On the plateau

This article on the plateau on the road to financial freedom comes courtesy of Budgets and Beverages from Team Monevator. Check back every Monday for more fresh perspectives from the Team.

The Oxford English Dictionary defines ‘plateauing’ as:

‘A time of little or no change after a period of growth or progress.’

It’s the worst, isn’t it?

Starting something new brings a feeling of excitement. Seeing progress in ability and knowledge brings a sense of euphoria. But then your ascending race to the top suddenly halts and is accompanied by exhaustion. Ending all too easily with you losing interest and letting your hard work go to waste.

I didn’t expect to experience this in investing. But the plateau has arrived and it’s making itself known to me.

Not a time to be negative

‘To plateau’ is a phrase that carries negative connotations. Understandably so. As the dictionary states, it suggests a lack of progression and a failure to keep moving forward.

We’ve all experienced a plateau at some point – whether in school, at work, or on that never-ending journey to get in shape. (And there were plenty of people making me feel guilty about that last one in Tokyo this summer…)

But last weekend, with a cup of tea in my hand (and a biscuit alongside it – when is there going to be an Olympic event for the most bourbons eaten in a minute?) I sat and wondered whether plateauing in investing might actually be a good thing?

And I’ve concluded that it most definitely is.

I only discovered the concept of financial independence last September. And as I alluded to in my previous Monevator post I’ve consumed as much information as I can since then.

I’ve changed my habits and curbed my spending. I’m now fully invested – financially and metaphorically – into this world.

So it’s not really a surprise I saw change and I saw it quickly.

But as my first year comes to a close, the rate of change has slowed.

Sometimes, it feels like it’s stopped altogether.

Automatic accumulation

It would be easy to panic, to wonder where I was going wrong, and to question if I should be making changes.

Thankfully I haven’t done that. Instead, I boiled the kettle again (obviously!) and reflected.

Given how much I’ve learnt and changed in the last 11 months, it was inevitable that the momentum would slow down at some point.

Now I think it’s a compliment to myself that things are happening at a slower pace.

My accounts are set-up, my transactions are automated, and my index funds have been chosen. As I understand it, that’s me done for the next 10-20 years.

Time to become a plateauing perfectionist. (It’s not the sexiest of superhero names, I grant you.)

A plateauing stock market?

It’s not just me that faces a plateau. There’s the stock market, too.

Now I can feel you all screaming at your screens: “The stock market doesn’t plateau! It’s exactly the opposite! It’s volatile!”

And you’d be right.

But I’m not talking hour to hour, or even day to day. I’m thinking about longer periods.

Because when you start to look at returns over months or even years, then there’s plenty of plateauing in the stock market, especially in index funds.

To save you from scrolling, here’s that dictionary definition again:

‘A time of little or no change after a period of growth or progress.’

Well here are examples of plateauing in action in three popular index funds over a 12-month (or longer) period.

S&P 500
30th June 2000: 1454.60
29th June 2007: 1503.35

In these seven years, the S&P 500 only increased by 48.75. That was definitely a time of little or no change!

FTSE Global All Cap
June 2018: 10,000.00
May 2019: 9945.25

In the space of a year in the FTSE Global All Cap, there was a small decrease of 54.75. Pfft.

Vanguard LifeStrategy 100
May 2015: 14,537.97
May 2016: 14,298.10

In these 12 months in the LS 100 fund, there was a small change of 239.87.

Think too about the UK’s index of 100 largest companies – the FTSE 100 – which famously went nowhere for most of the past two decades.

Investors in the FTSE 100 got dividends, so the return they received was far better than nowt. And there were certainly ups and downs along the way.

But all told, anyone looking for excitement from the UK’s benchmark index would been better off heading to Wickes for a pot of paint to watch dry.

Flatter to deceive

Obviously, I cherry picked those numbers to support my argument. And I wouldn’t blame you for finding numbers that go against it.

Also, it’s true that when you expand the view out from a year to two years, or five, or ten, then plateauing is less seldom seen – in your portfolio or in the markets.

So given enough time your index funds *should* rise, barring an ill-timed crash or a global pandemic.

And at that point you’ll thank yourself for being a plateauing perfectionist.

Your portfolio should be up, too – from the rise in the markets, and from your slow, steady, and consistent investing habits.

Compound interest is on your side, after all. But compounding does not happen overnight.

Outside of the Olympics, slow and steady wins the race

We’re so often encouraged to go at 100 miles an hour, to chase that next milestone, and to beat our competitors.

But I’m enjoying taking things at an apparently boring pace.

I won’t be chosen for Team GB any time soon. But I have got my eye on winning gold in the art of plateauing, at least when it comes to my finances.

Let’s be proud to be boring in the world of investing. Be proud to slow down. And be proud to plateau.

I’m sure we’ll all thank ourselves in the years to come.

See more posts from Budgets and Beverages in his personal archive.

The post On the plateau appeared first on Monevator.

Weekend reading: The pandemic was a shot in the arm for financial independence

What caught my eye this week.

I told to my friend we should saunter down the platform, because the tube would surely be busy. It was Friday night in London, after all.

But when the train drew in, the carriages were all half-empty.

You can visit Oxford Street and imagine things are back to normal.

But if you really cast your mind back to the crush and the rush, you know we’re not there yet.

And, as I’m steadily catching up with friends for in-person conversations, it’s uncanny how the same related topics keep recurring.

Work/life balance, going back to the office, moving out of the city – and how while we’re all happy to be seeing more people, we’re (mostly) not going back to those frazzled social lives we once thought must-haves.

Of course my friends are self-selected. They mostly know I write about financial independence and investing and all that malarkey, too.

And they know I’ve worked from home since forever, so it’s natural the subject comes up.

But even allowing for this, I’m hearing a lot more about changed habits – or at least a willingness to experiment – that no hectoring about savings rates or the hedonic treadmill could inspire back in 2019.

What a difference a virus makes

That most of us saved more money when locked in our homes due to Covid is well-understood.

We’ve also kicked about on Monevator what offices will be for now, how much we’ll stick to home working, or how we’ll mix in a mask-less world.

But could more subtle shifts be seen in the millions made meditative by successive waves of lockdown?

The substitutions they report are straight from a primer for financial independence:

Partying in the garden instead of partying on a far-flung beach.
Wearing the same clothes instead of wearing nothing new twice.
Learning a new skill versus chasing a new experience.
Working out at home compared to working out how to afford the gym.
Getting a takeaway (delivered) instead of eating at a restaurant…
…and cooking your own meals instead of getting a takeaway…
…in both cases saving on alcohol bought at supermarket prices.
Seeing a friend for a lockdown coffee versus blathering with strangers.

Netflix and M&S snacks versus the cinema and £10 popcorn.
Buying a nice home office chair instead of a £4,000 season ticket for the train.
(Barely out of your) birthday suit to answer emails rather than shopping for another suit for the office.
Saving 20% each month instead of dipping into the red at its end.

This list goes on. Let me know what have I missed below.

To many Monevator readers, such potential new habits will sound pretty pedestrian. But we’ve always been the exception.

No, I don’t think the world has caught FIRE1 along with Covid.

But perhaps some tenets of living well on less will be an easier sell for the next few years? Let’s hope so.

Have a great long weekend!

