Greetings all and thank you for returning for part four of Mortgage Advisor on F.I.R.E. I'm still in pain but have reduced the number of painkillers I am taking. My ankles are both in a bad way. My right foot hurts when the ankle moves in certain directions, mostly twisting motions. The left Achilles tendon is sore generally.
I’m in between a rock and a hard place because I need to lose weight to put less strain on my joints, but I gained weight when my shoulders were operated on and I stopped exercising. Diet is the key to everything, and I really need to be more disciplined with what I eat. The problem is, being side-lined once more through ill health has made me feel down and when I feel down, I comfort eat. It’s a frustrating cycle.
I have an MRI booked in for 29/11/2019. This will be my eleventh MRI which should mean the one after is free.
Premium Bonds: £9,150 (up £500 from last week).
Stocks and Shares ISA: £6,890.75 (down £21.64 from last week).
Credit Card Debt: nil (down £3,899.99 from last week).
Loan Debt: £3,850 (up £3,850 from last week).
F**k It Fund: £1,000 (up £149.04 from last week).
Surplus Cash: £400 (up £105 from last week).
Tech Fund: £50 (up £50 from last week).
Total Wealth Figure:* £51,221.92 (up £832.39 from last week)
*(total assets including residence valued at £172,500) £189,990.75 minus (total debts including mortgage) £138,768.83 equals £51,221.92.
As you will have noticed I have taken out a loan to pay off my credit card. This was something I had been thinking about for a few weeks. My decision was forced when I realised that much of the credit card balance was now being charged interest and the APR was more than double what I could get on the loan. The loan is not going to be a long-term debt. I fully intend to have it cleared by the end of Q2 2020. I have £1,800 coming in December, as well as a bonus in March. Between those two lump sums and some overpayments, I should have the debt cleared by April/May time. It’s unfortunate, from a financial point of view, that I’ve started to automate my finances just as we approach Christmas. I will be spending a week in Romania with my girlfriend’s family just before Christmas and need to allow a little extra spending money than normal for the trip. Once Christmas and New Year are out of the way, I can start to concentrate on building passive income in 2020.
I am still working to a timeline that will see the first BTL being completed by mid-2020. We cannot move faster because the deposit money for my JV partner is tied up in investments until mid-2020. We can start searching for properties ahead of time, and I think we will probably start looking around Easter 2020. By the end of 2020/early 2021 we should have our second BTL and depending on house values I may have enough equity at that point to release funds from my main residence to fund the deposit on a third BTL with my girlfriend. It really does look positive.
This is a four-year plan and I’ve stated before that the best advice for building wealth is to “pay yourself first” and, as much as possible, make the process of building wealth as automatic as possible. To that end, I thought it would be a good idea to get down some ground rules for how my investment strategy will look in 2020.
Rule 1: Save a minimum of £400 each month in Premium Bonds.
The deposits for the BTLs are the base on which this whole endeavour is built. There are several places I could store those funds but with interest rates generally being low, I still prefer keeping the money in Premium Bonds. The funds are not being kept long enough to be eroded by inflation to any significant degree, but I may need access to them at short notice which rules out a longer, fixed-term savings account. There may be some savings accounts out there that will offer 1%-2% more than the accounts I have researched, but then there is the time and effort involved in researching and setting up those accounts, and then moving the money around. For the sake of a few pounds, I feel more comfortable keeping the deposit money in Premium Bonds and having the small chance of a significant win. My return on Premium Bonds has been pretty good with prizes in fifteen of the last eighteen months.
Rule 2a: Invest a minimum of £250 each month into my Stocks and Shares ISA.
Rule 2b: Reinvest all dividend income from the ISA.
Rule 2c: Absolutely no withdrawals allowed from the ISA.
The second part of my plan for long-term wealth is my Stocks and Shares ISA. This is a separate project to the property investment and is aimed more at looking after my financial interests in the 15-20-year time frame. Some of my holdings are already providing a modest income that will only grow over time, but this ISA is very much a long-term work in progress.
Rule 3: Save a minimum of £100 each month in my F**k It Fund.
I have another pot of money that I call my F**k It fund, which is self-explanatory. It’s a pot of money that is there for if/when I decide “f**k it”. It’s also an emergency fund and I will continue to grow this pot little by little until I have enough money to live comfortably for at least three months, and a little less comfortably for another month or two after that.
Rule 4: Save a minimum of £30 each month in my Tech Fund.
My MacBook gave up the ghost a few weeks ago and now all my writing is done through my girlfriend’s laptop or through my phone. I will need a new laptop at some point, but I will not go into debt for it. Instead, I have started a small “tech fund” to save for my next laptop and then my next smartphone. My current iPhone was bought for cash in July’17 in New York as it was significantly cheaper than buying in the UK. This is probably the longest I have had a smartphone and I hope to get at least another two years out of it. The phone still holds a charge, has no cracks and performs like it did out of the box. No need to replace it just yet, but the time will come.
Rule 5: If I use my credit card, pay it off immediately.
Although I have paid my credit card off, I like the fact it earns airmiles. I will continue to use the card for spending on the condition that I pay the card off as soon as I spend on it. I have maintained this habit for the last few days and I hope that writing here about this will help keep me honest.
