Over the last couple of years the UK personal finance blogosphere has expanded massively – it is a great thing to see many more people taking their financial future into their own hands, and asking themselves what they want out of the whole work-eat-play-sleep tradeoff offered in a post industrial consumer society. One of the great things is that there is more awareness of these options – and that there are choices to be made, at least for some of us.
Most PF bloggers seem to be in the accumulation stage, although there are a few who have passed across the event horizon to the other side like me – The Escape Artist for one, and I greatly enjoyed Living A FI’s post on crossing the Great Divide. My summary of the changes looking back on work to non-work is here. I feel different to most writers, not only because I am looking back from the other side, but also because I lack much of the laser-like analytical focus. It’s been just over five years since I started. I have changed, the world has changed, perhaps my work is done here.
Of measurement, and metrics, and goals
Many of us are quite analytical employing metrics and goals, tracking progress against these goals reviewing them and keeping score. In particular the notion of the savings ratio clearly works for most people. I’m a lazy barsteward and don’t do any of that. I had no idea what my savings ratio was – all I knew is it wanted to be as high as possible to shore up the defences against an earlier exit from The Firm than I had planned. I guess I took RIT’s £0 target and considered anything else a fail.
Metrics never worked for me steer savings. For starters the whole goals and metrics things was one of the things that really pissed me off towards the end of my working life, I have no desire to gamify my life, and I lose the big picture easily if I focus on the details. I have never forward budgeted like you are supposed to – I have always tried to satisfy the Micawber rule by looking in the rear-view mirror and the shape of the road behind me in what I have spent, and adjusting the direction to keep the line on the right side of the Micawber threshold.
The one exception is I track investment dividend income and capgain, benchmarking total return against VGLS100 and the FTAS, unitising every year. I probably need to rethink the benchmark as I am diversifying geographically. Maybe benchmark the HYP against VGLS100 and FTAS and the overall portfolio against some sort of passive world index fund.
It’s difficult to work back and see what it had been when I was working – it was probably in the order of 80% for the three years as I ran out. This was easier for me than most because as I had discharged my mortgage. In theory saving has now switched into reverse – I don’t have use of pension savings yet and I don’t use the proceeds from my ISA. And yet one thing puzzles me – I look at how dramatic the contributions of Saving Hard make to RIT’s networth and wonder what is different. It might be as simple as I am ten years older and therefore the stock of accumulated resources was higher than the flow of savings, but on the other hand I didn’t have huge savings when I started in 2009 because I had favoured paying down debt in the form of the mortgage. I don’t count the value of my house in my networth because its value is more income-like in the rent I don’t pay. Shona Sibary is the cautionary tale of considering home equity as networth and spending increases in it. If you want to make money from residential property do it on other people’s homes, as a BTL landlord. I don’t do BTL and I don’t eat the seedcorn, so res property doesn’t show on my networth chart.
I only have investment gain at the moment to carry things forward until first my SIPP gives me an income that I run down over five years and then my main pension comes in, paid at the normal NRA of 60 for The Firm for the vast majority of my time there.
The stock market has been on a tear pretty much from when I left work, I have been lucky with that. This would have been tough had things gone the other way – as I crawled from the crash-landing of my career it would have been difficult to look at a gradual networth decline and not extrapolate that to a feeling of general wipeout and fail 2.0. Personal Finance is as much about the personal as it is about finance. The numbers circumscribe what is possible, but what matters is how you feel about the numbers and where they are going. That’s not always acknowledged – this is symbolic, it is part of the myth[ref]myth as in psychological legend, not the alternative usage myth as in fictitious[/ref] of one’s lifestream.
Not everything that counts can be counted, and not everything that can be counted counts.
Albert EinsteinWilliam Bruce Cameron
About half of these assets are in cash – I would have reached the other side (getting to 55 to use pension income) before the cash ran out even if the market had wiped out. But it’s as much about how it feels as about how it is. I fought against the fears of a fall in networth as I retired, but in the end Lady Luck smiled upon me – governments pumped stupid amounts of money into inflating asset classes, the oil price fell holding the inflation that would normally create at bay for a few years. I was fortunate enough to have invested in the right things, though over the last few years you just had to show up in the market and be reasonably spread out across sectors. Of course I would like to say that I was a stupendously brilliant investor. But that would be bullshit. So thank you, madcap governments who pumped up asset prices with fistfuls of funny money – I feel better set to face the coming crash than I did in 2012 because I will soon have pension income and once again an answer to that Micawber fellow…
Some of the government activity that made things look better in the markets may turn out bad in the end – perhaps as the decades roll by the centre cannot hold and it will all fall apart in a doom and death spiral. But so far, despite endless prognostications that the world was going to end including some of my own it hasn’t. Maybe it will end with a series of whimpers rather than a bang – after all the middle class is slowly being destroyed in the West and the whole experience of work is getting increasingly insecure, ugly and marginal for many[ref]Lousy and Lovely Jobs: the Rising Polarization of Work in Britain, Maarten Goos, Centre for Economic Performance, LSE[/ref], although a small number are making hay. Indeed, apparently by taking my engineering skills out of the workforce, I am a hazard to the economy and destroying Britain’s productivity.[ref]there seems to be much head-scratching as to why Britain’s productivity is falling, and early retirement isn’t fingered by Peston, for example, who seems to point to governments spiking the guns fired by Schumpeterian creative destruction[/ref] To which I can only say f**k that – if you want humans to work longer then stop being stupid with metrics – as Liz Ryan summarised
To hire talented people and hobble them with bureaucracy is the height of stupidity and poor management to boot.
