Hello and welcome back to Mortgage Advisor on F.I.R.E. This week I will discuss the impact of coronavirus on my strategy in respect to the stock market. Also, I will have a look at my 2020 reading challenge and highlight some of the best, and worst, books I’ve read so far this year. First, the weekly update.
For the past few weeks there has only been one topic to discuss; the coronavirus. We have still not yet peaked and I fear that even when we do peak, there will be a second wave in the autumn and winter months. In the last few days I have managed to get set up to work from home, and so my plan is to fortify myself here and only leave when absolutely necessary for food and medicine.
I had some good news this week. I spoke with my cardiologist on the phone and he confirmed that the tests I had done in February show my heart function is now normal and that the stretching and distending of the heart has gone. I have to continue taking the medication for my heart for now, but my doctor suggested we can review that situation in a few months. This definitely feels like a victory as for the last few years it has felt like every update regarding my health has been a set back.
Those of you who follow me on social media will know that I set myself an annual reading challenge. Last year it was to finish 104 books; 2 per week. This year, I had the same target for the number of books read but I also wanted to read outside my comfort zone. I realised, when I looked back, that I had not read much by female authors. Also, I am embarrassingly ignorant of the classics. My additional goals for 2020 are to read more works from female authors and more of the classics.
As of the end of March, I had finished 25 books. Here is the list with ratings out of five for each:
I started the year with some excellent fiction. Station Eleven and Normal People are two of the most moving and compelling stories I have ever read. The first of those books takes place across different times; before, during and after a flu pandemic. The world is ravaged and the story is told from the point of view of different characters. It’s an exploration of what it means to be human. Station Eleven is about philosophy, art, literature, community, friendship and love. A remarkable piece of writing.
Normal People is less epic in scope but with similar themes. Taking place in Ireland and focusing on two teenagers as they grow into adulthood, it is a story about normal, but damaged, people. The characters are vivid, with depth and subtlety. The writing style took some getting used to, but after a while I stopped seeing the words on the page and became immersed in the story and in these characters. When I finished it, I had to just sit and process what I’d read. Another fantastic book.
There have been a few disappointing reads as well. The Paradox of Choice was not just bad, but insulting. The idea is great; that too much choice can lead to distress, anxiety and stress. I know I always get stressed with too much choice. I hate going to restaurants that hand you a menu the size of the Argos catalogue and much prefer a single side of A4. This book was pure verbal crap. There is no effort to provide analysis and debate. It’s mostly a series of lists and examples of choice that apply to a small segment of society. I actually returned the book for a refund. Complete and utter garbage.
As was I Thought It Was Just Me (but it isn’t). This is a strange book. The blurb seems to be describing a different book entirely, as it makes no mention of the fact it covers the topic of shame in women. The blurb talks about how “The quest for perfection is exhausting and unrelenting.” I find psychology interesting, so I can see why I would buy a book on this subject, but I did feel like I had been misled. A quick glance over the reviews on Amazon shows I am not alone.
I have placed links to Amazon for some of the books mentioned. Purchasing the books through those links will provide a small contribution to the cost of running this blog, with no extra cost to you.
Premium Bonds: £15,000 (no change from last update). TARGET MET.
Stocks and Shares ISA: £6,876.04 (up £259.52 from last update).
F**k It Fund: £4,331.15 (up £2451.64 from last update).
Property Value: £181,626 (no change from last update).
Total Assets: £207,833.19 (up £2,711.16 from last update).
Credit Card Debt: £0 (down £2,216.24 from last update).
Loan Debt: £0 (down £2,871.56 from last update).
Residential Mortgage: £144,906.05 (up £11,232.21 from last update).
Total Debts: £144,906.05 (up £6,144.41 from last update).
Total Wealth Figure: £62,927.14 (down £3,433.25 from last update).
Investment Income in 2020: £28.67 (target £2,000).
There is a lot to unpack this week from the financial update. With interest rates being so low, we decided to release some of the equity in our property. We borrowed an extra £11,500. Some of that we used to pay off our credit cards and our loan. The rest we divided up so that my girlfriend has some cash in reserve. We also put money on one side for another holiday and towards some work we want to complete in the apartment. It also clears the deck somewhat. In addition to borrowing the extra money, we have reduced the term on our mortgage by nine years. The plan is to build up some more emergency funds and then start hitting the mortgage hard whilst putting money to one side for another BTL. I already had the £15,000 saved for a BTL with my business partner. However, I would like to get a BTL with my girlfriend as well. My plan for financial independence is based around rental income and I will need five or six rental properties by the end of 2023 to make it work.