From Monevator

Time to switch to a new mortgage rate – Monevator

Fund names explained – Monevator

From the archive-ator: All about assets – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!2

‘Criminal’ post-Brexit error on HGVs could see Christmas food shortages – ES

Record numbers leaving London, but where are they going? – Which

83% of UK department stores have shut since 2016 – ThisIsMoney

Giant US retailers are now chartering their own freight vessels – Axios

The real victims of the mass crypto attacks that keep happening – BBC

The pandemic spurred millions of Americans to retire earlier – NPR

Too bad for their over-worked former colleagues left behind – The Cut

Products and services

Contactless payment limit set to rise to £100 in October – Guardian

Revolut’s ‘Payday’ feature will advance you half a month’s salary – ThisIsMoney

Interactive Investor is offering £100 cashback for ISA transfers worth more than £20,000 and up to £500 if you transfer a pension – Interactive Investor

A roundup of the camper van and transit van market – ThisIsMoney

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

PayPal enables UK users to buy and sell cryptocurrency – Reuters

How low can fund fees go? [US but relevant]Morningstar

Zopa launches Best Buy two-year (1.67%) and three-year (1.76%) fixed savings rates – Zopa

Homes for sale near universities, in pictures – Guardian

Comment and opinion

A comprehensive overview of the 4% rule [Podcast]Rational Reminder

Rules, truths, beliefs – Morgan Housel

Will gold have its day as an inflation hedge? [Search result]FT

Assumption – Indeedably

When to use rules of thumb – Humble Dollar

Why does quitting your job still feel so hard? – BBC

So far 2021 is yet another great year for the US indices… – AWOCS

…but remember that all markets can and do fall eventually – Validea

How to trade up from a bobby pin to a house [Podcast]NPR

Foxy Money with Andy Craig, of How To Own The World fame – via YouTube

Welcome to the weird – Simple Living in Somerset

Digital asset mania mini-special

12-year-old coder to earn $400,000 after two months selling NFTs – CNBC

OpenSea is first NFT marketplace to pass $1bn in monthly volume – The Block

Visa bought a CryptoPunk NFT for $150,000 [Good publicity…]CNBC

Why wouldn’t Bitcoin go to $100,000? – The Reformed Broker

I don’t fucking get it – The Irrelevant Investor

Naughty corner: Active antics

Price moves everything around me – Of Dollars and Data

A look at the valuation of the major investing factors – Validea

Analysts say lost decade is over for emerging markets – Bloomberg

Average late stage VC valuations nearing $1 billion – Institutional Investor

Covid corner

Covid infection protection waning in double jabbed… – BBC

..and cases are rising again. Time to worry? – BBC

Some Wall Streeters are fed up with their unvaccinated coworkers – NY Post

Kindle book bargains

The Art of Gathering: How We Meet and Why It Matters by Priya Parker – £0.99 on Kindle

Surrounded by Psychopaths: or, How to Stop Being Exploited by Others by Thomas Erikson – £0.99 on Kindle

The Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle

Hired: Six Months in Low-Wage Britain by James Bloodworth – £0.99 on Kindle

Environmental factors

Dead white man’s clothes – ABC News Australia

Meet the bounty hunters after Florida’s invasive pythons – Field and Stream

Off our beat

The secret to surviving cancer – The Atlantic

Uh oh! Netflix discovers the clickbait that killed online journalism – Slate

Why people who brush still get cavities – Five Thirty Eight

The hard men removing Spain’s squatters – BBC

Having killed them off, why is Amazon now opening malls? – The Atlantic

In the ‘undefeated’ Panjshir valley of Afghanistan – BBC

And finally…

“Pain is inevitable. Suffering is optional. Say you’re running and you think, ‘Man, this hurts, I can’t take it anymore’. The ‘hurt’ part is an unavoidable reality.”
– Haruki Murakami, What I Talk About When I Talk About Running

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Financial Independence Retire Early.
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The post Weekend reading: The pandemic was a shot in the arm for financial independence appeared first on Monevator.

Fund names explained

Just as a twirlable moustache and a sinister laugh means you’re dealing with a villain, fund names instantly reveal much about the nature of an investment.1

Learn how to decode fund names and you can quickly parse product lists, rapidly spot index funds and ETFs, and save time finding what you want.

Here’s a typical fund name and what it means:

Let’s break the formula down.

Fund provider

This is the asset management firm who created the product. In the UK, the main players issuing index trackers are:

Vanguard
BlackRock aka iShares
Fidelity
Lyxor
Amundi
State Street aka SPDR
HSBC
Legal & General

The provider’s name may be twinned with a sub-brand. For example: iShares Core.

Core ETFs are often low-cost entries in a provider’s range, although that’s not a hard and fast rule.

Asset class

The main asset class usually reveals whether you’re getting into equity (stocks and shares) or bonds. If the fund name doesn’t suggest an asset class then you’re probably looking at an equity fund.

The sub-asset class shows where the fund’s assets are concentrated. For a broadly diversified equity fund this is typically a geographic region. For example: the Developed World.

Specialised funds will often pair the region with a tilt to an investment style, such as Global Small Cap.

The sub-asset class may be preceded by the name of the index tracked by the product. As in: Vanguard FTSE 100 UCITS ETF. That tells you the ETF tracks the largest 100 companies listed on the London Stock Exchange.

FTSE, MSCI, S&P, Stoxx and Bloomberg Barclays are the big index providers. They are often referenced in tracker names.

Bond maturities

A bond tracker’s name often signals the maturity dates of its holdings:

iShares UK Gilts 0-5 UCITS ETF. This ETF holds UK government bonds (gilts) that will mature in up to five years. Five years and below indicates the sub-asset class is short-dated UK government bonds.

SPDR Bloomberg Barclays 15+ Year Gilt UCITS ETF. This ETF hold gilts that mature in 15 years or more. Anything over 15 years is a long-dated bond holding.

The giveaway – Most but not quite all index funds pop the word index or tracker into their name to make things slightly easier.

Active fund names don’t feature indexes, but not all trackers do either.

Share class

A single fund may offer itself in more guises than Zeus, as denoted by its share class. Instead of turning up as a bull or swan like a Greek god, a fund simply puts some letters in its name (e.g. Class A or D or I) to indicate that exactly the same product is available at different costs.

Index funds tend to be limited to three types:

Retail – Available to individual investors like you and me. The fund name may include the abbreviation Ret instead of a share class letter.

Institutional – Available to pension funds and the like. Sometimes available to you and me when a deal has been cut between the fund provider and a particular broker. Inst funds are cheaper than their retail counterparts.

Platform exclusives – Some fund managers furnish large online brokers like Fidelity and Hargreaves Lansdown with slightly cheaper versions of their index funds. The fund will offer a small discount on its annual charge but will otherwise be the same fund that’s found everywhere else bar an ‘exclusive’ letter designation in its name.

Share class letters have specific meanings in the US. That doesn’t apply here in the UK, where classification notation is all over the shop.

Income treatment

There are two varieties: Accumulation and Income.

Accumulating funds reinvest your dividends and interest back into the product without you lifting a finger.

Income funds pay out dividends and interest as cash money into your broker account. You can then reinvest or spend at your leisure.

Accumulating funds are also termed ‘capitalising’ and usually contain one of the following abbreviations:

Acc
A
C
Cap

Income funds are also known as ‘distributing’ and may feature these: abbreviations:

Inc
D
Dis
Dist

UCITS regulated

You’ll notice most ETFs include the abbreviation UCITS. This memorable acronym refers to EU regulations that enable funds to be sold across European markets.

UCITS funds are meant to maintain certain standards that protect retail investors, such as a minimal level of diversification.

UCITS rules also apply to index funds.

Non-European ETFs are not governed by UCITS regulations. Neither are other exchange-traded products like ETCs (Exchange Traded Commodities).

Take the hint. Exercise caution and conduct more research on non-UCITS products.

There is now a UK UCITS standard that facilitates post-Brexit harmony.

Other info

As we hit the tail end of a product’s name, you may see a cavalcade of cryptic codes, scattered around at the provider’s whim.

Some ETF names are gilded with their replication method.

For example: Lyxor Core MSCI World (DR) UCITS ETF – Acc.

DR stands for direct replication and indicates that the ETF physically holds the securities in the index.

The alternative is a synthetic ETF that’s occasionally signalled by the word ‘Swap’.

ESG stands for Environmental, Social, and Governance. ESG funds are meant to favour companies that make an effort to reduce the harm they inflict on the planet. Mileage varies.

Currency

ETF fund names often quote a currency, such as GBP, USD, or EUR. This usually refers to the currency the fund reports its results in and doesn’t protect you from currency risk.

The information is useful when the product currency hedges its return to neutralise the risk of swings in foreign exchange markets.

Some providers helpfully mention currency hedges in the fund name.

For example: Xtrackers Global Government Bond UCITS ETF 2D GBP Hedged.

This ETF hedges its return to the pound. Its returns to UK investors should be mostly unaffected by jostling in the currency markets.

Incidentally, 2D in this name refers to the share class.

Domicile

You’ll occasionally see the letters IE, IRL, LU, or LUX dropped into a name.

That’s because Ireland and Luxembourg offer favourable witholding tax rates if a fund is based there.

Some providers use that as a selling point. You won’t see less competitive tax jurisdictions being flagged, however.

You can confirm your fund’s domicile using its International Securities Identification Number (ISIN).

