Shiny shiny starts to gleam as fear rises

Fear usually means a fire sale in the markets. MedFi gives you the graphical take straight between the eyes using the gold price vs the S&P500. Market valuations have been high in recent years so I feel this one will have legs. Officially the selloff is attributed to coronavirus, so let’s start off with a bit of old Leonard, RIP.

Everybody knows the plague is coming,
everybody knows it’s moving fast

You’re going to get covid-19. So am I. Most likely in months, not years. Not sure I’m smart enough to even imagine how they’re going to isolate London, but hopefully some bright minds are on it. Let’s hope they’re not all Dominic Cummings’ weirdos and misfits with their charming views about creating a master race 😉

Our Sab, with the all-knowing clarity of youth. Bless…

Selective breeding works a treat – for us, rather than the selectively bred species. Closing that loop doesn’t seem to end well.

The odds of surviving Covid-19 seem good, so game theory shows us that in the financial aspects it’s the opportunities that are worth looking at. If you aren’t going to survive it then your investments aren’t your problem – in five years’ time you’ll know if you were hardy enough. If you aren’t then you’re not going to experience the downside of getting it wrong. You shouldn’t have money in the equity markets that you will need in the next five years.

It’s early days yet, but I wonder if the coronavirus is gaining extra traction in the markets by pushing a stale long bull run over into its natural nemesis, the bear market. We aren’t there yet, but the markets could get more interesting.

The fear/greed index has shifted into fear

If you’re under 40 this should be a cause of celebration. Firstly because you’re very low risk from covid19, and secondly because you are a net buyer for a long time. A low stock market early in your investing career is all to your benefit.


VWRL in early March 2020

Bear markets declines are steeper than bull market rises , presumably because fear is more contagious than optimism. The bull run has been very long, and for the last ten years stock markets have been inflated by funny money as interest rates have been depressed. The bloodletting could be stiff.

I am not under 40. I have now come to the end of my investing career, I was  unlikely to make a contribution to my ISA ever again, and I will only wash £2880 through my SIPP as cash to collect the free £180 a year from the government because it’s rude not to.

Unlike every other bugger in the FI/RE blogosphere, I am done, I have turned the engine off and pulled out the key. All around there are many FI/RE protagonists intoxicated with ten years of bull run, and the the air is heady and ripe, the smell of Autumn in the stock market all around although it is only Spring in the landscape. Winter is coming.

Over the last few months I had shifted my holdings more defensively, largely as a result of high valuations and my impending shift towards drawing an income from the ISA. Most of that income I can get from the natural yield, and I have a chunk of cash in Premium Bonds that I was going to slowly decumulate over the next few years to boost that ISA top-up to smooth my income ahead of getting the State Pension.

I am not a passive investor, that heavy cash/gold policy was set because I looked at the high valuations of the markets as I came up to drawing down and felt meh about it. I haven’t sold any of what I did have, but didn’t add much to the equity sections at these valuations.It’s fine to draw down from the natural yield of what I have bought.

The natural yield will probably be reasonably stable, as it is largely from investment trusts and the high-yield portfolio. But there’s a lot of gold in my ISA, which was there because of the high market valuations and the fact I don’t have decades of accumulation ahead of me.

no battle plan survives contact with the enemy

I am wondering if I shouldn’t sell some of that gold over the next few months and run the other way, into beaten down ITs. And/or take some of the cash and use next years ISA allowance, which would mean I would have less yearly income in running it down.

Valuations haven’t yet fallen to levels that are usefully lower than say a year ago – f’rinstance if you take a look at VWRL

VWRL in early March 2020

while there is a tip at the end where it has nutted down, but it’s not as if it is down to this time last year. For me to exchange some of the shiny shiny for VWRL I’d say I don’t want t pay more than say £52, as it was way back when in 2016.

If I am going to surrender some of my guaranteed income or my shiny tokens for income, ITs give a good income stream, particularly when bought at a discount due to bearishness. It’s been over ten years since I last saw that advocated, but I took action on that message – and these investment trusts have been paying me steadily for over ten years. I’d like some of those low prices, please.

So I need to take some time out and do some research, ask myself what sort of prices/discounts I would consider ITs better value than some of the guarantees of cash or gold, and start sticking some alerts out. The time may never come, in which case nothing to see here, move along now.

I’m using natural yield, not a SWR

I am not going to sell stocks to derive income. I want more income from the ISA but I don’t have to thrash it; I get over 3/4 of what I want already off the natural yield.