The stock market is an important part of my plan for financial independence. Although I invest heavily in index funds, I also have a small selection of four individual stocks that I invest in for dividend income. These stocks have a good track record of healthy dividends and I’m satisfied with what I’ve seen when looking at their financials. Then, the coronavirus happened. Two of those stocks have cancelled their dividends for the rest of 2020. Another is strongly rumoured to be cancelling in the coming days and the fourth seems ok for now, but I expect it to also cancel. This sounds like a bad news story. Well, it is and it isn’t. I will explain.
Dividends are going to make up a substantial part of my income once I eventually give up my day job. The dividends being cancelled throws a spanner in the works but no one could really predict when the next pandemic would hit. This is a risk you take, and it could happen again in the future. I could also lose my job in the future, or be hit by a bus crossing the road. One cannot avoid risk, but you can mitigate it. That’s why I always put my phone away and check the road before crossing. That’s why I try to develop my professional skills whenever possible. That’s why I will not be relying solely on dividend income.
There are ways to protect your money and ensure a good return in the current climate. It reminds me of the stock market just after the Brexit referendum, although I expect it to take longer for the stock market to bounce back this time. The four stocks I have individually picked are currently trading at the following levels according to their 52-week high:
Stock 1: 63% lower.
Stock 2: 25% lower.
Stock 3: 42% lower.
Stock 4: 43% lower.
All four companies should survive this crisis. We are looking at a major, global bank. A defence and aerospace company. An oil and gas company and a telecommunications company which operates globally. All four should survive. The question is more about how quickly, and how far, these shares will bounce back. The banking sector is quite safe, or should I say the major players are safe. I don’t think the government will let them fail in the UK. I do think those that have a major share of the mortgage market may be in for a rough time in the next 18-24 months as they deal with payment arrears. However, I can’t see any of the major players embarking on a wave of repossessions. It will do too much damage to their brand. Instead, we will see a lot of mortgages increase as the arrears are rolled up into the debt. There will be some exceptions, but by and large I think most people will be safe.
The opportunity in the stock market relates to something I have mentioned several times before; pound-cost-averaging. Simply put, you are getting more shares for your money right now. When dividends do resume, you will have more units of stock to receive payment on. Now is the time to invest, but choose your stocks wisely. If you are starting out, go with a FTSE index tracker and a US equity tracker from Vanguard.
They’re going to drop. It’s pretty much a certainty at this point. The only question is how bad it will be. As people lose their jobs and families are forced to operate on reduced incomes we are going to see people struggle. A combination of the gig-economy and high levels of unsecured debt means we were always on thin ice. This pandemic is taking a sledgehammer to that ice and a lot of people are going to find themselves in the cold water. If you’ve stretched yourself to get the biggest mortgage so you could get that three-bed detached house instead of that two-bed semi, you are probably worried right now. I’m not surprised - I would be worried too and I’m a mortgage advisor. If you work with your lender, they will work with you.
In recent years the banks have relaxed lending criteria. Contrary to what some people believe it is possible to get a 95% mortgage. If you have taken out a mortgage with a 10% deposit or less, especially on a new-build, in the last couple of years I would be preparing myself for a few years of negative equity (where your mortgage balance is higher than the property value). I can see this happening as, when the pandemic is over, a lot of people will be looking to sell. This will increase supply and there will not be as many people in a position to buy. The drop will not happen immediately as people will struggle to accept their house has dropped in value, but the drop will happen. It will be the professional landlords and investors who will start snapping up properties and we will see a further transfer of wealth from the poor to the already wealthy.
Graph showing how UK house prices fell following financial crisis of 2008. Credit BBC News at the following link: https://news.bbc.co.uk/1/hi/business/7812108.stm
Should You Buy Now?
Absolutely not. Anyone buying a house now, unless it’s an absolute steal, should be hanging on to their cash. In a year, that property will be 10% cheaper at a minimum. Also, we are facing a recession and I can see many major employers going under in the coming months. People need to be asking if their jobs are secure and preparing for the worst. Even if your job is secure I would still hold off on buying. Prices are going to drop and there will be bargains to be had. I’m not suggesting that you should take advantage of vendors with derisory offers, but at the same time there is no need to pay more than what something is worth.
Thank you for reading and I hope you stay safe and healthy. If you have any comments or suggestions for future posts, please leave a note below.