ISIN numbers contain a handy two-letter country code, which helps you recognise your product’s domicile:

IE = Ireland
GB = Great Britain
LU = Luxembourg
FR = France
US = US
DE = Germany
CH = Switzerland
CA = Canada
GG = Guernsey
IM = Isle of Man
JE = Jersey

An ISIN number looks something like this: GB00B59G4H82. The GB means this fund is resides in good old Blighty.

It’s less well-known that the Irish and Luxembourgian investor compensation schemes are less generous than the UK’s.

Whatever you do, record the ISIN number of the fund you’re interested in.

This catchy number is the one way I’ve found to reliably distinguish between fund versions, and ensure I buy the right one when I place an order.

More to know than fund names

Want to learn more?

How to read a fund factsheet.
How to read a bond fund webpage. Coming soon!
Our best global tracker fund (equity) recommendations.
Find the best bond funds.
Ideas for the cheapest index trackers.

Take it steady,

The Accumulator

An ETF is a type of investment fund, so I’ll use the term ‘fund’ when referring to generic characteristics shared by traditional funds and ETFs alike.

The post Fund names explained appeared first on Monevator.

Time to switch to a new mortgage rate

This article on choosing the best mortgage rate is by The Dink from Team Monevator. Check back every Monday for more fresh perspectives on personal finance and investing from the Team.

The email from my bank practically begged me to pay attention: “Dear Mr Dink, it’s almost time to switch to a new mortgage rate.”

I’ve only renewed my mortgage once before. That time it dropped my monthly repayments by £70. So I’m excited by the prospect of more of the same.

Renewing a mortgage was not always pleasant. Speak to anyone who had a mortgage in the 1970s and they’ll tell you that. The 17% minimum lending rate some saw back then could be life-changing – if not life-threatening.

At 17%, my monthly mortgage payments would triple to £1,800.

Ouch!

My bank’s email also reminded me to be grateful to simply be on the housing ladder at all.

As a millennial, many of my friends are stuck in a cycle of not being able to save for a deposit. The high cost of rent is too high.

The average house costs around £300,000. Buying one requires a 10% deposit of £30,000. You need to be saving about £1,000 a month for three years to cover the deposit and associated buying costs. All while paying rent.

Ouch, again.

My mortgage history

We bought our house in 2016 for £172,000 with 90% Loan To Value (LTV) mortgage at 2.49%, fixed for two years. The monthly payment was £820.

In 2018 we switched mortgage and topped up. This got us into a better 75% LTV bracket. We fixed at 1.99%, with a £750 monthly payment.

Today in 2021 the house is valued at £220,000. The mortgage balance is £120,000. Our LTV has come down to 54%.

We didn’t overstretch ourselves in 2016. This despite the bank offering us five-times our salary and the standard advice being to get as big a house as possible to leverage house price growth.

Instead, we bought a modest house to give us more flexibility.

Sure, in a good year a £500,000 house might go up by over 3%. That’s £15,000 in extra net wealth! However, you don’t get to see that money until you sell. Even then, selling is a painful process that takes months.

A cheaper house also fitted our lifestyle back then. Our smaller mortgage was not a burden. At a pinch we could pay it with a single salary if we had to (albeit by living on bread and water.)

The money we would have spent on a £500,000 mortgage has instead been funneled into our ISA accounts. Those have done pretty well so far!

Should we pay off the mortgage?

At the start of my FIRE1 journey I wrote up a rough allocation, which I believe matches my risk profile.

My asset allocation manages my inner conflict between three competing tendencies – active investor, sensible passive investor, and wannabe crypto punk.

This is how I divide my assets:

60%: Passive ETFs
30%: Actively traded
6%: Cash
3%: Gold
1%: Crypto

This allocation enables me to sleep at night. I’ve stuck to it and rebalanced as required.

Now, after seven years of maxing out my Stock and Shares ISAs, we have enough to pay off the mortgage should we choose to.

It is tempting. But would it lose me money overall?

With a mixed portfolio it’s very hard to estimate what return you can expect over the next five years.

Compare that with using the money to pay off your mortgage. In this instance all the numbers required are known upfront. You can therefore calculate a certain ‘return’ on paying off some debt to the nearest penny.

To get an approximate idea, I turned to a compound interest calculator. I assumed my portfolio would return 4% over the five year term of my next mortgage fix.

Scenario #1: Pay off the mortgage

Let’s say I withdrew £120,000 from ISA to fully pay off my mortgage.

Obviously there would be no more mortgage repayments after that.

So I assume I will pay the freed-up £640 – which the mortgage would have been costing me each month if not paid off – into my ISA.

After five years – at that guesstimated 4% – I would have £42,431.

To recap, after five years:

Remaining mortgage: £0

ISA balance:  £42,431

Net: £42,431

Scenario #2: Don’t pay off the mortgage

Alternatively, what if I left the £120,000 in my ISA (assuming again 4% return on my portfolio) and continued to slowly pay down my mortgage?

Five years after not paying off mortgage:

Remaining Mortgage: £86,992

ISA Balance:  £146,519

Let’s say I then – after five years – used the ISA balance to pay off the mortgage – so £146,519 minus £86,992.

Net: £59,527

The financial difference

On these numbers I’d end up £17,000 better off by waiting another five years before paying off the mortgage.

This is my personal situation. It is based on that 4% estimated return from my portfolio. Different numbers would obviously change the final result.

My portfolio might well earn less than 4%. However I’d be willing to take that risk. I think 4% is fairly conservative compared to historical returns – and there’s also a chance I would earn more than 4%.

Paying off the mortgage completely will not give me a chance of reaching financial independence any sooner.

Having more money growing in my ISA just might.

LTV thresholds

Last time we renewed our mortgage we paid in a few thousand extra pounds to get us into the next 5% LTV bracket.

This money came from my ISA. I believe it was definitely worth it to reduce the monthly mortgage payments by qualifying for a better interest rate.

Since then, the recent house price boom has increased the value of our home by enough to get under the top 60% LTV for best rates.

Offset Mortgage

I’ve previously found it hard to see a situation where an offset mortgage would be useful to us. But based on my comrade’s enthusiasm on Monevator, I re-ran the numbers.

If I converted everything outside of my ISA – that is gold, crypto, and cash – to a savings account to offset against the mortgage, it could give me £10,000.

The bank would now calculate the mortgage against £110,000 rather than £120,000 – but at a higher rate of 1.39%

This gives me £40 a month cheaper mortgage payments of £600.

Honestly, the offset is more competitive than I thought it would be.

However, I’m happy to take the chance that my £10,000 left in mixed assets will grow enough to beat the £40 a month saved – and maybe by a lot more.

Again, something to decide based on your situation and risk appetite.

The best mortgage rate

I don’t get wound up striving for the absolute best mortgage rate. There is not a life-changing difference between most fixed deals I look at.

For the convenience of renewing with my current provider, I don’t mind paying an extra few quid a month. It helps that my current provider has consistently ranked at the top of the mortgage rate tables.

What you must avoid is ending up on an expensive variable rate.

Premier customers

Because of the large lump in my ISA, I’m a premier customer at my bank. This sounds great, but I really struggle to make use of any of the perks.

My bank offers a ‘5-year Fixed Premier’ account with a good rate. But the large arrangement fee means it’s not worth it on our small mortgage.

Lounge access at the airport, though, is brilliant!

What if we move home?

Well-meaning friends have told us we should not renew our mortgage if we intend to move within the next 18 months. Instead, they say, we should go onto the variable rate

We’ve lived in this tiny house through lockdown. With the prospect of working from home a lot more, of course we would like a larger home soon.

Our friends’ advice centres on the Early Repayment Charge (ERC). This becomes due if you pay off a fixed-rate mortgage before the term is up.

On our current mortgage the ERC is 1% of the amount repaid early, for each year remaining of the fixed rate.

However our mortgage advisor has assured us that most people can ‘port’ their mortgage when they buy their next house. So hopefully by doing so we can avoid any penalty payment when we eventually move house.

I’ve heard of another life event that this fee can nail you on. That’s if you get divorced and have to sell the house.

If in that situation you need to pay off the mortgage early you might be liable to pay a charge. So if your relationship is a bit rocky don’t sign up for a five-year fixed mortgage with potentially a near-5% ERC.

(Of course if your relationship is already shaky then explaining why you want to avoid a five-year commitment might itself lead to an interesting conversation…)

Exploring the fixed rates on offer

My bank seems to always be near the top of the mortgage tables. Handy.

I therefore started my search by creating a spreadsheet with all my bank’s fixed mortgage options, over two, three, and five years.

