Bear markets are a bastard when investing at a fixed time in life

Most of the younger folk reading this will go WTF? Bear markets are the investor’s best friend. You get more for your money. The trouble is, that a human life is not infinite. It is short, and a working human life is shorter still, unless you have a trust fund working for you until your 20s.

Reading this article brought this home to me, getting good results with financial markets is a combination of luck, being in the market a long time1 and never be a forced buyer or seller.

Never be a forced seller

The human financial life cycle – buyer at the start

There is a human financial life cycle2, and that life cycle has two big events in it where you make a big financial decision at a time which is more a function of when you were born than any financial considerations. In the first case, you are a forced buyer. In the second, you are a forced seller.

The first one I got very, very wrong, and that is the time you buy your first house, should you be earning enough to do so. Buy at a bull market high with a mortgage, and it will take you decades to recover from that error. Although it’s true that you don’t have to buy a house at any specific age, the human lifecycle is such that that becomes more of a consideration in your thirties, and it tends to be more of a consideration when breeding. The latter you need to make happen in a space of about 10 to 20 years, and you’re probably too skint or haven’t met the Right One in your early twenties, so this window is more like 10 years in practice. Unlike the financial markets, cycles in the housing market are long and slow, and you take this decision with little experience of market cycles.  And you do it with leverage.

The upside is that you take this decision early in your working life, so there is enough time to recover from errors, though if you get it very wrong it will cramp your style for a long time. Leverage is lovely when the asset you purchase rises in value over time, and it is frightful when it goes down over time. Most of the time housing goes up over time, which is why 90% of Britons regard residential property bought with a mortgage as a money tree3. But if you take a negative equity suckout early in your career you’ll be paying off a long time.

The second decision you take when you are out of ammo, and you become a forced seller, every year. It’s called retirement, and while on average a 4% ‘safe withdrawal rate’ SWR is considered acceptable (it used to be 5% a few years ago) you’re still a forced seller.

And a seller in retirement – an early bear market hurts your SWR

The early retiree, and particularly the extreme early retiree, has a tough balance to strike. What most people want to run their life is a steady income, preferably matching inflation or earnings growth, whichever is the greater4. Sure, in an ideal world you’d want to have as much as possible, but when wrangling the art of the possible, something that looked like their income when working would be nice.

Living off a capital sum and unreliable investment income is really, really hard. It leads to suboptimal outcomes, too. I will be glad when I have a base income that is defined. There’s then a clear answer to ‘how much can I spend in a year’. In the years of living off savings and investment income, the answer to ‘how much can I spend in a year’ was always ‘as little as possible’ and now in hindsight there’s a case to be made that I spent too little over the last eight years. Now that’s easy to say looking at an ISA bloated by ten years of a bull market. It could have been different, and I could have needed the money I didn’t spend had things gone differently. Most of the win I had was in the fact of not working for The Man, the stress of weaving a way through the financial jungle is far less than the stress of working was at the end.

But I never considered taking the CETV of my DB pension. Younger readers probably tap their heads and think that crazy. But I have had enough of living from an unstable income. It’s just not how I want to live. The Irrelevant Investor’s article shows the problem. If you set your income at 4% of marked-to-market investment income at the start, then a bear market at the start of your retirement will kill off your capital in 20 years.

You can fix that easily. Stick with the 4% rule and spend 4% of your capital as marked to market at the beginning of the year. Simples

Your income if you suffer an early bear market, predicated on a 40k income at a 4% SWR at the start of retirement. Swiped from The Irrelevant Investor

Our retiree didn’t get anything like 40k that his SWR promised him most of the time, and suffered 2:1 swings in income. “Can we go on holiday next year? God knows…”. Had the bear market happened at the end, then of course he’s been living high on the hog, ending up with a lot of money.

You can theorise all you like, but you have to live a particular sequence of returns trajectory rather than the Monte Carlo average. Sure, you can pool resources with other people to reduce the swings a bit. That’s called buying an annuity. It’s what you had to do until as recently as 2014, but when most people look at how much they have to pay for an annuity they run away in the opposite direction. Heck, even where people already have an annuity in the form of a defined benefit pension (which is annuity in all but name) and someone dangles a CETV in front of them to buy them out of getting that annuity many of them take the money and run.

There aren’t any good answers to this problem. There’s an argument that I have made the other mistake – fearful of the hazard of ever having to go back to work, I ended up with an ISA that is worth five times my gross salary at the high-water mark of my career, about to draw a pension that meets my needs and most of my wants. There is a case to be made that I underspent in the last seven years.

And yet it could have turned out differently. Because I started in the teeth of the financial crash, more than half of that capital came from investment rather than from savings. That investment gain might not have come. The market could have gone lower. That is the conundrum of trying to live off investment returns. There are a number of paths through the maze, as things like firecalc can show you. But you don’t know which track the hand of Fate has allotted you until you look at the path you lived, and there is much variation in the particular sequence of returns you can live through. In the early years I believed I would run out of money within five years, reaching 2017 with no fuel in the tank.