It’s all very well for people to sit in their ivory tower and say sell off units of VWRL to achieve your wanted SWR, but I am not going sell off units of anything, because I only started to get ahead in the markets when I stopped selling equities. I am a jumpy seller and that’s bad. But I do skew buying choices.

Natural yield is despised by people in the accumulation phase – see the stick Greybeard took in this article for advocating investment trusts. ITs form a large part of my high yield approach, much of mine were bought early in my investing career, because IT prices get thrashed more in times of turmoil as discounts open up due to their closed-endedness. Which is a bug when you’re selling and a feature when you’re buying in a down market

Written before the recent falls, this interesting throwaway line in Monevator’s SIPP/ISA article

For eight-year periods or less: save enough in cash to cover your spending needs plus an inflation top-up. The potential upside of equities isn’t worth the risk of grievous loss with so little time to bounce back.

made me change my mind about adding to the ISA for one last time next tax year, because my distance to the State Pension is of this order. I could add to my ISA to top up my income to the amount of the SP, trying to smooth my income, but I could also run down cash savings over a decade to make up the difference that way. At valuations a couple of weeks ago I’d need to spend about 30 times the desired uplift in annual income to get it from the stock market.

Using the rough rule of thumb that inflation halves your money over 15 years I’d need about 15 times the desired annual income to draw cash down over 10 years. The catch is, of course, that drawing down the cash means it’s all gone after 10 years. The plus is that it’s not sensitive to bear markets.

I normally used within five years as the sort of time horizon where one would steer clear of the markets and hold cash, but as I said above, valuation matters. At high valuations the cash-favouring time horizon drags out for two reasons.  You’re paying more for less expected income. Plus the risk of capital loss gets higher.

the smell of fear in the morning

The ermine snout twitches, wondering if there is the scent of one last chance to purchase income at low valuations. That time is not right now, but it may be soon. My investing career would then be bookended by bear markets, a fitting swansong. The first one served me well, more so than anything I could do with what’s developing. There’s only a couple of year’s worth of ISA allowance I could commit to this one so it would be more of a fillip to my income rather than a heavy lift, like the years starting from 2008.

There’s certainly mileage in yanking out some of the Premium Bonds and replacing the amount I borrowed from my Charles Stanley ISA earlier this year, that needs to happen this month. If I decide that I don’t want to buy into the ISA I can shove the money back into Premium Bonds next tax year.

To make this worthwhile I need a bloodbath in the markets. Perhaps there will be an opportunity to swap some income for about a decade into some income for longer. And I need a strong enough immune system to fight down covid-19 to carry off the spoils of war. If not – then it’s not my concern…

I’m going to take time and look at what happened to various ITs in the last crash including their payouts, what their prices were over the years I have been an investor, and determine a price that I would think was really good value to buy. And set these alerts for if/when the price falls below that. I will be looking for valuations closer to 2009-2012 than 2013 to now. The opportunity may never come. But if it does, then sometimes you just have to hold your nose and do it…

40 thoughts on “Shiny shiny starts to gleam as fear rises”

  1. Oh, my – what exciting times… Having been around this particular sort of block before, I am not as exercised by this as some. I am not looking at my investments at all; there’s no point, as I have no intention of altering my current portfolio of global index funds.

    I am retired, and half of my income comes from a rental property (my corporate tenant has just signed up for a 5th year – hooray!). The other half is taken as drawdown from my SIPP, at a nice conservative 2%ish withdrawal rate. Yes that’s right, I sell investments each month, so there ;). I had intended to award myself a pay rise from the SIPP this April, but have decided to wait and see…

    If the current situation starts to worry me I’ll just pause my SIPP drawdown, as I keep over 10 years’ worth of total expenses available in cash or near cash (eg NS&I). Probably too much cash really, but then again I sleep soundly. It does make me wonder, when I see people gunning for ‘lean FIRE’ (which I think of more as ‘skin-of-the-teeth FIRE’), what on earth they would do in this sort of situation. In a Covid 19 world, picking up extra barista-type income to supplement your RE is not really a goer.

    Jane in London


    1. > as I keep over 10 years’ worth of total expenses available in cash or near cash (eg NS&I)

      Wow. I thought I was being hyper-cautious with three years expenses in cash! Hats off to you there.


