cap bonuses to no more than salary

as preposterous. Usual codswallop “Bankers claim it could increase risk by leading to higher salaries. ”

Now I don’t think that’s such a bad idea at all. In fact it’s such a good idea I’m surprised it came out of the European Parliament Note it is not a restriction on pay. It is a restriction on the balance of pay and bonuses. The trouble with the bonus culture is not that the bonuses are large, it is the total lack of transparency and general moral hazard. The size of the bonus is only known after the fact.

There are some sorts of people we’ve always incentivised by bonuses, like the salesforce, who usually earn a low base pay and a larger bonus. However, in the not so distant past a decent salary and a modest bonus used to be enough to even get CEOs out of bed in the morning. The reason bonuses work for a salesforce is that the output can be easily quantified over the last year. Whereas the value added by a CEO is the devil’s own job to quantify. We can’t control for all the variables, so the default assumption is that he’s really great at this job. Why does that work for the CEO better than for some middle-management grunt? Because the CEO is the boss. What he says goes.

Businessweek seems to agree with me. It all started going wrong in the early 1990s, when Bill Clinton favoured bonuses related to performance. Now Clinton was a reasonably sharp cookie, but he achieved an epic fail here. “You get what you measure”, but if you’re in charge of the operation you also “measure what you get”.

That’s the rotten core at the heart of the whole performance related pay ethos. Who sets the Board’s targets – well they do. Quis custodiet ipsos custodes? So they inflate their pay, and good old Bill gave them the keys to the corporate safes. Company employees at the top have been looting it ever since, quite legally. Maybe it isn’t such a surprise that shareholder returns have been desultory since the dot-com bust, as this legalised thievery gathered pace.

What Diamond Geezer Bob did for Barclays shareholder value last year.

Now Diamond Bob might be worth every penny of his £17.7m pay over at Barclays, though some shareholders beg to differ. But wouldn’t it be so much more transparent to say this year we’ll pay him £9m, with a performance related bonus of £9m? It used to be how pay worked, it’s how it works (with the figures adjusted) for lowly grunts like me and everybody else below board level. And we’d see beforehand just how much Barclays is planning to pay it’s CEO.

Oh and we wouldn’t end up with reckless tossers taking excessive risks because when your bonus is 90% of your pay it incentivises you to bet the farm on nutty stuff that sometimes screws up so much that taxpayers have to bail you out.

In the end, what’s so wrong with a fair day’s pay for a fair day’s work, with the chance to double it if you fiddle the books right are a talented superstar with extremely rare talents capable of adding serious shareholder value? Shareholders, seeing all that awesome value you added last year may increase your pay this year and up the ante. Looks like a win-win here. There’s nothing wrong with high pay, if it really is necessary. But there’s everything wrong with a lack of transparency and control. It’s the shareholders that capitalise the company and take the risk, not particularly the employees. When Fred the Shred sunk RBS, all he lost was his job, it’s not like he was at risk of losing his life savings.

Thes Big Swinging Dicks need to relearn these facts of life, and that 50:50 pay:bonus split limit could be a good place to start IMO.

I buy bread wheat directly from some farmer friends who live close by, by sack of twenty or so kilograms for £8 each. This is above the wholesale price they are paid for wheat, to take into account the extra work entailed in organising collection, bagging the grain up, and so on.

Wheat in the fields

I pick a couple of sacks up whenever I am passing by, or visiting them, so there is no extra transport cost involved for me. To turn my wheat into flour I have a small, but sturdy, “Country Living” grain mill that I bought many years ago when I had a “proper job” that earned me a good deal more money than running The Oak Tree Farm  does now.

Mr Ermine, being a handy sort of chap with all things electrical, has grand plans to motorise the mill, but for the moment I turn the handle myself in the dead times when I am cooking something else. I don’t really need the extra exercise now, running a smallholding gives me quite enough of that, but I certainly did benefit from the effort  it took when I sat behind a desk all day.

American "Country Living" Grain Mill

My habit of making bread and pasta from wheat grains surprises a lot of people, but it really is quite a sensible way of carrying on. As soon as wheat is milled, the increased surface area of the tiny flour particles results in rapid oxidisation of the vitamins in the wheat. Flour that is stored for any length of time, even wholemeal flour, has a considerably lower nutrient content than freshly milled. And for the Ermine household, it has the great advantage of being cheap. Really cheap.