In the long run this too shall pass, indeed. More and more jobs are being controlled, measured and rammed into a rigid structure. I rose four levels up the greasy pole at The Firm – when I started as a young pup I could authorise £500 spend before needing authorisation from the next level up, when I left as a greybeard I had to get authorisation from two levels up get a train ticket to London. The only correct response of humans to that sort of ossification of processes and systems is to get the hell out, and let the devil take the national productivity 🙂 Work is supposed to sustain your life, not replace it.
I am an outlier – much less analytical, and I don’t subscribe to some common PF shibboleths
Maybe because I never worked in a management consultancy, I’m weak on the whole PDCA thing here. Philosophically I just don’t have the faith in in it when it is applied to complex and interactive systems, because it is hard to separate the variables properly, and also you are typically an observer rather than an active experimenter (unless you’re the Fed). As for the check part, the problem here is the dreadful uncertainty of some key variables – obsessing about the exact value of a variable with an inherently massive uncertainty leads to short-termism and massive over- and under- compensations. Lord Kelvin is all very well in his place but mistaking precision for accuracy can turn meagre knowledge into precisely incorrect beliefs.
I’m with Mr Fox here rather than the prickly one – read widely and cover much ground, and read lots of stuff I don’t believe in (the efficient market hypothesis) as well as echo chambers of my own predilections and prejudices. I should know why I disagree with something, what the counterarguments are and I should have the humility to accept that I may be currently believing something that’s wrong simply because sometimes I know jack shit and sometimes see things wrong. I try to at least do common memes the honour of trying to understand their premises. Nevertheless, I’m big picture fellow rather than streetfighting the details. I leave it to others to determine the details worth fighting – lower fees, yes, all the way, but I still can’t get excited about trying to win a return on cash.
There are a number of common tenets in the PF community – passive investing, an ultimate ~4% SWR, the efficient market and some of the consequences of that hypothesis, that I don’t find common ground with. So be it, I have no desire to push what may simply be my ignorance onto others. So far I have survived six years of investing reasonably well. That’s still not a huge track record and it doesn’t span multiple market cycles. The job I had to do was much simpler and lower risk that for many – I wanted to top up my works pension to compensate for the missing eight years of working, which is easier than establishing a complete retirement fund for 30-40 years of working. I have largely done that now – the HYP pays enough dividends now to make up the shortfall, and being tax-free as ISA savings the target was 20% lower. I will half split future funds, half to build the HYP and half to built a more globally diversified index ETF section of the portfolio to insure against something currently unknown about the HYP philosophy going bad in the decades to come.
The trouble with networth is while financial stock and flow are related, they aren’t locked together, and the variation is called volatility, and afflicts the stock value – the income flow is much less volatile. It was with great difficulty that I finally broke out of the instinctive association of volatility with risk. At some point, to become a successful investor, you have to do the Dr Strangelove thing with volatility[ref]hopefully without the drastic ending![/ref] and learn to love it. It gives you your opportunities as well as your challenges.
Although volatility is sometimes associated with risk, it doesn’t stand proxy for it. For someone with a high proportion of capital in equities the volatility makes the savings rate/rundown rate unknowable over short time-scales of less than about five years, particularly if they are adding to their equity holdings. I exchange some of my cash savings for equities rate limited by the annual ISA allowance. It is possible to derive some statistical estimates for the income from equities – after all the 4 or 5% SWR principle is derived from a Monte Carlo analysis of historical (US) data. However, the history of statistical analysis on equities is littered with some extremely big fails.
There’s an implication that I have a positive savings rate at the moment despite having no income, because the networth is still rising, though the value is volatile. It’s a bizarre carry-on that investment capital can increase at a faster rate than I spend it, I guess this was the thesis of Piketty’s Capital in the 21st Century, and of course there should always be the memento mori that the stock market has been going absolutely bananas for three years and really cannot go on like that. It’s not like the world has suddenly become free of financial hazard. Presumably it would also be possible for a working saver towards FI to have a negative savings rate even if he were saving as much as he could, in the event that his investment capital were high enough for a stock market crash to diminish his networth faster than he is saving.
This seems to be a problem with some of the common PF metrics – they start to fail you and become noisy and erratic as you approach the destination, because of the uncertainty of the value of equities. The rising uncertainty of the value can be seen as the increasing erratic trace of my networth as time goes by. This is characteristic of any equity based DC pension savings – and mine are buffered by about half the holding in cash.
There will be two more jumps in the networth when my DC pension savings appear in the total – one when I get to 55 and the other when I get to 60. After that the fossil savings from my working life will be mined out, other than my pension after 60 which is deferred pay, a flow not a stock. The implication of that networth chart is that once I get these extra funds/income I will be underspending. That’s what happens when you shoot the demon of consumerism. There are many people who fixate on replicating their income when they were working, and want to be able to buy a new car every three years etc because that’s what a prosperous middle class lifestyle looks like, and good luck to them. My income will be less than when I was working, though it is possible that my disposable income will be a little bit more. The working me put a lot of money into the mortgage, and a lot into spending on rubbish, and the focus needed to get out in three years still serves me. The lesson stuck – consumerism involves a lot of spending that doesn’t necessarily lead to enhanced quality of life. One of the metrics the consumer sucker uses is comparing their Stuff and lifestyle with other peoples Stuff and lifestyles, rather than their own requirements. Busting out the TV and other instruments of consumer mind control like Facebook and social media in general help shift the balance closer to following my own needs and wants rather than those of the admen.