  2. Great post as per usual – thank you.

    I think we’re all agreed that this newest virus is not a serious issue, right? Otherwise, instead of waiting for VWRL to drop to £55 per share, or mulling over how much of a discount we’d like on this or that investment trust before we press the “buy” button, we’d be stocking up on tinned beef, petrol, antibiotics and amo, and perhaps bicycle parts for when the petrol runs past its use-by date. And a print map showing the locations of all nuclear power plants in the UK 😉

    Liked by 2 people

    1. > we’d be stocking up on tinned beef, petrol, antibiotics and amo

      Hmm. If it’s that serious, then a crate of the finest wine money can buy, and about two weeks of the finest food is probably enough to see you out 😉

      It will be serious for some, but the odds appear to be low. I’m not making light of the human tragedy, but so far we don’t seem to be dealing with anything like the Black Death.


      1. Nah, I’d plan on surviving it… A’la the nut job from The Last Man On Earth that stayed out at sea for years till it was over, then came back ashore and got shot by the other survivors 😉

        Liked by 1 person

      2. The odds of COVID-19 being a killer are more serious if you’re over 50, diabetic, and/or have lung damage (e.g. are a smoker). Basically, 5%-6% of infections become serious cases and 60% of serious cases die, with death heavily skewed towards the over 50, diabetic, and smokers.

        Being in the USA, I’m at the stage of “this shit is starting to get real” because a friend of a friend has been quarantined at home and there are confirmed cases within 100 miles. I’m over 50 and pre-diabetic. Factors in my favor are living rural and only going grocery shopping once a week. Factors not in my favor are attending autocrosses with 90+ other competitors (fortunately outdoors rather than confined indoors). But then I also have some big events scheduled in Las Vegas and near Los Angeles… really trying to break habits of touching my face or at least washing hands before I do so.

        Finanaces? Stock market is getting whipsawed by the news, but my portfolio appears to be defensive enough that it is outperforming the broad indexes at this time.


      3. @George – I too am over 50. Although I can see some rationale for trying to spread out the infection rate on a collective basis to reduce peak loading on health systems, as an individual I can’t really see there’s much chance of avoiding it. In the end if my number’s up, well, it’s up.

        OTOH that case for the crate of fine wine is getting stronger. If I am going to have to self-isolate, it’s something to look forward to at the end 😉

        Liked by 1 person

  3. As of last Friday you could get close to a 5% dividend yield from a portfolio of equity income investment trusts. I also have some trusts invested in high yield bonds and commercial property that push the yield above 5%. If you want to buy more income then now looks like a good time… but things could get even cheaper!


  4. As the virus starts killing off the ill and the old what are the inheritors going to do with their new shares and houses?


  5. “You’re going to get covid-19. So am I. ”

    That’s the absolute worst case for an infection rate. i.e. 100%. The thing is, as with most worse cases, is that they’re very unlikely to happen otherwise, by definition, they clearly wouldn’t be worse cases. Making an investment based on this assumption is fraught with risk. There are two huge calls here – the first is that we’re going to see a worse case and the second that it’s this particular thing where we see it.

    What’s the point of gold if it’s not sold when prices are high and income is cheap? May as well because if the worse case does come around those shiny tokens are going to be taken away by someone who is bigger, meaner and in possession of higher testosterone levels.

    That’s what the gold nuts don’t get. A Canadian Maple has very little value if someone takes it off you and, worse, inflicts some physical harm in the process. They’d be better off being easy to get along with and having some sort of utility value.


    1. It seems many who get it don’t show symptoms or they are mild. After all, I didn’t get flu this year, or even a cold. But presumably I was exposed to these enough, they just didn’t take?

      But I agree with your take on gold. Which is why I am trying to determine what I consider cheap enough for income, and alerting for it when/if the time comes. Mine is paper gold, not real gold, that infrastructure will be long gone if I find myself in zombietown. I am too old to want to streetfight, I’ll leave that sort of thing to hosimpson. Another vote for the crate of fine wine 😉


  6. I understand that a large number of deaths are caused by the sufferer contracting pneumonia. So get vaccinated. It costs £70.00 at Boots – worth the investment I think.


  7. Think you’re being too negative . This looks so far like a correction rather than a crash or bear market. Stocks were down 13% in a week but have bounced back about 5%. This is after a record year last year where global stocks went up more than 20%. This could be a V shaped trend, but none of us knows as depends how the virus spread plays out. The government worse case of One of five off work, and half million dead in the uk sounds absurd at the moment when there have been zero uk deaths and the infections are those returning from china and Italy. Time will tell. Many Ftse 100 stocks have very high yields 7-8% so for income investors there is bargains to be had. Having said this caution best for those close or in retirement.