Your local, friendly, near-monopoly supermarket chain charges, at time of writing, £1.29 for 1.5kg of wholemeal flour. A rapid calculation shows I pay 60p, a mere 47% of the shop-bought price. When you start to make bread and pasta, the savings really add up, but you could just as well benefit from those savings by using shop bought flour.

So in short, thanks to a one-off investment in the grain mill, Mr and Mrs Ermine eat better food for less than half the price of supermarket supplies, thanks to a friendly transaction with a local farmer and a small amount of physical effort. Our food miles are vastly reduced too. What’s not to like?

Mr Ermine adds:

The cost difference suprised me, as it shows the invisible hand of the market is in full price-gouge mode. A 100% markup on a low-tech basic foodstuff which is a 1000-year old mature technology is really quite remarkable.

The grain mill is designed to run at 60rpm and needs about a 1/4 horsepower (200W) motor. An average human can achieve a sustained power output of about 1/10 horsepower. This accords with observation, I don’t hear the sound of this running for sustained periods of time, more 2-3 minute bursts

Hi Bex, LOL DC, dnt tl Sam...

The Ermine doesn’t expect politicians to speak the truth all the time, but it’s kinda nice to feel they know what it looks like even if they don’t call it I like competence in them, even if they are doing back-handed deals with the Digger’s army. It doesn’t tremendously trouble me that David Cameron was sending ‘lots of love’ to flame-haired wingpeople of the Murdoch clan. What does trouble me is despite the finest education money can buy and all the flunkies around him our Dave was unaware that LOL doesn’t mean ‘lots of love’ to anybody else.

I even looked it up, to see it it has picked up that alternative meaning in txt spk. No, it still appears to have the same meaning as it did when I first saw it, on Usenet or CompuServe twenty years ago, in 1992. Looks like there’s lulz in your LOLs, Dave. So here’s a LOLcat, just for you.

In itself it’s no big deal, but it does make you wonder about David Cameron’s situational awareness. BTW Dave, there’s a shitstorm brewing in the Eurozone, and it’s coming our way. Just in case you hadn’t noticed, LOL

Warning. This turned out to be a rant, though unlike the Tax one it doesn’t completely lack the milk of human kindness. However, if you’re a parent that believes More Stuff compensates for Less Time with your kids you might not want to read further than Has Anything Changed since the 1960s to make life harder for Modern Parents. It’s reactionary, unprogressive and not Right On.

Sometimes an Ermine looks at himself in the mirror and thinks

Self, you have become a cynical old sonofagun

So it is with Rob (Self-Employed Investor) and Lee’s (Five Pence Piece) Call to Arms – Campaign to Introduce Compulsory Personal Finance Education in Schools. Don’t get me wrong, I’m absolutely behind them, if it happens to be the case that this is necessary.

But I have to admit, that the first thing that sprang to mind when I read Rob’s piece Personal Finance in Schools was

Eh? Don’t these children have parents? Why aren’t they learning about this at home, what’s it got to do with the school anyway?

You see, success in personal finance isn’t about making the figures add up. It isn’t about the book-keeping, though that’s important. Most people have  on-line bank access and tallying the figures isn’t the main problem.

Personal finance is about personal values, not the adding-up

Success in personal finance is about values, not about arithmetic. Money is crystallised power. It’s a claim upon future work, yours if you owe money and someone else’s if you have money. How you use power is all part of your beliefs and value system. You learn that from your parents, watching how they live life by their values.  Children who see their parents solve problems with a fist-fight learn that a fight is an effective way to get things done, children who see their parents defer purchases and buy with cash rather than credit will buy their own flat panel TV with cash rather than a credit card. Rob cites an example to prove the point

when I was given money for a summer fete as a kid, I was also told that I could keep that I wouldn’t spend[...]. That sub-clause taught me that spending 20p on a 1m cart ride was unlikely to be the best use of my money.