Once I decided what rate suited us best, I plugged it into a couple of mortgage comparison sites. Just to make sure it was fairly competitive.

I’m not going to share my spreadsheet. It’s a brilliant exercise to write one yourself. (Also, I’m scared of any liability or criticism that may be directed at my sheet!)

The deals in detail

These are the mortgage deals my bank offered me:

Product
Fee
Rate %
Years

2-Year Fixed Fee Saver
£0
1.14
2

2-Year Fixed Standard
£999
0.94
2

3-Year Fixed Fee Saver
£0
1.34
3

3-Year Fixed Standard
£999
1.09
3

5-Year Fixed Fee Saver
£0
1.34
5

5-Year Fixed Standard
£999
1.09
5

5-Year Fixed
Premier Standard
£1,499
1.06
5

I then turned to the basic mortgage calculator at Money Saving Expert. I plugged in my mortgage debt (£120,000), mortgage term (17 years), and the interest rate of each deal.

This gives me a monthly repayment and a remaining debt figure (at the end of the term) for each deal:

 
Fee
Rate %
Years
Monthly
Remaining

2-Year Fixed Fee Saver
£0
1.14
2
£648
£107,063

2 Year Fixed Standard
£999
0.94
2
£637
£106,853

3-Year Fixed Fee Saver
£0
1.34
3
£658
£100,761

3-Year Fixed Standard
£999
1.09
3
£645
£100,412

5-Year Fixed Fee Saver
£0
1.34
5
£658
£87,498

5-Year Fixed Standard
£999
1.09
5
£645
£86,992

5-Year Fixed
Premier Standard

£1,499
1.06
5
£643
£86,931

Using the monthly repayment I then calculated the total paid over the period for each deal. This is the monthly repayment multiplied by 12 and then by the number of years, plus the arrangement fee.

Subtracting the remaining debt from the initial loan amount of £120,000, I get the amount that has been paid off the mortgage at the end of each product’s term.

Show me the money

In the table below, the ‘Total cost’ is then the difference between ‘Total paid’ and the amount ‘Paid off’.

Finally – based on total cost and the amount paid off – for each mortgage option I calculate the true cost for each £1 paid off of the mortgage:

 
Monthly
Remaining
Total Paid
Paid off
Total Cost
Cost per £

2-Year Fixed Fee Saver
£648
£107,063
£15,552
£12,937
£2,615
0.20

2-Year Fixed Standard
£637
£106,853
£16,287
£13,147
£3,140
0.24

3-Year Fixed Fee Saver
£658
£100,761
£23,688
£19,239
£4,449
0.23

3-Year Fixed Standard
£645
£100,412
£24,219
£19,588
£4,631
0.24

5-Year Fixed Fee Saver
£658
£87,498
£39,480
£32,502
£6,978
0.21

5-Year Fixed Standard
£645
£86,992
£39,699
£33,008
£6,691
0.20

5-Year Fixed Premier Standard
£643
£86,931
£40,079
£33,069
£7,010
0.21

(Please refer to the tables above for rates and fees for each product)

Looking across all of the deals, none of them are significantly different enough to have a life-changing effect on my finances.

It is scary when you work it out like this though. It’s costing me at least 20p for every £1 that I pay off my mortgage.

But don’t panic. Go back and reread the section ‘Should I pay off the mortgage?’ for some perspective.

What am I going to do?

Last time I renewed, I fixed for three years. I was sure that the interest rate would go up due to Brexit. But I was wrong.

This time I’m even more certain that interest rates will go up. So I’m going to fix the mortgage for five years.

But it doesn’t matter if I am wrong. I’ll sleep well at night having locked in a monthly payment – one that we can comfortably pay and have budgeted for.

However if interest rates do shoot up, I’ll be unbelievably smug for the next five years. That alone is worth the risk!

You can see all The Dink’s articles in his dedicated archive.

Financial Independence Retire Early.

The post Time to switch to a new mortgage rate appeared first on Monevator.

Weekend reading: I do, you do, we do

What caught my eye this week.

I am recovering from an excellent wedding that ended late last night (not my own!) so straight into the links this morning.

Except to observe that people of all ages do seem very happy to mix again.

And that commentators who asked last summer “Will we ever be comfortable at a party again, post-Covid?” might have been bemused to see half a dozen pensioners crowding together into one of those comedy prop-strewn instant photo booths.

Of course that’s not to say that was necessarily wise behaviour for their age bracket in the midst of the ongoing Delta spread – nor to deny that there are limits to the double-jabbed vaccination protection that made this wedding possible.

More that the human spirit has strong reversion-to-the-mean tendencies.

Investing accordingly, I think.

Have a great weekend!

From Monevator

Should you borrow to fill your ISA each year? – Monevator

SIPP money saving hack – Monevator

From the archive-ator: Why your house is an investment, and an asset, too – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Downing Street hints triple lock will be watered down – Guardian

Inflation falls to 2% in UK amid retail discounting – BBC

HMRC digs deep into your data [Search result]FT

Food industry chaos due to Brexit not Covid, say trade groups – Sky News

Lloyds moves into the landlord business with a 50,000 home plan – Guardian

UK house prices increased by 13.2% in the year to June 2021, up from 9.8% in May 2021 – ONS

Products and services

How will the post-Brexit return of roaming charges hit consumers? – Guardian

The pros and cons of a 35-year mortgage – Which

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

John Lewis launches investing accounts with Nutmeg – ThisIsMoney

How to buy a secondhand phone, and what to look out for – Guardian

Nationwide is offering a £125 bank account switching bonus – Which

Homes for sale with a loft conversion, in pictures – Guardian

Comment and opinion

“Why I won’t wait to retire”Humble Dollar

The best advantage of life: being born rich – Of Dollars and Data

The age of the ETF is looming [Search result]FT

All or nothing markets – A Wealth of Common Sense

The optimal amount of hassle – Morgan Housel

The hidden risk of equal weighting index funds [PDF]Northern Trust

Bubble wealth [Academic paper/PDF, a few weeks old]SSRN

Naughty corner: Active antics

What’s harder? Asset allocation or stockpicking? – Behavioural Investment

There’s no such thing as buy and hold – Ensemble Capital

Quants are rethinking stock trades in the manic Reddit era – Yahoo Finance

How to craft a 30-stock, sector-neutral portfolio – Fortune Financial

Zooming out on Palantir’s vaunted vault of gold – Abnormal Returns

Hybrid workplace mindset mini-special

Why are so many knowledge workers quitting? – The New Yorker

It’s time to re-onboard everyone – Harvard Business Review

Mental health is the next big workplace issue – Axios

Disinfection robots and thermal cameras: the post-Covid office – Guardian

Covid corner

Is catching Covid now better than more vaccine? – BBC

Kindle book bargains

Surrounded by Psychopaths: or, How to Stop Being Exploited by Others by Thomas Erikson – £0.99 on Kindle

The Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle

Hired: Six Months in Low-Wage Britain by James Bloodworth – £0.99 on Kindle

Happy Money by Ken Honda – £0.99 on Kindle

Environmental factors

Twilight of the nautilus – Nautilus

The case for green versus blue hydrogen in energy production – DIY Investor

Behind the fight to save the Gulf of Mexico’s reefs – Texas Monthly

Off our beat

Inside Facebook’s Metaverse for work – The Verge

How to remember what you read – Farnam Street

Everybody is having hilarious fun and you’re not [On NFTs]Justin Paterno

How Wingspan – a board game about birds – became a surprise hit – Slate

Time dilation – Seth Godin

It’s time to bring back cargo pants – Wired

And finally…

“The impression was gaining ground with me that it was a good thing to let the money be my slave and not make myself a slave to money.”
– J.D. Rockefeller via Ron Chernow, Titan: The Life of J.D. Rockefeller

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The post Weekend reading: I do, you do, we do appeared first on Monevator.

SIPP money saving hack

Okay, confession time. This SIPP money saving hack won’t change your life. But it could be worth the price of a nice meal out every year.

If I was a better intro writer I’d also highlight it might save you up to 82% on your SIPP fees – which will certainly be true for a few readers.

Either way, it’s surely better to have every pound working for you rather than for the Military-Financial complex, eh?

SIPP money saving in a minute

This tip should only take a couple of emails to sort. It will help two groups of people.

Firstly, anyone who is not maxing out their pension annual allowance and is not using their platform’s SIPP account to pay their fees could benefit.

