Looking Back: Part 12

Originally published January 10th, 2020. There are two main dividing lines in my life; before and after 9/11, and before and after Covid. Both events changed the world massively, and we’re still dealing with the impact of the pandemic. Trying to remember a time before face masks, social distancing, and handshakes is strange now.

Introduction

Hello and welcome back to Mortgage Advisor on F.I.R.E.  This week I will be reviewing a couple of books I have read since the last post, and in addition to the usual financial update, I will talk a little about how I have restructured my Stocks and Shares ISA.

Weekly Update

The past week has been a bit of a blur.  My day job, as a mortgage advisor, has been extremely busy but it has been a good kind of busy.  I have had some great conversations with people, and I have received excellent feedback from people I have advised.  Helping people understand mortgages, and finance generally, is something I enjoy and it’s a large part of why I look forward to writing this blog each week. 

I have just finished reading The Little Book of Common Sense Investing by John C. Bogle, the creator of Vanguard and the first index investment fund.  Index investing is something I am a promoter of, and some of you may recall my earlier entry where I talk about the differences between active investing and passive investing.  With active investing, through managed investment funds, you are relying on a fund manager to consistently beat the market and in return, you will pay them fees that can be at least twenty times that of a passive fund. 

There is a wealth of research out there showing that index funds outperform actively managed funds over the long term.  Yes, there are exceptions in the short term but if you are investing in funds for the long term the chances of you selecting an actively managed fund that outperforms an index are similar to those of winning the jackpot on the lottery.  An index fund mirrors the market, so you can never beat the market but at the same time you can never lose to the market.  You track the market. 

​Although I did not learn a huge amount of new information from Bogle’s book, as I’ve heard or read several summaries of his opinions, it was still a fascinating insight into his thoughts and beliefs.

So far in 2020 I have read some fantastic fiction, with two books impressing me and jumping straight onto my favourite fiction list.  The books are Station Eleven by Emily St. John Mandel and Normal People by Sally Rooney.  Station Eleven takes place across different times and looks at the lives of people before, during and after a flu pandemic ravages the world.  It’s not a typical end-of-the-world book though.  The flu pandemic is in the background, and what follows is a psychological piece that discusses everything from art and literature, to love and the morals of killing to stay alive.  It is a thoughtful and understated story and quite moving.

I’d forgotten that I’d read Station Eleven just before Covid struck. It’s an incredible book and one I want to revisit. I’ve read three books by Emily St. John Mandel and there is something about her writing that is beautiful and melancholic at the same time. It creates an emotional reaction unlike anything else I’ve read. Another thing I like about her stories is the little links and easter eggs connecting each work.

Normal People was a raw and unflinching look at two psychologically damaged teenagers, and their assorted friends and family.  Sally Rooney creates some of the most three-dimensional, flawed and realistic characters I’ve encountered in fiction.  Whilst reading the book, I experienced it so vividly.  I could not put it down.  When it was done, I just sat in silence for a while.  A very emotional story; sad but also hopeful.  I think it will be considered a classic in time to come.

An amazing book and although the show was decent, I don’t think it matched the heights of the material it was based on.

​After I finished both works, I found out they were being made into shows for television.  In some ways, I’m excited to see what is produced, but on the other hand, a poorly made show could threaten my memories of how I enjoyed these stories.

I’ve still not seen Station Eleven’s adaptation, and I’m nervous to do so. I don’t know what it is about shows just not matching the quality of the books they are based on. I knew someone who loved the Lord of the Rings books and refused to watch any of the films. They loved the books so much and had their own mental image of the characters, story, and settings, that they didn’t want to contaminate that. I think now I understand.

Financial Update

Premium Bonds: £11,500 (no change from last week).

Stocks and Shares ISA: £7,805.71 (up £60.25 from last week).

F**k It Fund: £1,161.85 (no change from last week).

Property Value*: £173,501 (no change from last week).

Total Assets: £193,968.56 (up £60.25 from last week).

Credit Card Debt: nil (down £1.10 from last week).

Loan Debt: £3,800.49 (no change from last week).

Mortgage Debt: £134,279.11 (no change from last week).

Total Debt: £138,079.60 (down £1.10 from last week).

Total Wealth Figure**: £55,888.96 (up £61.35 from last week).

Investment Income in 2020 (Target £2,000): £0.00 (no change from last week)

*according to the lender’s index.

**total assets minus total debt

It still amazes me how much my figures have changed in just a few years. It’s motivation to keep going, and to keep following the process. It’s like when people talk about time travel and making small changes in the past can have massive impacts on the future, but no one considers how making changes now can impact on your future. It’s the same principle but we are looking at it in a different context.

I’ve amended the format of the financial update slightly.  I think the new layout makes more sense and is cleaner, and clearer. 

Financial News and Opinion

Restructuring my ISA

I’ve made some changes to my Stocks and Shares ISA since my last update.  I have sold my units in three funds because I felt that I needed to rebalance my asset allocation, and I’ve sold the three funds that had the highest fees, which were 0.2% and above.  My preferred ceiling for fees in a fund is 0.15%, but some of my funds have fees much lower than that.  For example, the Vanguard FTSE 100 Index has ongoing fees of just 0.06%. 

