of an unwrapped account is lower.
Have you seen the prices platforms charge on funds post RDR? I’m a shares and ETF guy, and I’m gobsmacked
A global portfolio tends to favour funds not ETFs because there is more choice in funds. Which is a drag because I don’t like funds – I don’t like forward pricing and above all I don’t like paying percentage platform fees every damn year. It seems the devil’s own job to find a low-cost platform that is low-cost for funds – the percentage fee joints seem to become dear at a £30-40k point. Up until now platform pricing hasn’t bothered me, I’m a shares/ETF guy rather than a fund maven. I don’t pay platform fees on shares, but 0.35% on funds. Every single year!
Monevator tells us
Flat fee brokers are better for most investors who’ve accumulated over £25,000 – 30,000 in assets – percentage fees can siphon off eye-watering amounts if your broker doesn’t apply a cap.
The HYP is a fair way more than that, but TD charges nothing on shares, so I haven’t noticed this problem. In funds the platform fees would be a few hundred pounds every year. Say I had a fund portfolio of the same market value as a HYP, and take the 4% yield out every year. 0.35% is roughly a tenth of a 4% SWR/yield, that’s a nasty platform income tax rate of 9%! I have a rump of £2500 of funds in it and the fees associated with that still make me sore though they’re less that £10. I don’t mind paying transaction costs because I aim to amortise that over years of inactivity. It would piss me off to be losing 10% of my income every year – RDR seems to have shifted the ripoff department from the IFA kickbacks to the platform fund fees.
Flat Fee brokers would reduce that, natch, but have problems of their own. Most want to charge you for buying funds. WTF? The whole point of funds, the reason you put up with forward pricing is that they cost now’t to buy and sell[ref] it’s not as simple as that, some of these costs are hidden in bid-offer spreads or dilution levies[/ref]. Ideally I’d like to spread ISAs around at no more than £50k a platform because of the compensation limits. A 4% SWR on 50k is £2000. Most of these fixed platforms seem to run at ~ £80 p.a. – 4% of the annual income. That’s better than a 9% income tax, but still a bit dear. That’s the trouble with this index investing lark – it doesn’t pay very well!
I’d never noticed the mess RDR made of the investing in funds landscape, it’s only in trying to get this global diversification that I’ve run into sight of this platform tax. And I’m going to favour ETFs as a result.
So what does the global portfolio look like?
If I look at the composition of that non HYP global portfolio
I’ve ended up highly prejudiced against AsiaPac in general. I don’t understand how Japan will get out of its demographic bind in my lifetime[ref]Yes, there have been periods when Japanese indexes did well through Abenomics, but it strikes me as a sugar rush that’ll be paid for over time[/ref]. However, when you look at the Credit Suisse yearbook Greg kindly drew to my attention I could do with losing that prejudice against AsiaPac. I know jack about Australia and NZ but it would behoove me to find out, at least to investigate suitable index ETFs (eg VAPX) to open that sector up. South Africa looks worth investigating, as do some of the Nordic countries. All of which shows me up as an inveterate tinkerer and unbeliever in the single global World fund.
Trouble with buying a World fund, is US CAPE valuations are high and gorged on funny money. I find it hard to muster enthusiasm about buying a world index half of which is the unusually dear US. If I can buy the cheaper bits first without paying shedloads of fees that would be nice. If I had 30 years of investing it wouldn’t matter because those 30 years will include times when the US is low. I will be a net buyer for a few years because of that cash pile and the CGT and ISA limits, but I’m not facing 30 years of working life ahead of me, thank God 😉 With such a short time horizon valuation matters. Just as in the HYP new money goes to the stinkers, in building the global portfolio I should favour bombed out sectors first.
If I were a fund guy I could run with the idea of building up the funds that comprise Vanguard Lifestrategy 100 but drop the UK ones, the US for now, the Dev world exUK for a while (because I have it already). I only need to make up two or three funds in appropriate ratio. I can put off going back for the US component until it gets cheaper – the Dev World exUK will get me about half the US exposure anyway. Then I can become one of those wussy investment managers who are closet trackers because they don’t have the cojones to stick their necks out. Which is okay – the aim is to get a world index less the UK – sticking my neck out is for the HYP.
The aim of this part of my portfolio is to forestall the long-term decline of the West over decades. Although I don’t aim to sell in the HYP I would rebalance the global portfolio to try and keep the pies in rough balance – this is a mechanical strategy so it doesn’t depend on me making judgement calls to sell.
There’s nothing wrong in investing in something even if you don’t believe the indexing premise, knowledge is an imperfect quantity and I can’t do much better on foreign assets that I know little of. In that case, irrational and schizophrenic investing isn’t a bad way to go. Irrational because I don’t believe the premise, but do it anyway 😉
Simple Living In Somerset 
Thanks for the links (and for remembering!) as ever. I am very proud of that “investment trusts at a discount” article.
At the risk of tooting my own horn, I actually don’t think anyone else really was writing that. You had people saying “income ITs could be a good buy here” but few if any looking at the arbitrage (I don’t recall seeing anything on the Fool HYP board at the time, for instance).
I get enough wrong like everyone to be very happy when something goes well.
RE: Global portfolios, we’ve just done a new article on this if you’re interested.
For active fiddlers like us (i.e. me, not the ‘house’ view at Monevator) there is something to be said for DIY-ing a global portfolio via ETFs, as the OCFs are really low for the major markets (you can get 0.05% for the US, for instance). So one could do that for UK, US, Japan, Germany, and so on, and then bolt on a few EM investment trusts which *are* on nice looking discounts at the moment.
Latter might be tricky with Asia, but you say you don’t like Asia anyway. 🙂 (Note: That could be a shame as the income situation is improving there).