  8. Eh… its difficult to get excited about a correction. But top marks for trying.

    Its also difficult to excited about discounts on investment trusts. Once you could pick up big generalist investment trusts with (for the time) low management fees at 20-30% discounts to NAV.

    I remember buying RITCP with the discount to NAV being c. 40%.

    Now you can track major stock markets through etfs for single figure basis points for annual expenses.

    Therefore you really need BIG discounts on ITs to make the additional management charges worth it.


  9. I’m a fan of investment trusts – however, I don’t have a pot of cash lying around to bag some bargains so I can only just stick to my plan of investing monthly and scoop up a few at a discount.

    My head is being turned however by big drops in high-yielding shares like Legal & General – what to do, what to do!?


    1. Legal and General currently on a yield of 11% – I smell a rat!

      L&G go ex-div on final dividend of 12.64p on 23rd April, payable on 4th June. This has been declared, but a lot can happen between now and then. You pays your money you takes your choice.

      Stay safe

      Liked by 1 person

  10. First time commenter…Ermine, your blog is the most unique, and therefore valuable, personal finance blog I’ve discovered. I do have to say that I am concerned anytime FIRE folks start getting excited about financial turmoil….I know people like us stand to benefit from market drops, but do we take into account the legitimate suffering that many people endure? My gain comes on the backs of people like my dad, who sell into every panic and buy at market tops. I don’t know what my point is here, but I feel deeply uncomfortable taking pleasure from other people’s catastrophic personal finance decisions. Curious what everyone else thinks.


    1. If it makes you feel any better for your Dad, I was that guy, in the dotcom bust. I have the contract notes to show for it 😉

      Although I think the fear on the coronavirus is perhaps overblown, while acknowledging that everyone who doesn’t make it is a tragedy, this suckout has been on the cards a long time. Ten years is an exceptionally long bull run.


      1. I hope we get a technical bear 20% correction so we can stop the “longest bull run ever” comment.

        In the dec 18 correction it was just a whisker away from a bear so it didn’t count.


      2. Watching my dad turn $250k in 1999 into $150k in 2020 definitely taught me something I’m glad not to have had to learn myself. I have a personal rule that anytime the market drops by about a percent or more, I log on to Vanguard and buy SOMETHING, regardless how small. Now buying into market drops is basically hardwired into me.


    2. Two possibilities for your father:-

      (i) Buy investment trusts such as Personal Assets Trust, Capital Gearing Trust, or Ruffer Investment Company. Or all three. They hold mixtures of equities, index-linked government bonds, gold, and cash. They must have their faults but they may be less prone to error than he is. Of course he’d have to hold them for a long while: it’s no good if he panics and sells.

      (ii) Go really retro: look for a With Profits investment. The annual charges may be less than he currently loses by ill considered trading.


  11. Good post as always, ermine, and something that will be on the minds of everyone who reads ’em.

    You may be right that most people will wind up getting the virus, but I’m going to have a good shot at avoiding it, because while in good health, I am 64… I live on top of a hill outside a small town of about 2,500 souls a long way from anywhere big, so with a bit of strategic hand-washing and non-face touching etc reckon I’m in with a chance!

    Maybe the pandemic won’t in itself be too destructive, but I feel as you do that the peripheral effects could be enough to push the markets into an overdue downturn. -30% maybe? I’ve also had 10-15% in gold recently and it’s done ok, but also in the last couple of days thinking about taking the profits on it before the turnaround. I’m sitting on a big pile of cash and cash-like assets, the big question is at what point to think about buying back in. Hopeless trying to call the bottom, too many uncallable inputs, although if the COVID-19 situation gets significantly worse over the weekend, which it probably will, further falls seem likely. My forward thinking tends to focus more on how far the market’s fallen at any given point. If you buy back in at -20% and there’s a further 10% fall, well, hey, you’re still getting a 20% head start. Get closer than that and you’ve gatecrashed the Royal Mint. I think I’m older than you, but still see this as a last opportunity to upgrade my retirement a bit. Once the markets are on their way back up, I will ungracefully retire from trying to make a bit of dosh, stick most of it in a collection of ETFs and forget about it, plus a few years (maybe not 10!) of cash, gold & bonds to tide me over any further corrections…


  12. FWIW, I am currently in cash. The COVID is nasty, there is no herd immunity, and computer models at Imperial College suggest up to 80% infection, with up to 500,000 deaths in the UK. This is not the flu! My gut feeling is a 50% crash (top to bottom) in the general market, however certain cyclical and technology stocks may fare even worse. Carnival Plc (Princess Cruises) are already down by 50%. This has only just begun!