Here’s what I learned as as child about finance, and where I learned it from.

the Ermine is a child of the 1960s

It’s very hard to put across just how different 1960s London was compared the the Britain of today. Money was short, and there were still many bomb-sites in London left over from the war, though that had ended more than two decades beforehand. The freedom that I had as a child to wander seems out of all proportion to what is typical now. For instance, I went to primary school in New Cross, London, and walked the 500 yards home alone from when I was 8 I believe, before then my mum or other adults had helped me across roads -

early school route

The school and my parents’ house have both been demolished since then so the start and destination are approximate. The halls of residence for what is shown as Goldsmith’s College were a building site, and that supplied endless fascination for us kids, we’d play all over them after school on the way back. Building sites weren’t the regimented walled off things with dogs and security they are now – then you’d occasionally get yelled at if a builder saw you. A friend lived on Barriedale, and occasionally we’d go through the gate at the end of the garden into the allotments and climb trees on the railway embankment at the back. We were obviously instructed not to go near the track, but there was nothing seen as wrong about playing on the vegetation fifty yards away. I get the feeling that sort of thing would be frowned on nowadays

A London of Hire-Purchase, coal fires and credit controls

This was a Britain without credit cards, though many people bought consumer goods on hire purchase. TVs were rented and black and white, and most people’s radios still had vacuum tubes in them. Central heating was rare until the 1970s, most people used coal fires.

My Dad worked as a maintenance fitter for a glassmaking firm, then at a brewery in the City of London for over 20 years. My Mum was a SAHM – though it sounds odd nowadays this was typical of the 1960s and 70s. But it did mean that I had more chance to learn from my parents, simply because I saw more of them than is typical now I believe. So I wasn’t born to parents who had masses of wealth living in a manor house. But they did have time to spend with me, and pass some of their knowledge on.

My Mum helped my Dad do the mortgage application for the house, in those days you had to put a suit on and have an interview with the building society manager, who would ask you about your income, your prospects, your outgoings, your savings, whether you were going to have more children. This was when I was in primary school, and of course I didn’t go to the interview – this was simply my own parents sharing the ways of the world with their son. I recognise the diagram below (taken from Mortgages Exposed) from my mother’s description, though I think she drew the graph as a line graph of capital repayments

how a traditional mortgage builds equity

She took the time out to explain the issue of the interest and the principal (as what we now know of as the capital) get paid off, starting off mainly with the interest every year, but then as time went on more and more of the capital gets paid off until after 25 years the house would be yours. Now I know in the modern world that looks terribly old-fashioned, but we should remember than in 1960s Britain the very basics of life, food, energy, rent, took up the vast majority of people’s income. People ate out a lot less, and generally needs were a much larger part of their budget than wants. You couldn’t just wing it on interest-only and hope something would turn up by the time you retired.

It was a much more stable world, however, and because accumulating wealth was so slow, people planned things ahead more. Jobs were easier to come by though pay was average, and there was a much wider range of manual and semi-skilled jobs for labourers and chargehands as upto the skilled trades, before the big divide to salaried white-collar workers. Blue collar workers tended to be paid weekly, in cash, and have opportunities for overtime, whereas white collar workers were paid for a fixed workign week, monthly, into a bank account.

A world of Hire Purchase but no  Credit Cards

My parents also explained about how hire-purchase worked. In those days there were no credit cards in Britain, but that didn’t stop people living beyond their means. That’s what hire-purchase was for. If you bought a TV on hire-purchase then you’d pay about twice the capital cost for it over five years. But you could have it right away. In many ways it was better than credit cards, because if you stopped paying, I believe the goods were taken back and you lost what you’d paid so far, but that was it. The seller still technically owned the goods until the last instalment was paid. My parents were pretty disparaging about this as a way to carry on.

There were some cases where it made sense – for instance TVs were unreliable then, and since the title of the product remained with the seller until the end, if a hire-purchase TV broke down you could either get it fixed at the seller’s cost or be entitled to a replacement. It all sounds like a better way to do it than a credit card – say you bought an iPad on hire-purchase. If you lost your job you’d lose the iPad, but you wouldn’t have jack-booted goons from some debt recovery agency chasing you for the money outstanding on the credit card.

They’d also share their opinons on the news and why. Because my Mum was German and still had a lot of connections there, they were more attuned to international affiars than people were generally. I recall them making some pretty disparaging remarks when Harold Wilson got on the radio and told us all that the pound in your pocket here in Britain had not been devalued, despite his devaluation. They explained how he was a lying sack of shit by describing how my Grandma, when she came over with her Deutschmarks would find a cup of coffee cheaper, whereas if we went over there a cup of coffee would be dearer, and that this would affect the price of things like wine imported from Germany.