I was lucky. That early bear market never happened, and so I reached the finish line with more than I started with. It now makes sense to draw my main pension a little early, and to shift the profile of the ISA towards income, so that I smooth my income until I get my state pension.

I will give up some total return doing that, but in return I get peace of mind. I learned many things across the interregnum between taking my last pay packet and getting my first pension pay. One of those is that I am not a good judge of sell calls. Although the largest holding I have is VWRL which probably is my largest dividend paid per year, I have shifted recent purchases towards higher yielding investment trusts and of course the original HYP is still working. I should be able to make my income aim out of the ISA with the top up from my PCLS over a couple of years, while still nto having to sell.

Sure, if I wanted to optimise income, I wouldn’t start from here, particularly with all the VWRL which is a lousy dividend payer at 2%. I was led off the HYP path by the siren song of the passive investing shibboleth. But I can get what I want by a shift back towards income with future purchases. Without having to sell anything. I don’t want to shoot for the moon now. I want an easy life, and get an income uplift without making investment decisions.

  1. a long time because the real return of the market is piss poor on average, 3-5% in real terms I would guess. That means you need 100k of capital to get 4-5k of annual income 
  2. This should be prefixed “in the developed Western world” – and perhaps even more qualified “In pre-Brexit Britain”. Other European countries are more rent-friendly or have multigenerational living, and in Britain itself there have been higher levels of homeownership and more stable employment patterns, both of which are changing as a result of globalisation. 
  3. It always puzzles me why people don’t ask themselves what ground that money tree grows in. It is the hopes and dreams of their children trying to buy their houses 20 years down the line, because the parents pay politicians to water their house price money tree with tax breaks and credit pumped into the residential housing market. After perhaps too many drinks I greatly offended some berk at a party once who was mithering on about how it was so unfair that his kids couldn’t buy a house nowadays, after talking about how he’d done so well with property that he was thinking of getting into BTL. You couldn’t make it up… 
  4. Matching inflation keeps your absolute standard of living stable, but humans generally compare themselves with other humans, and if the others are working and earnings increase above inflation then workers will be able to buy the latest iPhone when you can’t, because they will be able to pay more. 

Two Factor Security shouldn’t involve a mobile phone

If I were God for a day the piece of technology I’d uninvent in a heartbeat is the mobile phone, with a special mention for its bastard spawn the smartphone. It’s made rude shits of us all, because the phone trumps the person you’re talking to in meatspace right here right now. It enables zero hours contracts, things like Uber and pretty much anything that allows us to treat human beings more like pieces of machinery. It allows Facebook to track the proles all over the place and sell them shit they don’t need to impress people they don’t like…you  know the pack drill. Pretty much anything that’s good for Facebook1 is bad for the common weal.

I give a few people I want to talk to my phone number, and even fewer a mobile number, along with the exhortation do not make the assumption that you can get me on this. One colleague summed it up perfectly when I was at work – he only uses a mobile when he is mobile. Well, yeah. Duh.  Unlike the rest of the human race it seems, I go about my business without carrying a mobile phone with me. I don’t want to be disturbed at anybody’s whim if I am doing something else. I think the AI guys can beat humans by just taking a break for a few years, then the gormless numpties that are us will lose the fight, like Idiocracy on speed.

Asimov missed the target in The Feeling of Power.

The congressman took out his pocket computer, nudged the milled edges twice, looked at its face as it lay there in the palm of his hand, and put it back.

It’s not just maths, it’s orientating ourselves spatially using a map, knowing shit that you ought to know without the Big G, all sorts. But this fight has been lost, the bad guys won. In the fight between Them and Us, Them routed Us comprehensively.

Increasingly seems that banks want, nay demand to have a mobile number, and they just can’t believe I don’t have one. So the blighters continually demand one, and say I can’t use t’internet to buy shit without. Sure I possess one, but since it spends most of its time in one place it’s not the vade mecum that it is for everyone else. I gotta switch the damn thing on, because I’m sick of the FAANGs “following me around with Rays2” otherwise.

2FA – what you have and what you know

I understand the point of 2FA3. Way back in the mists of time, you could present your credit card, and the spotty yoof would take a print from the embossed card and get you to sign it, and then inspect the signature with the one on the back to see if it matched. That was the something you have – the card – and the something you know, which is how to scrawl your moniker in such a way as to match the one on the back. The obvious problem was presumably visual artists could match anyone’s signature, so we went away and invented Chip and PIN, and all was well with the world.

Then some more spotty youths invented t’internet. Bless their idealistic souls, they built it along the models of some prelapsarian Eden where Bad Guys didn’t exist. It’s one of the reasons why email is so broken and you get all those letters from people you know, even those that are dead, saying they’re stuck in some God-forsaken place without money could you just Western Union4 over some cash.