You could be paying anything from 25% to 82% extra in foregone tax relief if your platform takes your SIPP fees from a linked dealing account.

Secondly, anyone who is maxing out their annual allowance and is using their platform’s SIPP account to pay their fees.

In this latter case you can grow the tax-free space in your SIPP faster by paying your fees from a linked dealing account instead.

This was me for a few years because I didn’t know I could pay my SIPP fees from a non-SIPP account.

Annual allowance headroom step-by-step

If you’re not maxing out your pension annual allowance then pay your fees from your SIPP account.

Set up your monthly direct debit on your SIPP account.
Instruct your platform to take fees from your SIPP account first.
If your platform won’t facilitate this request then don’t fund any account other than your SIPP. Leave enough cash in there to cover your fee. They’ll soon take it.

How much can you save?

A basic-rate UK taxpayer makes a 25% saving by using pension contribution tax relief to help pay their fees.

They’d save £60 on annual fees of £300, for example.

That’s because they only need contribute £240 to their SIPP to gain £300 after 20% tax relief.

A higher-rate UK taxpayer makes a 67% saving.

So, for a higher-rate payer a £180 SIPP contribution magically pays a fee of £300, after 40% tax-relief.

Some additional tax rate payers could save 82%. Some Scottish taxpayers will save at different rates. Anybody who can salary sacrifice into their SIPP to use this SIPP money saving tip will fill their boots even more.

No annual allowance headroom: step-by-step

If you are maxing out your pension annual allowance then pay your fees from your linked dealing account.

Instruct your platform to set up a dealing account for you and to take fees from that account first.
Set up a monthly direct debit on your dealing account to cover the fees.

This way every last pound of your annual allowance can be put to work expanding your tax-advantaged wealth.

Every little bit helps when the Government is shrinking your annual allowance by the inflation rate every year.

Granted, this is like squeezing the last blob of toothpaste from the tube. But who doesn’t do that?

Optimising costs

Relatively minor savings like this will rebound off the incredulity shields of big picture people.

But optimisations stack. The modern world is built on them.

Shave off enough costs like this and they’ll add up like extensions to a money moustache that grows bushier every year.

And of course, optimisation is a psychological comfort and motivator for detail hounds like me.

The originator of this SIPP money saving hack

I can’t sign-off without mentioning that Monevator reader Steve alerted me to the fact that his platform actively made it difficult for him to pay his fees from his SIPP.

I’ve never had this trouble from my platforms. But I did lose out by forgetting to switch my direct debits back to my SIPPs once I stopped maxing out my annual allowance.

Please let us know in the comments if your platform makes it difficult for you to save on SIPP fees – or any other costs.

I’d like to update our broker table with these extra nuggets that passive investors need to watch out for. Reader feedback helps.

Two hidden costs that platforms don’t advertise come instantly to mind:

1. Some platforms aren’t transparent about the currency exchange fees you’ll pay on dividends from funds invested overseas.

2. Many platforms advertise a low dealing fee for regular investing. For example, they say you’ll only pay £1.50 to buy an ETF on a monthly schedule versus £10 to trade whenever. That’s great, but watch out for costly catches.

For instance, some platforms restrict the choice of products available in their regular investing scheme. And some make it hard to undo the commitment.

In contrast one of my platforms lets me chop and change my regular investments every month, or to take a break anytime. So obviously that’s the one to go for if you expect to lean heavily on this feature.

Please add your experiences in the comments so we can create a checklist of questions to fire at new platforms before you transfer to them.

Take it steady,

The Accumulator

The post SIPP money saving hack appeared first on Monevator.

Should you borrow to fill your ISA each year?

This thought piece explains why it’s so compelling to fill your ISA each year. The approaches discussed won’t be suitable for all readers! Please think about your own situation and get professional advice if needed.

Even on a good middle-class income, it’s not easy to fill your ISA. The annual ISA allowance – £20,000 per year per adult – is pretty chunky.

And that’s a shame, because the ISA is a near-peerless tax shelter.

Gains made and income received in an ISA are tax-free. They don’t use up other tax allowances. You don’t even declare them on your tax return.

The snag is the ISA is a use-it-or-lose-it allowance. If you don’t fund your ISA one year, then that year’s allowance is gone.

That is to say, there’s no ‘carry-back’ type option, in contrast to pensions. 

Use it or lose it

Even with no investment gains at all, you can squirrel away £500,000 into ISAs over 25 years. Just by putting in the maximum of £20,000 annually. 

Okay, so ‘just’ is doing quite a lot of heavy lifting in that sentence. You would be excused for not quite being able to rustle up twenty grand of post-tax spare cash, year in, year out.

Especially in the early years of your career when your earnings are low, or when you’re trying to save for a house deposit. Or when you’re servicing a mortgage or wanting to go on holiday, or paying the school fees. Or for the kids’ university.

Oh, and what about saving into your pension?

Suddenly that difficult year is looking like your whole career. 

But then Great Auntie Mabel goes and dies and leaves you £500,000. (She bought a house in 1976.) It’s a shame you can’t just put that all into your ISA in one go, isn’t it? 

Especially since a friend, whose Aunt Bessie gave them £20,000 a year conditional on it being kept in a cash ISA during her lifetime, got exactly the same inheritance. Only they get a tax-free income from it, in perpetuity!

Tax and spend

Let’s say you both invest your inheritance into corporate bonds paying 2.5% per annum.

Let’s also presume you’re both higher-rate taxpayers in your retirement.

Because your windfall remains outside of an ISA, you will have £5,000 less to spend from your inheritance every year than your friend:

£500,000 * 2.5% * 40% tax = £5,000 tax

And since the ISA allowance is now effectively inherited between a couple when one of them dies, the ISA tax shield benefit could go on for 30 or more years. Which means the ‘cost’ of not being able to use that ISA allowance might be £150,000 (each).

And that’s all assuming no growth.

Yes yes, I know, you could be putting the inheritance into your ISA over this time, and at year 20 you’d have it all in there. My numbers are to illustrate a point.

Besides, perhaps you’ll get a second inheritance or a bonus or sell a buy-to-let, or some other windfall?

Gimme shelter

It all seems a bit unfair. It’s like the full ISA tax break is only really available to those who start out rich in the first place!

If only there was a way to carry forward all those unused years of allowance to later on in your life…

As I just alluded to, a later life windfall might not even be an inheritance.

Many people earn much higher wages in their 40s and 50s. Or they might cash-out equity in a business they are involved in. Or sell their Bitcoin.

Whatever the case, it would be nice to be able to shelter any late-life lump sum in the ISA that you couldn’t afford to fill in your 20s, wouldn’t it?

Well if you haven’t ‘banked’ all those decades of allowances, you can’t.

Should you borrow money to fill your ISA?

Borrowing to fill your is ISA is the classic business school solution to this conundrum.

Every year you borrow £20,000 and put it into your (cash) ISA.

When Auntie Mabel dies you’ll have £500,000 in your ISA and £500,000 of debt. Her money pays down your debt leaving you in exactly the same position as your friend.

Voila!

Common objections include:

Who’s going to lend me that sort of money?
The cost of the debt will exceed income on the cash ISA. That makes this an expensive exercise for some uncertain future benefit.
Shouldn’t I buy equities in the ISA for higher long-run returns? 

All reasonable counters. Let’s get the last one out of the way first. You’re asking should you borrow to invest in risk assets? That’s a different question to the one we’re answering here. We’re just going to say ‘no’ (for now). 

To answer the first two objections, we turn to our secret sauce – a devilish brew of Flexible ISAs and offset mortgages

Your new flexible friend

Flexible ISAs enable you to withdraw money from your ISA, without it affecting your allowances, as long as you return it in the same tax year. In this case it is treated as not having been withdrawn at all.

The legislative intent behind this is to enable you to use your ISA cash to meet unexpected large expenses and then ‘return’ the money to the ISA.

But we don’t care about the intent here. We only care about how we can turn this to our advantage.

Fill your ISA every year

You can withdraw money on the morning of the 6th April 2021 – the first day of the new tax year.

As long as it’s back in the ISA by the evening of the 5th of April 2022, very nearly one year later, you’re in the clear, because you’ve returned it in the same tax year, haven’t you?

Of course, the next day you can take it back out, for nearly a whole year again:

And you can do this every year – ‘re-paying’ into the ISA all the previous years’ used allowances, plus this year’s, and then immediately withdrawing it all the next day. 