Although I learned a lot from my parents, I also recall learning about preference shares from a children’s magazine called Treasure. It described, at a high level the principles of equity and debt, how debt is senior to equity. My recollection is that they said that preference shares were senior to ordinary shares, but that on the liquidation of the company ordinary shareholders obligations stop, whereas preference shareholders may be called upon for unlimited liability.

Although the debt seniority to ordinary shares is one of the advantages listed in this modern descripton of pereference shares, the unlimited liability either means my juvenile mind distorted the description in the magazine, or this has changed over the intervening forty years.

This magazine (and its successors World of Wonder and Look and Learn) was a great investment by my parents – it expanded my general knowledge no end and as this piece shows, some of the information even stuck. It used illustrations well – the description of how the newfangled central heating systems worked, with the cold-water tank, hot water cylinder and the feed and expansion tanks in the loft is still one of the clearest I have seen.

Treasure or its successor also described how fractional reserve banking worked, though it didn’t call it exactly like that. Remember this was a magazine aimed at 11 to 16 year olds, so I don’t know what’s gone wrong with people’s greneral knowledge because this seems to come as a desperate surprise to members of Occupy.

This was a world without electronic calculators until the mid 1970s, so financial stuff was hard, and compound interest and mortgage calculations often used paper lookup tables and rules of thumb. I learned long division because there was no alternative, and scientific calculations were done with logarithm tables and sometimes slide rules. I saw a mechanical calculator in the business office of the school, a huge beast with a handle on the side you cranked after you’d set dials. Through some remarkable mechanical engineering in the guts it could add numbers, subtract and multlply, but division was beyond it.

Dad was an early shareholder, when ordinary people didn’t hold shares

Unusually for people at the time, as time went on and I was in grammar school, Dad bought shares. He bought a lot of shares in his employer, I believe as part of the Save As You Earn schemes. However, the Wikipedia entry indicates these only started in 1980, so perhaps there were other incentive schemes before then. It’s difficult to understand now just how unusual share ownership was for ordinary people, and it was especially unusual among blue collar workers. He also held shares in some investment trusts, and it was either he or my Mum that explained to be how the net asset value was not necessarily the same as the average share price of the IT and how this was sometimes good for you and sometimes bad. I was to recognise this when I read this modern explanation, but it came easy to me because I had heard about investment trust discounts and premiums thirty odd years beforehand, and indeed a high-level view of what investment trusts were. They also described what share splits were and scrip dividends.

I started at Imperial College in the late 1970s, and unlike the unseemly hurried mess I made of my own retirement plans, it appears that my Dad took a measured and strategic approach to his retirement in the second half of the 1980s. He had been in every sharesave scheme, and amassed these shares over time, his employer was a decent dividend payer that served him well in retirement. He had also paid off his mortgage by the time he was in his late forties. In his favour he had the stagflation of the mid 1970s that made his house debt look cheap. He begans to ramp up his pension AVCs – like nearly everyone else in private industry at the time he had a final salary pension, and I believe his AVC strategy was basically the same as mine, but operated in a civilised mannner over five years or more, rather than in a mad rush over three years. Somewhere in this period  I recall borrowing three hundred pounds interest free from Dad to buy the inaugural public issue of shares in British Telecommunications in 1984 I think, which I paid back from wages when I was working at the BBC.

An unexpected challenge to the workplace financial adviser

When he came to retire, Dad must have had the option of a free session with a financial adviser paid by his workplace, in a similar way to the pre-retirement seminars I’ve been on. That can’t have been that adviser’s lucky day. Not only was Dad experienced as a shareholder, and largely of the high-dividend buy and hold mentality, he was also a believer in investment trusts. I recall him spitting bricks about unit trust costs and this FA pushing unit trusts for his pension commencement lump sum, and high fees and stuff, so he’d have none of it, putting his PCLS into investment trusts and various high div shares.

Dad was basically of the same opinion about the financial adviser industry as Monevator over here, but Dad got there earlier. This must have been a nasty surprise for that adviser. After all, advising a bunch of blue collar workers on how to use their pension commencement lump sum, which was probably the largest amount of money they’s seen in their lives, and at the same time rake off pretty stupendous fees in those heady days of the 1980s must have been an easy ride with easy pickings. Except for one right old awkward bastard, step forward Dad.