So we all got on our computers to buy our consumer shit that we see people with on Instagram, and they had to invent some other sort of out of band authorisation, involving injecting spurious data from third party sites5 and calling it 3d secure, ‘cos obviously knowing the number on the front and the one on the back is trivially easy for some punk that’s just nicked your card, as long as it’s not something he wants delivered.

That’s not up to snuff for actually using your bank online. Obviously they could ask you to put your PIN in the computer the way you do at an ATM, but all sorts of Bad Guys are in your computer along with the NSA, GCHQ and some random assortment of Russian whatevers. You’re probably OK form the latter sort of Bad Guys but it’s the ones who don’t have enough money that you have to worry about. Sometimes it’s a wonder you can get the lid back on your computer, there are so many bad guys in there. So the banks give you a gizmo you stick your card in that has no ports for a keylogger etc. Yet, anyway. The whole point is you don’t plug it into your computer where all the Bad Guys are hanging out.

I was pretty much OK with that as an option, and I would have been OK to use that on the Web instead of 3D (in)secure. But the banks now want to send out text messages to a mobile phone.

A mobile is highly thievable, insecure and spoofable

Hoodied n’er-do-well on a bike about to half-inch a phone in London, as shown by the Metropolitan Police

Now I don’t spend time thinking about mobile security but it’s pretty obvious that mobes are highly liftable. Plus, it turns out, they are highly spoofable by design, which is a big Security Fail for the banks, because Mr Big Bank sends you a SMS text message to a phone number.

In an epic fail, Mr Big Bank failed to realise that the phone number is not an inalienable parameter of the mobile phone, it is a function of the SIM card. The clue’s in the name – Subscriber Identification Module6.

So there’s no security to be had by texting your mobile number, because Bad Guys can get your number reallocated to them. As happened to gobshite Jack Monroe. While she may sometimes talk rot in along with a fair amount of sense presented in an edgy manner, she doesn’t deserve to have Bad Guys run off with some of her hard-earned. There’s also an object lesson here, which is if you must put your birth date on Facebook then for God’s skae make it a day, month and year which are not the same as the ones you give to your bank, huh? HM the Queen can have a real birthday and an official birthday. If it’s good enough for Her Majesty, it’s good enough for her subjects. OK so she has managed a fail by blathering her real birthday on the website, but she has the advantage over you and I that she has staff to sort out her money, so it’s not like she has to ring up the Bank of England and some droid in another continent asks her for her birthday to let her know how many billions she has in the Bank light now. Don’t plaster your birthday over social media, peeps, and if you must, make sure it’s wrong. Sure, it’s an example of security by obscurity but don’t make it unnecessarily  easy for the bad guys, eh? At least make your Social Media Self a couple of years older or younger if you’ve already let the cat out of the bag.

Mr Big Bank., let’s have less of this garbage about enhancing security and making life twice as hard as it needs to be. You had a perfectly serviceable method with the card reader gizmo to get an out of band validation of the customer’s pin, which you spurned in favour of the mobile phone. There is absolutely nothing secure about a mobile phone, and the smartphone is known only for being a totally uncontrolled piece of computing hardware which has a totally uncontrolled set of software applications and an equally uncontrolled software patch status.

The one thing we know about the smartphone is that is does pretty much anything it does incompetently, it’s nickable as hell and there’s no process of nailing the phone number to the phone, even if that were desirable. So, banksters, quit the fetishisation of the smartphone as a way to add security. Use either the card readers you have already, or suck it up. As for the rubes that grizzled on the radio about not being able to use their bank details stored on their mobile phones due to yesterday’s Three outage, well, whaddya expect? A bank card just is. If you want to save yourself the burden of carry less than 1g of plastic by sticking it on your phone where you need a working network connection as well as the damn phone, well, you’ve just discovered that the extra requirement inherently reduces reliability. Live and learn, eh?

  1. OK, let’s not pick on the Zuck. Anything that’s good for the FAANGs isn’t good for the common weal. 
  2. Terry Pratchett, Soul Music, Foul Ole Ron 
  3. Two Factor Authentication
  4. The rule is simple. If it involves Western Union it’s a scam at best and criminal at worst. Presumably there is a correct use for Western Union but I’ve never run across it. Why the heck they don’t re-christen it Bank of Con-Artists and Thieving Scumbags is a mystery to me. 
  5. how injecting cross-site scripting Javascript into a web page makes the system more secure beats the hell out of me because in pretty much every other application on the Web that’s a big No No. 
  6. Else it would be called the PIM, huh? There is a phone identifier snazzily called the IMEI that is meant to identify the phone. No idea how spoofable that is. There’s still the problem that phones are small and valuable, thus attractive to thieving barstewards.