      1. Stock market is down a decent amount too. So I got onto Premium Bonds and asked them to xfer enough to my bank account so I can put back what I borrowed from my ISA earlier in the year. I want to have ammo. The time is not yet now, but fortune favours the prepared as well as the brave.

        And I may as will acknowledge the dark tip to my tail. I believe market timing is a thing 😉 Largely because my job degraded badly in the last crash which also helped me get out of it early…


  13. Hairy times, looking to the news for comedy and to comedians for the truth.

    Soon find out if the nervous-hedge move in changing half the portfolio into cash before the selloff was dumb panic or forgivable.

    More depressing watching mouth-breathers decking each other in the supermarket over toiletpaper hoarding, just shows how easy it is to rule by fear when half of any given country is sh*tting itself over something or other at any one time. We’re really not a likable species, enough pressure and those neanderthal genes start showing.


      1. Fair enough, I was too hasty and modern humans are suspected to have had a role in doing in the neanderthals, so to imply they were the ugly side of humanity was adding insult to injury. How about philistine?


  14. Having steadily added funds since Feb 2018 – not that long ago – I notice that I am roughly level so far after a drop from peak of, say, 13% . Even back then, one could have expected we were at the end of a rather long bull run (as it turned out we weren’t, of course). For that reason, whilst selling nothing (100% equities since 2018), nor am I clamouring to buy yet.


    1. I was kinda more accurate on Leonard than on the rapidity of the surrender. Mind you, the amplification effect of ITs going into deep discounts as everybody exits stage left, pursued by a bear is out in force.

      I am not greedy yet. but I’m getting more interested. I have sprung enough to the premium bonds to get that year’s ISA I borrowed from Charles Stanley back in there in the next couple of weeks. I have time enough to think about next year’s ISA. I ain’t sold my gold yet. I am seriously tempted by some ASL and some of the other big ITs, but they could do with at least a few days of not falling. I could set up a drip in, but I figure some things you have to take on manual. I reckon this bear’s got legs.

      Market’s a whole lot more exciting, these days!


      1. I agree this has a distance to go. At the very least the market will want to wait and see Q1 earnings next month before attempting any sustained rally. I’ve experienced a handful of longer-lasting collapses over the decades, and while I haven’t ever sold out – indeed, added on the way down – I have in those cases always reached a point where I have given up on imagining a future financed by the returns on my holdings. That point would have been the moment to add to those holdings, but it would have taken more courage than I possessed had I had any spare cash left. The lesson I draw from this is that as long as I have faith in the idea that I might be buying the bottom then we haven’t got there yet.


    1. Yo! It’s too early to actually sound the trumpets of doom. I’m not necessarily disputing the terminus, but it isn’t yet time to capitulate IMO 😉


      1. The unemployment figures coming out in the US as states go into isolation one by one are seriously alarming. By some measures already higher than the nadir of the GFC and this thing has barely begun.


  15. Looks like the magic money tree injection in the recent budget sequence has just trickled down to the lowest in our society. In yesterday’s Independent newspaper there were arrangements being discussed to house the homeless in a budget hotel chain so they can be more controlable medically. (An upgrade on the Xmas red-letter day classic) This was marketed as ‘for their own good’ of course as opposed to for the good of the rest of society really. Treating them as honorary humans for as long as it takes, so they don’t give us diseases is unsurprisingly cynical when the free freshly printed money sloshing around, could get their lives restarted and remove them as an underclass by promoting them to fully human, call it ‘settled status’. Nobody seems bothered though when all these emergency measures will bail out too-big-to-fail entities, like even large companies and hedge funds, not just our regular old friends, the banks.

    Karma is sabotaging the NHS in over a decade of austerity, making medical staff’s conditions off-putting enough for them to desert in droves, then creating a hostile environment for the foreigners brought in to plug the gap. So when an emergency randomly arrives we are shocked, shocked I tell you, to find ourselves suffering as a result of our own choices. Actions have consequences, that’s reality vs unicorns.


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