Another change I have made is to the way my fees are collected.  To date, I have simply gone with the default option for fee collection which takes fees from investment income first and then collects from residual cash and finally from the sale of stock in your portfolio.  I spoke with an advisor at my ISA provider and he offered an alternative which I was extremely happy with. 

I have set up a separate share dealing account which runs alongside my ISA.  I have credited that account with cash and my default fee collection option is to now take cash from the share dealing account.  This makes the ISA cleaner and all income generated in the ISA will stay in the ISA, and all fees will be collected externally.  This is no more, or less expensive, but it just feels easier.  Also, it makes it easier to monitor the fees as I only have to check the share dealing balance periodically. 

I much prefer this arrangement for paying fees. It just feels a lot cleaner and less murky.

​I’ve embedded images from my Stocks and Shares ISA so that my asset allocation can be reviewed.  I am heavily weighted in favour of stocks, with over 99% of my ISA allocated to that asset class.  Almost 60% of my ISA is held in US stocks and funds.  The subject of stock-to-bond ratios has been debated at length with some experts calling for a 50/50 split, and others a 90/10 split in favour of stock. 

Some argue that the split should be based on age and that the older you get, the more you should lean towards bonds for the preservation of capital and a more stable cash flow.  Another option is to start with the number 100, subtract your age in years and whatever is left should be the percentage of your portfolio in stock with the remainder in bonds.  For example, a 25-year-old would have 75% of their portfolio in stock and 25% in bonds.

My view now is more along the lines of, “screw it; funds and stocks equals stonks.”

**NOTE** the above sentence is in no way meant as advice.

I’m of the view that a more aggressive strategy is best, but that’s because I’m open to “risk”, whatever that means.  The concept of risk means different things to different people.  I’m in this for the long haul and so I’m relaxed about stock volatility.  If prices go down, I can buy more for my money.  I also have plenty of time to see my stocks bounce back.  If I was approaching my 60s or 70s, I would probably hold a different view.  I’m aiming for a rough 90/10 split going forward and will be rebalancing my ISA in the coming months. 

Gambling and Credit Cards

In a move that has needed to happen for a long time, gambling with credit cards will be banned in the UK.  This is so far overdue it is just tragic.  I have posted before about issues I have had with gambling in the past and to my shame, I have used credit cards to gamble with.  This was a decade ago and I only stopped because my card provider blocked gambling from their end.  I gambled on and off for a few years with my own funds but never got into debt for it again.  Not everyone has been so lucky. 

There are countless stories of people who have gambled online, using credit cards and found themselves heavily in debt.  Gambling is a social evil, and online gambling is the deepest level of evil.  You can open an account with minimal checks and lose thousands of pounds within minutes.  It’s a terrifying thought.  I haven’t gambled in a long time, but there is still something in the back of my mind that acknowledges in the wrong circumstances I could slip into the habit once more. 

What makes gambling so insidious is that, unlike many other addictions, it can be almost completely hidden until the addict reaches breaking point.  Those who are addicted to alcohol or other drugs normally have signs of their addiction.  Gambling is an invisible addiction.  All the addict needs is a smartphone and an internet connection. 

The fact it is so easy to open accounts with the dozens of betting sites out there and spend so much money without adequate controls is a failure of our society.  Responding with arguments such as “you can’t control how people spend their money” or “people should just pull themselves together” misses the point completely.  We are talking about companies spending millions on research about how to hook people into throwing their money away.  We are talking about teams of people working out how best to trap vulnerable people into a spiral of addiction.  With gambling addiction, we are talking about behavioural addiction with the highest rate of attempted suicide. 

The figures for gambling are worrying.  In the United States, it is estimated that around 2-3% of the population has a gambling addiction.  That is roughly six million people.  In the UK, it is estimated to be anywhere from a quarter to half a million.  Of those, one in five will attempt suicide because of their addiction.  This is not a case of people “pulling themselves together” but of people needing help from their society.  With any addiction, willpower alone will not work.  If the means to act on the behavioural addiction are freely available, then it is more likely the behaviour will take place.  Banning credit cards for gambling is a step in the right direction, but it’s the first step of what should be a long journey. 

I am enough of a realist to acknowledge gambling will not be banned outright.  There is too much money being made.  In the UK, betting companies make billions in profit each year.  Denise Coates, who runs Bet365, was paid around £300,000,000.00 in one year.  Let that figure sink in for a moment.

What I would like to see is all gambling means tested.  You must sign up and provide photographic ID and be logged on a central database.  Then, once your finances are assessed, a decision is made on how much you can gamble across all licenced operators within the UK.  This would probably bankrupt several operators, but strangely I just don’t care. 

In the years since I wrote this my thoughts on the gambling industry have become even more militant. It’s an evil industry that survives on the back of human suffering. Although the data differ depending on who you ask, it’s thought that over half of the profits that gambling companies make comes from approximately 5% of their users; those who are addicted.

Final Notes

​Thank you for reading part twelve of this blog.  Next week I will have a closer look at financial myths, common misconceptions and how to budget for long-term expenses.