We only need to borrow the money for one night every year – overnight between the 5th and the 6th of April.

Now we’re going to need to borrow an additional £20,000 more each year for that evening, which may present challenges.

And realistically we should get it there a few days early, as opposed for just one day. There are operational risks – think “computer says ‘no’” hiccups – when moving large amounts of money around. 

Off and on again

But how will you borrow the money?

That offset mortgage, of course.

If you have an offset mortgage or a flexible mortgage (one that enables you to overpay and redraw funds at will) then you’re all set.

You’re simply going to draw the money down on the 5th, warehouse it in your ISA overnight, and then pay-back (or offset) the mortgage with it for the other 364 days of the year. It’s only going to cost you a few days’ interest.

True, you might need to start off by taking out a larger mortgage than you would otherwise require, in order to give yourself the borrowing capacity to fill your ISA. But since it’s an offset / flexible mortgage, you can do that and pay no more interest, since the extra cash will spend most of the time parked against your outstanding balance. 

This is a completely reversible transaction. It’s not like contributing to your pension, say, where the money is locked away. You can stop at any time if you need to, and let your ISA allowance lapse.

And it’s a very low-cost option. 

Variations on the theme

This is just an idea. Do with it what you will. And yes, there are many real world frictions.

But it doesn’t have to be all or nothing – and you don’t have to do it for 25 years.

Maybe you only do this with a portion of your ISA, because you can afford to save some money from your income, too? You borrow to top-up the rest.

Or it could be as simple as avoiding the difficult decision of whether to use your bonus to pay down your mortgage or use up your ISA allowance. Do both!

Perhaps you could do a 0% transfer on your credit card balance, free up a bit of cash for a few months, and use it to fill the ISA allowance this year.

Business owners may be able to borrow from their business without tax implications if it’s within the company’s fiscal year (a reason for not having a April 5th end-of-year).

Crypto bros can DeFi borrow against their Bitcoin for a few days without triggering capital gains tax on their BTC. 

You get the idea.

What about pensions?

The pension annual allowance is another, somewhat, use-it-or-lose-it allowance. (Only ‘somewhat’ because there exist carry back / forward arrangements).

But you can’t get access pension money very easily, so borrowing to fill it is a very different proposition.

However, there may be edge cases where it’s worth considering, such as if you’re a 60% tax payer (earning £100,000 to £125,000) on the eve of retirement, and a long way from the Lifetime Allowance.

The point is to be – cautiously and legally – creative.

Nobody else is better at looking out for your money than you are!

If you enjoyed this, you can follow Finumus on Twitter or read his other articles for Monevator.

The post Should you borrow to fill your ISA each year? appeared first on Monevator.

Weekend reading: London stalling, with stagnant house prices and empty offices

What caught my eye this week.

For as long as I’ve been conscious of what’s happening beyond my own digestive tract, London was on the up-and-up.

From the 1980s yuppies I caught the tail-end of in the early 1990s and the regeneration of Docklands, to the middle-classing of the East End, the Dotcom bubble, the 2012 London Olympics, and the pre-Brexit immigration boom at both ends of the jobs market – London was where it’s at.

Of course, it wasn’t all rosy. House prices are up as much as 10-fold since I’ve been here. That long ago priced out most of those without parental help or huge salaries. Many London-born left the city altogether.

Also, despite all the wealth generation, some of the most deprived areas of the UK are still in London. Admittedly this has eased in recent years. But that’s perhaps as much because of gentrification as the locals getting richer.

Indeed, while the tidying up of London has suited my hipster tastes for flat whites, farmer’s markets, and retro beats, I’m not sure it was all good news.

Something was lost. London is less village-y now than when I came here from a real village in the provinces. Different boroughs have mostly the same shops, style, and people.

Though I suppose that’s happening everywhere.

The big smoke

Talking of everywhere, some readers complain when I focus on London every year or three in an article.

This reflects a wider sentiment – that London gets too much attention, and that we long had it too good in this city. (Though ironically, most of those who moan about London’s riches also say they’d hate to live here).

They feel aggrieved despite London being a net contributor (via its trade surplus and redistribution) to the UK economy.

And despite London being realistically the only place in the UK with the status to pull in enough foreign capital and talent to really move the dial.

Such regional resentment was one of the many motivations behind the unfortunate vote to leave the EU in 2016.

Yet despite the odd protest, I will continue to single out London occasionally, so long as I’m blogging.

London calling

London is my home, for a start. (Nobody minds when Ermine wanders about in the Somerset countryside or Dave has a run in the Highlands!)

Nearly a third of visitors to Monevator are in London, too. The three nearest web traffic rivals – Glasgow, Manchester, and Birmingham – account for only roughly 2% each. Besides the sheer population size, there’s a fit between our content and Londoners that definitely isn’t exclusive, but is pretty natural.

Also London makes a unique contribution to the UK economy. I have sympathy with the view that it’d be nice if it wasn’t so. But anyone seeking to change this is fighting a global trend. Or at least the pre-Pandemic trend.

Personally, I believe we should all be grateful the UK has (had?) one of the handful of world class cities, even as the economic centre of gravity shifts to Asia.

Home alone

Others will disagree. They’ll be heartened by this heatmap showing that while the housing market in England is on fire, London isn’t:

Squint at the blue bits

London house prices are still very expensive, despite years of flat-lining. So maybe they shouldn’t be rising. But property is soaring globally on low interest rates and the fallout from Covid, so something is going on.

It’s probably too soon to unpick the impact of the UK’s self-harming Brexit on London from the consequences of the pandemic.

Foreign-born workers have returned home for both reasons. And plenty of UK residents have moved home to outside the capital – or said they’d like to – now they don’t have to enjoy the supposedly gilded life of a Londoner squished into a tube at 7am to pay for a one-bed flat above a train station.

I haven’t yet decided whether widespread working from home – or at least not in the office – is a fad, or the new normal.

The City of London is still ‘fairly empty‘. London-based workers in general want more pay to return to the office. Only a minority are in a hurry:

With Covid-19 restrictions leaving many offices empty, white-collar staff have spent 16 months mostly working from home.

Just 17% now say they actively want a full-time return to the office [research shows].

The City of London Corporation has already started planning to redevelop excess office space into residential homes.

But when the big idea of the summer for making London a better place to visit and live was a £6million mound of earth, more might need to be done.

We’re shafted, or we’re Shaftebury-d

On balance I’m a bit more pessimistic about a full-blown return to office life than I was. (I mean pessimistic from an investing standpoint. I don’t think a five-day workweek in an office is particularly healthy!)

As a result I sold some early post-pandemic investments I made into quoted commercial property companies that owned mostly generic office space.

But I’ve hedged my bets with a position in Shaftesbury PLC.

Shaftesbury owns swathes of London’s West End – Soho, Covent Garden, Chinatown, and Fitzrovia. I believe you’d need much more money than the firm’s depressed valuation if you wanted to recreate this asset base.

I also judge that with a focus on leisure and destination shopping and the coming of the much-delayed Crossrail connections, if these areas don’t bounce back in the next few years then everything really has changed.

Normally everything doesn’t change. Time will tell.

Are you placing bets on the future of London, or the UK in general? Let us know in the comments below.

And have a great weekend!