He’s getting on a bit, well into his 80s these days, but he still doing well. Some of Dad’s approach to shares looks unusual to me, for instance he takes the actual price of a stock into account, never buying anything > about £8 a share and I believe he has a minimum target. He doesn’t use computers – he used to use the FT and now simply uses Teletext (or the red button alternative).

And yet Dad’s track record is far better than mine. To get where he is, bearing in mind he’s been drawing a penson for nigh on a quarter of a century, he must have preserved the real value of his PCLS and grown it while drawing some income from it. He’s done it across the decades, he wasn’t wiped out in the dot-com bust like I was, he wasn’t destroyed in 2007-8 crunch. Dad doesn’t do index investing, he’s a stock picker, because that’s all he could do when he was starting out and learning. He’s not Warren Buffett either, but he’s still there and his portfolio is doing for him exactly what I want mine to do for me. Great as they are, it wasn’t Monevator or TMF who convinced me that I could top up my foreshortened pension with income from shares. It was my Dad. You can’t argue with track record. Buy and hold works for him. His shares normally only change because of corporate actions I’m trying to get to his Zen-like approach. I don’t want to have to buy a smartphone when I am retired and track the stock market all the time. I want to sit in a boat on the middle of a lake and contemplate the meaning of life, not stress about how my shares are doing, and if I should sell TSCO and buy RDSB.

What my parents taught me, largely by example

Do not borrow money for consumption

That’s the main one, basically Micawber’s rule.They lived it – they just didn’t borrow money, with the one exception of the mortgage. They never bought anything on hire purchase. And yes, other people did have more consumer goods than my family did. But my parents took the time out to explain that sometimes men in suits with thick necks and bad manners came to some of these neighbour’s houses to take their fancy goods away, and they didn’t want that to happen to them.

Yes, I knew how a mortgage worked and don’t borrow unless against productive assets, and a motley collection of bits and bobs about shares. It was going to be ten years before I did anything with any of that, and by then I was my own man. My parents sent me out in the world knowing not to borrow money, and with some basic cynicism for advertising. That’s good enough. I’m not sure there’s any need to teach kids about ISAs and stuff. The number one biggie is don’t borrow money – essentially Do No Harm to your finances. All that stuff about investment trust NAVs was thirty years before I’d use it, and there were people like Monevator about who could tell me about that when the time had come anyway.

Other financial stuff my parents passed on was

• how a repayment mortgage worked
• a general impression of compound interest (this was shown in Treasure magazine, though their example lived in a delightful inflationless world ISTR)
• how equity and debt finance worked for companies (from the aptly named Treasure magazine)
• what shares and dividends were
• what scrip dividends were (dividends in the form of extra shares)
• what an investment trust was
• how the gold standard had worked (Nixon had gone off it in 1971 ISTR)
• the principles of the Bretton Woods system of fixed exchange rates (overtaken by events in 1971)
• what hyperinflation did to people’s savings
• howa savings account was different to a current account, and what you used for which
• what standing orders were (there were no Direct Debits in those days)
• How you needed to keep a certain amount in a current account to avoid charges (it was about £50 in the 1970s, unlike now, though the charges were not punitive as now)
• how to fill out a cheque and what A/C payee meant. There was a time when you had to write that in manually else anyone could cash a cheque, from the days when few blue collar worers hada bank account.
• what the difference was between a bankers draft and a cheque was in terms of repudiability
• some idea of foreign exchange variation, and how you couldn’t devalue without increasing the cost of imports
• a general awareness of the balance of payments, though my parents had a  mercantilist viewpoint by today’s standards

Not all of it was with a view to being used, the Ermine was of an inquisitive nature (aren’t all children?) so some of this was accumulated from ‘why are you doing that’ sort of things.

Has anything changed since the 1960s to make life harder for modern parents to do what mine did?

The young Ermine was raised, in a stable family, by both biological parents who were married to each other. And my Mum was SAHM, which was common at that time

We’ve made a different compact with the world of economics since then. The world I grew up in was stable, with plenty of jobs at all levels, and somebody who was prepared to work reasonably hard and save diligently could raise a small family and buy a house on a single man’s wage.