Have you looked at JEMI yet, btw, while we’re on the subject? No discount but nice stable looking income/holdings.
The other snag with cheap country ETFs is there aren’t so many distributing options.
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@Monevator I recall that article with fondness – it came at the right time and shone a light in the “how the hell do I do this” one I had accepted that in the darkness there was a potential open goal standing next to me. But it was a very scary time indeed! It took a notable effort of will to do that, but I got a couple and they’ve been working for me all these years.
In the years following I was sore that I didn’t have enough chance to do more ITs, because I was hitting a global 50:50 tracker in my AVCs. You just can’t say no to a 42% sure fire win 😉 Then everybody else started searching for yield 😦
I’m not fundamentally prejudiced against Asia – it is more than my attempts to lean against the home bias need marshalling, and it was an interesting accidental hole I discovered, because to date all my attention was focused on the HYP. That gives me what I would need now, so I can widen the search in terms of diversification and some loger term security.
A wrinkle I hadn’t appreciated, though I am an ISA guy for this so hopefully I can get round that sort of hurt!
JEMI looks interesting!
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Hi Ermine,
“Say I had a fund portfolio of the same market value as a HYP, and take the 4% yield out every year. 0.35% is roughly a tenth of a 4% SWR/yield, that’s a nasty platform income tax rate of 9%!”
A good point, that is easy to miss. 0.35% seems like a (relatively) low charge, and I suppose it is given where we’ve come from. But put like that, it is a hefty chunk.
At the moment I am content with investing in just a handful of ETF’s as I am still building my pot and settling into an asset allocation that I am happy with.
But the impact on the Withdrawal is something I hadn’t considered explicitly. Thanks for you your thoughts.
Mr Z
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@Mr Zombie – it’s the dirty little secret of the investment world in general. You are shaving incredibly low slices as income from your capital. The capital makes other people’s shavings look small – but as part of your income they’re huge.
Even in the accumulation phase this comes out of your pocket. Though as an ETF guy also, you can probably find platforms that don’t charge you holding costs, which is nice!
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“Jacob ERE outlines some of the issues here, though note Jacob work(ed) as a quant, so at a different level to grunts like most of us.”
I don’t know; a little digging about him and the strategy I took away from this guy was: “Start an aggressively marketed early retirement website to promote your new book on it.”
Which is probably good advice, but hardly lends me any assurance about his comments on how to invest.
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@Brendan I can see how he might not be everyone’s cup of tea, and I read his blog as he was writing it five years ago rather than the auto-recycle he has now, which kind of screws up the narrative IMO.
He’s brash, opinionated and doesn’t take prisoners, but paints the picture in clear strokes. Some of the insights I wouldn’t have got any other way.
Guess he’s done OK on the book, though – $180k isn’t bad. And it’s the right way to monetise a PF blog – adsense is toxic in the field.
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@Brendan
As Jacob now left early retirement for a job in quant trading/research, I consider him at least as good an adviser as Financial Times, maybe better :).
http://earlyretirementextreme.com/so-long-and-thanks-for-all-the-fish.html
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Hi Ermine, another great article. One point that struck me, though – “Later this year I am probably ready to re-enter the middle class income fray”
Are you going back to work?
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@TNT > Are you going back to work?
Good grief, no. The black tip of my Ermine tail is becoming grizzled enough with the passing of the years that I will be able to get a pension income from Osborne’s changes.
I have cash SIPP savings and will have to investigate if I can run out *some* of my AVCs – if I have to shift the lot I’d have to pay tax if I run it out over 5 years along these lines. It’s close, though – if they keep on whipping up the personal allowance I could sneak in under the wire.
I have enough pension savings for my needs, and then some. And only one life, which is far to valuable to me to spend any more of it at work 😉
I do have a slight problem in that I am looking at doing some soil microbiology research which will pay me P/T, which may help me get one last year of NI to get me up to 35 years, albeit largely contracted out. But I aim to lose some of the income in an important tool for the trade which should reduce my tax liability a bit. I’m doing it out of interest and to help people out rather than to earn money, but i guess it falls into a slight ‘work’ classification. it’s not the label I’m allergic to, it’s the power play I don’t want.
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Good to hear. What with Jacob doing the deed, and even MMM monetising more than he ever earned, and RetiredSyd writing for several news resources I was beginning to worry that all the early retirees out there are now all not going to be retired anymore!
I now have 2 more days – though in practice it will be 12, as the Firm cannot seem to get its act together to actually finalise the details – and it will be interesting to see how retirement plays out!
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“No actuarial reduction for 90% of it” … Don’t rule out taking the reduced amount at an earlier date. If you weigh the gain from starting 1 or 2 years early against the reduced long-term income, you may find the break-even point is suprisingly far into the future.
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@TNT It’s not that surprising extreme early retirees may dip back into the workforce. Not for the reasons the IRP think (that they ran out of money) but simply because to actually be able to do that they need to be quite unusual and/or driven. Such people would probably encounter more opportunities to apply their skills.
@Steve the cross-point is 76 in my case. There is a case to be made that you can use more money earlier in retired life than later, which favours drawing early.
Against that is a DB pension doesn’t demand investing skill of me, and also because Mrs Ermine is notably younger than I am part of the pension is likely to be paid beyond my expected lifespan. I believe that is also reduced on drawing early.
I’m also possibly lucky – the pension changes made by Osborne mean I can move the AVC funds I saved while working into my SIPP and flatten it between 55 and 60 as a short pension – you can flatten a SIPP of about 65k tax-free over five years at current personal allowance levels. Front-running my DB pension from 55 to 60 like that would work fine for me.
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