From Monevator

Are meal boxes on the menu for FIRE seekers? – Monevator

Vanguard LifeStrategy funds: 10-year review – Monevator

From the archive-ator: How to enjoy life like a billionaire – Monevator

News

Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Winchester the least affordable place in the UK to buy a home… – Guardian

…while Derry in Northern Ireland is the most affordable – Which

Vodafone to reintroduce roaming fees in Europe thanks to Brexit – Guardian

Energy bills to rise by average £139 a year when cap is raised – ThisIsMoney

PayPal says a Persian mousemat violates international sanctions – Guardian

Top players seek a financial game plan for life after sports [Search result]FT

A world awash in capital – The Big Picture

Products and services

Natwest and RBS offer £1,000 prizes for regular savings accounts – Which

Science-based productivity playlists to help you work from home – Trello

Sign-up to Freetrade via my link and we can both get a free share worth between £3 and £200 – Freetrade

Coventry Building Society rewards loyal customers with 0.65% 21-day notice account – ThisIsMoney

Address mismatches in databases can affect your credit score – Guardian

Five-year fixed-rate mortgages offered below 1% – Which

Island homes for sale, in pictures – Guardian

Comment and opinion

Diversifying your portfolio isn’t zesty, but it works – Bloomberg

17 questions to ask yourself before you quit your job – Guardian

Magic beans – The Reformed Broker

Setting an example – Humble Dollar

How to be poor and happy – Wellcome Collection

“My wife didn’t know I had $450,000 of debt until yesterday” [Podcast]Ramit Sethi

A weekly review of 100 years ago leading to the Great Crash – Roaring 20s

We are gonna make it – The Escape Artist

Do short-term flows permanently affect share prices? [Nerdy]Albert Bridge Capital

US market valuation mini-special

The US stock market looks over-valued by many measures – A Wealth of Common Sense

How much have US investors benefited from multiple expansion? – Morningstar

Naughty corner: Active antics

Forestry investors see the wood for the trees [Search result]FT

The war among the algorithms – Donald MacKenzie

It’s not worth building a portfolio of inflation-correlated stocks – Factor Research

Credit and asset booms may foreshadow financial busts – Verdad

Greedy investors make markets more efficient [Research]Joachim Klement

Covid corner

Warning of Covid ‘disaster’ in Japan as cases explode – Guardian

Kindle book bargains

The Moneyless Man: A Year of Freeconomic Living by Mark Boyle – £0.99 on Kindle

Hired: Six Months in Low-Wage Britain by James Bloodworth – £0.99 on Kindle

Happy Money by Ken Honda – £0.99 on Kindle

You Are a Badass at Making Money by Jen Sincero – £0.99 on Kindle

Environmental factors

The devastating new UN report on climate change, explained – Vox

Blazes burn across Med with more extreme weather forecast – Guardian

The other epidemic: what’s killing wild salmon? – The Walrus

Animals count and use zero. How far does their number sense go? – Quanta

The world must cooperate to avoid a space collision… – Nature

…meanwhile this asteroid is one of the likeliest to hit Earth – National Geographic

Off our beat

Hanging by a thread – Morgan Housel

Operating at optimal speed – Mr Stingy

Metabolism peaks at age one and tanks after 60, study finds – BBC

The creator economy is in crisis – Li’s Newsletter [hat tip Abnormal Returns]

And finally…

“You and everyone you know are going to be dead soon. And in the short amount of time between here and there, you have a limited amount of fucks to give. Very few, in fact. And if you go around giving a fuck about everything and everyone without conscious thought or choice – well, then you’re going to get fucked.”
– Mark Manson, The Subtle Art of Not Giving a Fuck

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Are meal boxes on the menu for FIRE seekers?

This article on meal boxes is by The Mr & Mrs from Team Monevator. Check back every Monday for more fresh perspectives from the Team.

For years, money slipped through the fingers of The Mr and me. Our outgoings kept pace with – and often outstripped – our earnings.

Even once we’d noticed this insidious ‘lifestyle creep,’ our immediate options seemed limited. 

We had little scope to increase earnings, invest savings, or slash housing or travel costs.

But we could cut other spending. Significantly.

Our fight back began with food.

Ending the bloat

For the past decade, we’ve experimented with ways to feed a family of four (plus dogs) on a tight budget. Our efforts have ranged from discount stores to tending an allotment.

Yet holding down our food costs was a slog.

The Mr has always loathed shopping, particularly supermarket shopping. And I resented the time and energy I spent planning, prepping, and cooking nutritious food for an unenthusiastic family.

However, swapping household roles would be worse!

Every so often, tiredness, boredom, or disorganisation would get the better of us. We’d rebel against our self-discipline and seek a quick fix.

Comfort snacks. Unscheduled takeaways. Blowout restaurant meals. All bad for the budget and bad for our waistlines.

Each lapse would prompt tough measures to get us back on track.

This yo-yo scenario was how matters seemed set to continue, until…

Opportunity knocks

Five years ago, on a day when The Mr was home alone, a vivacious sales rep called by. The rep was signing up customers for a new subscription food service.

The Mr: I don’t remember using the word ‘vivacious’ but maybe my description conveyed it.

When I returned home, The Mr excitedly brandished glossy leaflets at me and explained we no longer had to eat crappy food. In fact, the rep would be back later to collect our payment details.

The Mr: For the record, this is literally the only time I have ever bought anything sold door-to-door. But – just sometimes – good things can happen this way!

I flicked through the blurb. So, there were companies that specialised in delivering meal kits to your door?

Wow – didn’t we already have online shopping?

When the rep returned, I was ready with a stern expression and my arms crossed. No way was I spending extra money and more time in the kitchen, whatever fantasies The Mr might be entertaining.

I said to the rep: “Sell meal boxes to me.”

The pitch that got us into meal boxes

“Imagine that a large box – carefully packed with fresh ingredients – lands on your doorstep each week. You’ve chosen the delivery date, some delicious meals, and the number of servings you require.

The menu contains more than 40 meal options. These change on a weekly basis. High-quality seasonal ingredients are bought in bulk and the savings passed on to you. There’s minimal packaging and minimal waste as you buy only what you need. Meals are planned by professional chefs and are healthy, nutritious, and portion-controlled. Clear step-by-step instructions and timings are available online or on reusable recipe cards.

It’s easy to suspend delivery if you’re away. Or to alter the number of meals required. There’s no need to trawl the supermarket aisles or to fret over balancing the family’s dietary needs.

We aim to deliver fine dining at home at a very competitive price.

Any questions?”

Reader, I signed up… on a discounted trial basis.

The Mr: Phew!

Meal boxes unpacked

It’s tricky to compare exact like-for-like options between the various subscription services. Some have tried though: BBC Good Food recently analysed meal kits from the main UK providers.

For the budget-conscious Monevator reader, the best value is usually a family box containing three or four meals for four or five adults (or two adults and three kids).

Introductory discounts for new customers can reduce costs for a few weeks while you try out a service.

Fixed-price family boxes are offered by HelloFresh (a German company that began UK operations in late 2012) and Gousto (appeared on Dragon’s Den in 2013).

During the pandemic, Morrisons entered the field with a meal-kit box containing five family meals. But while the cost is much lower, Morrisons doesn’t offer a choice.

HelloFresh family box costs £54.99, or £3.25 per portion
Gousto family box costs £47.75, or £2.98 per portion
Morrisons family box (five meals) costs £30.00, or £1.50 per portion

Not falling into the budget meal bracket, but potentially useful for post-FI readers, is UK company The Mindful Chef. It’s aimed at the health-conscious and caters for (some) dietary needs ( for example gluten-free).

The Mindful Chef also offers meal boxes for one person.

For comparison purposes, The Mindful Chef’s family box (three meals) varies in price according to the recipes chosen. A test selection costs £64, or £6 per portion.

Note: prices quoted were noted on 31 July 2021 and do not include any promotional discounts.

But is it good value?

When we started using meal-kits, I obsessively price-checked each recipe against buying the same ingredients from the supermarket.

On the whole it was roughly equal, though some proved more expensive.

However I was not including delivery charges or petrol costs. Nor the re-planning on finding key ingredients were out-of-stock. Nor had I put any monetary value on the time that The Mr and I were saving.

The Mr: These are not to be ignored. And we find some ingredients (like Henderson’s Relish) aren’t even stocked by the local supermarkets.   

However for the geeks out there, we price-checked a recent Gousto recipe.

Gousto: chunky veg stew with goat’s cheese

Stew incorporates 13 ingredients including fresh red peppers, courgettes, red onions, cherry tomatoes, rocket, and an excellent goat’s cheese. Cost from Gousto is £2.98 per portion.

Matching the exact quantities – regardless of actual packaging amounts – for this meal against our three nearest supermarkets:

Tesco – £2.89 per portion
Sainsbury’s – £3.46 per portion
Asda – £2.47 per portion

But wait! Unless you’re buying at a market, it’s tricky to buy exact quantities. Most food is sold pre-packaged, or bottled in set amounts. While you may end up with a larger quantity that lasts longer, it will cost more at the outset.

Assuming that you had none of the ingredients – except olive oil, which Gousto also requires as extra – we recalculated the costs of this recipe using the closest packaging match and loose veggies (where these are available or work out cheaper).

We’ve also given a portion-cost for consistency, although you will have surplus ingredients like pumpkin seeds for other meals:

Tesco – £4.18 per portion (£16.71 total)
Sainsbury’s – £4.78 per portion (£19.10 total)
Asda – £3.42 per portion (£13.69 total)

Again Gousto’s £2.98 per portion charge holds up fairly well by comparison.