You just can’t do that nowadays. Not only are jobs less secure, though they pay a little better, indeed some people a heck of a lot better, but we have driven up the price of housing in the UK so that the average household needs both parents working to be able to pay the mortgage.

Housing in general is very dysfunctional now compared to then. Margaret Thatcher deeply damaged the British housing situation when she sold off council houses that had been built in the post-war period. She did this for the sugar rush of buying votes, selling off the capital assets of the country cheap.

She claimed this was to enable aspirational people to own their own home. There was a perfectly good system in Britain for people who wanted to own their own home, and as a self-styled free market advocate she would have known about it.

It was the open market – my parents never lived in a council house, they bought on the open market. They started in rented accommodation with just the shirts on their backs – when they got married they used upturned orange boxes as seats and secondhand tables. But they bought their house later. They didn’t need Thatcher’s largesse to do it. Basically if you rent from the council then you can’t afford to buy a house. That’s what council houses were for, and there was no stigma in raising a family in one. Many of the kids at my grammar school lived in council houses.

Thatcher fixed an awful lot of things that were wrong in 1970s Britain, but she did untold damage to the delicately balanced housing system, that succeeding generations have been paying for and fighting against ever since. The house I am living in is a semi-detached house, similar to that my Dad bought. I bought it on a single wage for various reasons, but I needed a white-collar job to do it in a provincial town and not London. If I had been in Dad’s generation I could have bought a detached house in the stockbroker belt of London. I couldn’t even afford to buy a house in London – the damage Thatcher perpetrated to the housing market in 1980 had already had that effect within ten years. It still echoes onwards – if I were 28 on the graduate scale at The Firm I would struggle to buy the first two-up two-down that I bought in Ipswich in 1988, as a single man.

It’s unfashionable and considered terribly reactionary, to say it, but over the years we have sold spending time with our children for time at the office, and buried the extra money we’ve earned in house price equity and consumer baubles. We have averted our eyes to the impact on those we claim to hold most dear, and tried to outsource some of the work that used to be done by parents to the State. Heck, the State is making significant transfers from those without children to those with in an attempt to fight back.

And we aren’t acknowledging the fact that raising children is work, it seriously degrades the material living standards of the parents, and reduces their ability for self-actualisation. People, my own parents included, tell me that there are great rewards to be had that outweigh those factors

But unlike my parents’ generation, we now often refuse to accept that compromise. We want to Have It All, and We Want It All Now. How has it come to pass that it’s very right-on to say that It Takes A Village to Raise A Child, but you aren’t allowed to say It Takes Two Biological Parents To Raise a Child in polite company? The house sparrows outside my window know that it takes a cock sparrow and hen sparrow to raise a fledgeling, so how come we have tried to erase this awkward fact of human life in the last 40 years?

Humans have a long and difficult journey from newborn to young adult, the longest relative period of dependency of all animals. The modern world is an increasingly complex place and if anything it needs better parenting, not less parenting.

I’m not such a reactionary old git as to say there aren’t any exceptions to the two parent ideal, and humans are resilient and adaptable, we’ve always had exceptions to the historic norm of two biological parents raising a child. Countering that, we had extended families then which could take up some of the slack.

The proof is in the results. Far too often parents are sending kids out into Britain ill prepared for it, and finance seems to be just one of the areas where we have problems, then they aren’t stepping up to the plate as well as their predecessors did. If you don’t want to make the compromises that having chidren entails, then don’t have them FFS, the means to go about that are free on the NHS I believe.

As a society we could do with being less mawkish about children and actually roll up our sleeves and make life better for them. Government has mucked around with building schools and throwing benefits at families which only seems to have encourages the wrong sort of people to increase their fertility, and make the middle classes who ought to know better dependent on benefits to buy distractions for their children rather than actually spend time with them.

If Government really wants to do something for children then top of my list would be when we do build social housing for families, suspend a very sharp sword above jerks like Cameron who wants to sell it off cheap to buy aspirational votes. Then get a small monkey, say Nick Clegg or Ed Miliband, to cut the rope when bollocks like this comes out of his mouth

£75,000 discounts will help get tenants across the threshold

No. Get your damned mitts out of the housing market. Leave it alone, FFS. It’s going to take another generation of parents away from their kids, and it will reduce labour mobility. Use that £75,000 to build more frickin’ council houses, chump!