I had some feedback last week that I did not explain in enough detail why I prefer Index Trackers to funds that are actively managed. I will attempt to explain in a little more detail why I prefer Index Trackers.
No doubt there are plenty of honest fund managers out there who act with integrity and diligence. However, even the most trustworthy and dedicated fund managers are at the mercy of their own mind. I heard a phrase recently which I have modified slightly: the brain cannot guard against itself.
The point I am driving at, is that people generally do not like to lose. When they lose, they tend to try and reclaim those losses. The concept of chasing losses is what the whole gambling industry is based upon. Stocks and funds can go up and down and if a fund was having a particularly bad time of it, an active fund manager may be tempted (consciously or not) to try and chase those losses by making riskier and less well researched trades. This rarely ends well for the fund, the fund manager or the investors.
If you take a bit of time to research investment funds you will see a mixture of research that shows active funds can outperform tracker funds. This is true; active funds can outperform tracker funds, but this is the exception and not the rule. Many reports that claim this will, one way or another, be trying to sell you a fund and the research will cherry-pick those funds that are performing well.
Several (audio)books I have read or listened to have reported that it is not unusual for fund managers to have several funds on the go at once, and that they quietly close down the funds that are not performing well so that they can concentrate on the funds that are performing well. Then, once they have just the top-performing funds in place they can claim that their actively managed funds outperform index trackers.
The practices I have mentioned above are frustrating, but churn is something that is illegal and that there are some brokers and managers out there that do this makes me very angry.
Churn is where a broker or fund manager excessively trades to earn more in commission. Most brokers earn money on every trade they make for a client and this comes out of the money the client invested. The conflict of interest here is obvious; it is in the interest of the broker to trade as often as possible.
There is another way for fund managers to act with integrity and Guy Spier talks about this in his book The Education of a Value Investor when he refers to how Warren Buffett would charge fees. I forget the exact figures, but the principle was the epitome of honest, ethical fund management. The fund manager would only take a fee if the fund achieved at least 6% (I think it was) growth. Anything above 6%, the fund manager would charge a percentage against the surplus growth. In short, the fund manager only gets paid if the fund performs well.
Churn is something that can have catastrophic consequences for investors. Here is an example to illustrate, which draws on all the typical human psychology.
You invest £10,000 with a stockbroker and give them discretion to trade on your behalf. The broker charges 0.5% for each trade and then there is Stamp Duty at 0.5%. On the first trade, you are charged £50 in broker fees and £50 Stamp Duty.
The broker buys 19,800 shares of Company A at 50p per share for £9,900. The stock then immediately drops to 47p per share. The holding is now worth £9,306. The broker decides to trade again. The shares in Company A are sold at 47p but the broker takes a further 0.5% (£46.53). The investor now has £9,259.47 from an initial £10,000 investment.
The broker explains to the naïve investor that Company B is a sound investment. The broker places a trade for 7,000 shares in Company B at 130p per share (share prices are always in pence). 7,000 shares at 130p is a trade of £9,100 in addition to Stamp Duty of £45.5 and broker fees of £45.5. The investor has £68.47 of residual cash.
The shares in Company B drop to 120p per share and the broker sells them and explains to the investor that this was necessary to “cut losses”. 7,000 shares are sold at 120p per share, resulting in £8,400 being recouped. Once the broker takes his fee of £42, the investor is left with £8,426.47 with the residual cash included. After just four trades, the investor has lost over £1,500 (more than 15%) of their investment.
This is a very basic example and you might be thinking, “but what if the share price goes up?” Have a look at any stock and you will see that the buy price is normally higher than the sell price. So, whenever you buy a stock you immediately lose value. Take Apple for example, I’m looking at the live prices now and the buy price is $262.85, and the sell price is $262.22. Once you factor in commission, fees and tax you immediately lose value when you buy shares. Brokers that are engaging in churn will not care if your stock goes up or down as either is an excuse to sell. “Hey, your stock in Company A is up 10% and so I sold to lock in your profit!” and “Company A is trading 7% down so I sold to cut your losses.”
The previous few paragraphs contain value for novice or naïve investors. Trading stock is risky if you go into it with no education. Although there are some out there that claim to make money day trading, I am sceptical of anyone who claims to make serious money this way. The only way I think you can make money by high frequency trading is with huge sums of money where tiny changes in the stock price result in significant return.
A basic index tracker would be something like a FTSE100 tracker. This fund would have shares in all FTSE100 companies and so the value of the fund would mirror the collective performance of the FTSE100. There is limited trading within the fund, and this would only happen as and when a business is relegated from the FTSE100 and another business is promoted to take its place. These are generally more passive in nature with lower fees and because the human element is removed there is no risk of losses being chased or of churn.
It’s been a detailed post this week, but I enjoy discussing all things money and investment related. If you have any suggestions for topics you would like me to cover, please leave a comment. If you are enjoying this blog, please recommend it to a friend. Finally, if it’s not too much trouble, please follow Now We Live on Facebook, Twitter and Instagram.
Thanks for reading and enjoy your weekend.