I hope you can see that meal boxes are not the luxury purchase you might have thought they were.

Not to taste

Meal boxes will not suit everyone. Here are some who might pass.

Rarely in – If no one’s around to take delivery or there’s nowhere sensible to leave a package, then meal boxes don’t make sense.

Those on a tight budget – Simpler low-budget meal plans can be quite a bit cheaper per head. If you’re time-rich and cash-poor, meal kits may raise your costs.

The Mr: The really budget-conscious people I know look for alternatives to supermarkets. For example, Suma deliver wholefoods very cheaply but only in bulk. You need somewhere to store it, or else to club together with other households.

Foodies – While meal-kits may inspire some of us, others will be reluctant to outsource all their fun. Some of my friends spend hours poring over recipe books and heading off to the shops with a long list. There’s no accounting for taste…

The Mr: I know some people who need to ‘eyeball their vegetables’. It won’t work for them either.

Tasting notes

Originally, I saw the costs of a regular meal box as being akin to having a fixed-rate mortgage.

There’s a certain relief in fixing your mortgage costs, provided you don’t then agonize over whether the variable rate is lower.

I thought meal boxes would similarly make things simpler, but also add to our monthly spend on food.

In fact, our spending has decreased, despite the national rise in food prices.

One reason is that having restaurant-standard meals at home means we don’t feel deprived and so we rarely eat out these days.

Plus nobody in our family now minds our own boring cheap meals that help to balance out costs for the remainder of the week.

We create far less food wastage. Yet we don’t overeat because something is about to go off and we can’t bear spoilage, either.

And – saving the best until last – armed with clear instructions and all the ingredients, our kids have turned into good and confident cooks.

In short, I spend less time in the kitchen. The Mr spends less time at the shops. The family eats well. And spending on food is kept in check.

It’s an approach that works for us.

See all The Mr & Mrs’ articles in their own archive.

The post Are meal boxes on the menu for FIRE seekers? appeared first on Monevator.

Vanguard LifeStrategy returns: 10 years in

The 10-year returns are in for the Vanguard LifeStrategy funds. Forget the birthday celebrations and keep your cake, I hear you cry. Just tell us did the passive fund-of-funds deliver?

Did LifeStrategy investors earn respectable returns over the last decade?

Did the passive fund family hold its own against active funds that promise to beat the market like a drum?

Well, without wanting to spoil the surprise… if you invested in any of the Vanguard LifeStrategy funds a decade ago then you can be quietly pleased with yourself today.

Vanguard LifeStrategy 10-year returns

Here’s the 10-year returns for the entire Vanguard LifeStrategy range:

Source: Trustnet. Nominal1 annualised returns to 19 July 2021

Ten years ago, a LifeStrategy 100% investor might have hoped for around 7.5% annualised over the next decade (assuming they added average long-term inflation of 2.5% to an average historical equity real return of 5%.)

But expected returns were typically more pessimistic back then. For instance, the Financial Conduct Authority had recently published a real2 expected return range of 2.6% to 3.8% for a 60:40 equity:bond portfolio.

Call that 5.1% to 6.3% in nominal annualised terms.

As it turned out though, Vanguard’s LifeStrategy 60% bagged 8.4% annualised returns over the last decade.

Maybe there’s time for a slice of that cake, after all?

Risk versus return

The table above also shows the price paid by cautious LifeStrategy investors during a decade of high equity returns.

Each 20% allocation to bonds rained on the returns parade as surely as a low pressure front hovering over your BBQ plans.

The 10-year cumulative returns show most clearly what you had to give up in exchange for lowering volatility:

Source: Trustnet. Nominal cumulative returns to 19 July 2021

Still, a wince now beats the pain of panicking and selling out during a market bloodbath to come.

I’m not going to dwell on the risk-reward trade-off. The fact is a 100% equity allocation is not to be taken lightly. It is definitely not for most people.

Most of us will do better to be happy we enjoyed one of the all-time bull runs and maybe draw a few conclusions about the future. Such as that our past good fortune does mute the market’s prospects for the next decade.

With that said though, it’s arguably the bond-packing funds in the Vanguard range that have covered themselves in glory, not LifeStrategy 100%.

Yes, the equity-only LifeStrategy fund has done a solid job. But it hardly shot the lights out for the extra risk, compared to say LifeStrategy 60%.

LifeStrategy 100% returns vs the Rest Of The World

Vanguard LifeStrategy 100% is comfortably mid-table versus other geographic bets you might have made a decade ago:

Nominal annualised returns to 16 July 2021.

The real comparison here is between the iShares MSCI World ETF and the LifeStrategy 100%. You could have plausibly chosen either option ten years ago to gain cheap exposure to globally diversified equities.

As for the other funds, they help illustrate which regions flourished and why that cost the Vanguard fund.

Home bias – that is, an extra dollop of UK equities compared to a true global tracker – bit LifeStrategy investors over the last decade.

The LifeStrategy 100% fund is 22% in UK equities. Not helpful in light of the London market’s laggy performance over recent years.

In contrast the MSCI World tracker held less than 10% UK equities in 2011. That allocation is below 5% now.

The MSCI World also excludes the emerging markets.

Instead, you got an extra shot of US equity espresso in your portfolio vs LifeStrategy.

So if you ignored all the advice last decade that US equities were overvalued – congratulations!

But if your next move is to double-down on the US then you’re a braver soul than I.

S&P 500 valuation levels have passed eve-of-the-Great-Depression base camp and are closing in on dotcom bubble peak.

Strategy versus tactics

On the upside, Vanguard LifeStrategy 100% still beat its investment category benchmark, according to financial data shop Morningstar.

Morningstar gave the fund its Silver award – which ranks it in the top third of its peer group, including active fund managers.

Yet the point of LifeStrategy funds is to be a portfolio in a box.

One buy gets you all the diversification you need, including defensive bonds.

So a better comparison pits LifeStrategy 60% against a classic 60:40 equity:bond portfolio.

LifeStrategy 60% returns vs the Rest Of The World

And the bad news is that LifeStrategy 60% lost out to a passive 60:40 portfolio.

I compared the Vanguard fund-of-funds to a simple two-fund portfolio using ETFs that were available in 2011.

Cumulative returns for the last 10 years were:

125% Vanguard LifeStrategy 60%

158% iShares Core MSCI World / iShares Core UK Gilts

(60:40 portfolio data from justETF)

Home bias is my prime suspect again, but I admit I haven’t dug into the differences in bond holdings, fees, or rebalancing. (I’d shoot myself in shame – if I wasn’t so passive.)

Life is the name of the game

Now for the good news!

LifeStrategy investors can stop beating themselves up because every fund bar LS100% is the holder of a Morningstar Gold award and five-star rating.

A gold badge means the fund ranks in the top 15% of its peer group for returns after fees.

Five stars means the fund delivered top 10% risk-adjusted returns in its category over the last 10 years.

Note: This is all according to Morningstar’s methodology and category definitions.

LifeStrategy 60% ranked as high as the 4th percentile in its peer group in 2016:

Morningstar. Vanguard LifeStrategy 60% – percentile rank in category (2014 – 2021).

It’s also important to emphasise that the LifeStrategy funds have trumped the majority of their actively managed peers.

Granted, we can all easily find a handful of active funds that smashed the last decade.

But the trick is to find them in advance. Wisdom after the fact is self-satisfaction dressed like a hipster.

Chart attack

LifeStrategy 60% investors can also enjoy this Morningstar chart of their fund trouncing various benchmarks:

And here’s the Vanguard fund pounding its multi-asset rival – BlackRock Consensus 60:

Note: The comparison begins from the inception date of the BlackRock Consensus 60.

I score this as a triumph in the age-old morality tale of simplicity versus complexity.

The BlackRock Consensus funds’ USP is they hold index trackers with an active management tactical twist.

It turns out we don’t need it, going on the results so far.

Getting on with life

What do 10-year returns tell us? Nothing about the next ten, sadly.

Still, I think the LifeStrategy returns are power to our passive investing elbows.

We’re told to invest for the long-term. But it’s hard to stay true for decades. Especially when we’re battered by outlier success stories all the livelong day. Sometimes it can feel like we’re extras in someone else’s virtual reality bliss machine.

So I think it’s worth celebrating that ordinary investors can get a fair shake just by choosing a simple, well-designed fund that saves you a ton of time and worry.

Take it steady,

The Accumulator

Nominal returns include inflation.
Real returns are net of inflation.

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