My childhood had a lot less stuff in it that current kids, But it had more adult attention in it than is often the case now. Although I’ve fingered Thatcher’s much-vaunted right to buy revolution for what has been a major source of damage for British parents’ finances, the obvious challenge is that I’m an outsider looking in. I don’t know what it’s like to raise children in modern Britain, I merely get to observe the results. Here is a view from a modern parent raising kids in an Anglo-Saxon economy who talks about kids needing their parents’ time.

In the black-and-white discourse that poses as dialectic at times, people will no doubt get on my case for saying every British parent makes a pig’s ear of this in the modern world. Of course they don’t, the vast majority of parents are doing the best they can with the resources they have to hand. Unfortunately, more and more of the marginal cases are losing the battle, and Gordon Brown’s attempts to eliminate child poverty incentivised some pretty rotten prospective parents to become parents. So an increasing percentage of kids are being sent unprepared into the tender mercies of the economic system which does its best to eat their finances. The marginal cases get themselves into trouble and in some cases make life hell for the rest of us.

Parents, you are failing your children if you aren’t preparing them for the basics of life which includes finance. Live your values and pass them on by example, and leave the schools to teach the academic stuff.

We aren’t born wards of the State, and if things are getting to the stage where schools and the State has to teach children how to become competent citizens then we have gone an awful long way wrong. We need to stop, back up a bit and cut the crap.

Parents, your job doesn’t end with bringing the egg and the sperm together. If you want a decent world for your children, then start at home. Build that decent world within your own four walls. Express your values, and live them by example. Show your kids how you save for a plasma TV and explain that if you slapped it on the credit card it would cost you 120% of the purchase price, which would bugger up Christmas.  In the specific area of finance share the basics, and tell them how the world works. Tell them over the twenty odd years they’re in your care -

1. What money is – crystallised power, and a claim on future work
2. Don’t spend more than you have for consumables
3. Advertisers are corporate liars, don’t believe a world that they say
4. They need to develop their own values and live them, not buy them in brand names and empty dreams
5. The true odds of the National Lottery, that it is a scam designed to tax the poor and mathematically challenged and that it fosters empty dreams and it should be treated like a dog turd
6. If something looks too good to be true it probably is
7. There is no free lunch
8. People matter more than Stuff
9. Shit happens, so save towards that rainy day
10. Paying things by instalments is nearly always dearer than saving up and paying in one go. That applies to mobile phones and expensive contracts too
11. Markets like housing are cyclical. If they are a long way off long-term average they will probably revert to the mean
12. Markets can stay irrational for longer than you can stay solvent, particularly housing
13. How mortgages work. You are actually meant to pay off the capital
14. to ask themselves whether university is an unaffordable luxury, but also to understand that this debt is atypical of other debt
15. How a man without savings is always running

As they get into their teens and towards young adulthood, perhaps share some fundamental principles. These five aren’t a bad start.

A child is for life, not just for the Social Security claim. I can’t think of a better reason to sort your life out and get your shit together that to stand as a decent, honest example and be there for your kids.  I’m not quite yet ready to advocate applying a pair of house bricks to the offending organs for the sort of rabble that drag their kids up without equipping them with some of the basics about how the world works. But I’m getting there. Quite honestly if we are getting such rotten parenting then we are encouraging the wrong sort of people into being parents. You don’t have to teach your kids how the NAV of an investment trust works. Just start with the basics of Micawber’s rule. It simple.

Don’t buy shit you can’t afford, son. Save up for that iPad first. There are only two possible exceptions to that in life. Your education and your house, one day.

Neither of those are automatic exceptions. The reason they may be exceptions is one may make you money and the other may save you money, as long as you pay the capital off. None of this interest only malarkey, son, unless you have a plan to shift to repayment as your pay increases.

It incenses me that things have got so bad that good people have to start thinking up ways to outsource this sort of thing to schools. At this rate we’ll be expecting schools to teach kids how to use the toilet and making up for poor parenting in other ways.

It’s the parents’ job to send a child out into the world fit for life. There are always going to be some kids who are slow starters, fall into bad ways or otherwise lose their way. That’s fair enough, but make the effort, guys, then society can handle these kids as exceptions, not the norm!

In the meantime, I’m happy to support Lee and Rob’s  Campaign to Introduce Compulsory Personal Finance Education in Schools. I just want to see a Campaign For Better Parenting at the same time. We need to fight the cause, not just firefight the symptoms

I found it a lot better to look back on the expenses and income as a function of time, and Quicken lets me look back over the year. Just like a share price graph, if the trend is up its my friend, if it’s going down there should either be a reason for it or some action needs to be taken.

I also used it for my multimedia company, and there it helped with cashflow – by entering future costs, estimated future costs and estimated future revenues it told me how I would be getting on in future. Like any budgeting tool it is only as good as you are honest with your predictions.

Unfortunately Intuit quit the UK market a few years ago, and the obvious competition, Microsoft Money, also scarpered. However, Quicken remains serviceable for the moment.

Looking for a decent small-biz accounting program

It so happens that I’m looking for a program to do this job for a small company/future enterprise. I am not trained in book-keeping, but I used Quicken happily to manage my previous accounts and VAT returns, and it did the job and my company accountant seemed happy enough with the results to be able to draft the statutory accounts and HMRC jazz.

It doesn’t feel good to be using a 10-year old software package to do this job, since future versions of Windows may no longer run older code. I’ve got away with it so far. So I looked at the field, accounting software tends to be country specific because taxation varies greatly between countries. In the UK there seems to be Sage 50 which is £700 and up, QuickBooks which is £100 and upwards or a monthly rental/online of £10 which is even more expensive and doesn’t do VAT which is probably an issue, and a motley crew of wannabees and also-rans bringing up the rear around the £100-200 mark.

From my experience with Quicken I’d tend to favour QuickBooks, but the feedback on AccountingWeb seems to be that Intuit’s support makes people snarl and grizzle so maybe not. OTOH the Ermine is of the opinion that by the time things are so hosed that it ever seems a good idea to ring the manufacturer about a software problem the fight is lost. Software is sold like a used car – as seen and without any warranty express or implied.

Then we have the new kids on the block – cloud accounting software, with KashFlow, Xero, and FreeAgent. All these rough out at about £20 a month. Now I know they say that there’s no point in trying to sell anything new to anyone who’s over 40, but really, all your financial information processed and stored online? What on earth could go wrong

At least I can still use Quicken even though it’s been abandoned by the supplier in the UK. To still be using a cloud SaaS after a similar amount of time  I’d have been paying ten years’ worth of usage fees (£2400!), and of course I would be relying on the company to still be actively supporting the application. No, thank you very much.

Quicken tried software rental with QuickenXG for home users in 2003. The UK market correctly interpeted this as price gouging, and rejected the product, so Quicken retired from the UK market in a huff.

What do I want accounting software to do for me?

Accounting software does two things. One is making sure that all the figures add up. In a company of more than one person, there is room for both human error and fraud, and it’s the job of the software to minimise the former and make the latter harder to do and more traceable if it happens. Most of the statutory requirements are all about making sure the figures add up and are stated accurately, as the tagline for Companies House says, ‘for the record’

Most small business owners need accounting software so they can afford to pay their accountants. You need an accountant for statutory compliance if you are a limited company, though not as a sole trader I believe. Hit him with the shoebox full of receipts and you’ll pay for his expensive time to enter it all and reconcile, give him a data file and the bank statements and receipts and it makes the whole process work easier and cheaper.

That’s not what I want it for. I want it to set strategic direction, and to be able to see the cashflow enemy up ahead. It’s the finance director’s flight instrumentation panel, and it puzzles me why SMEs often outsource this book-keeping function. You shouldn’t be in business if you can’t achieve about a 5% return on capital employed (ROCE) or more in the long run. Just like Quicken in my personal finances, with my previous company it allowed me to see how much cost is going into something. No ifs or buts. I’ve seen entrepreneurs flog themselves in business not really making much money at all. They’ve lost sight of their ROCE, or got so emotionally hung up on the business that they haven’t observed the slow changes that rust away at the fundamentals of a once-sound business case from years ago.

An ex-bank manager related the cautionary tale of a one-man truck driver. He expanded, taking on more staff and trucks. In the end this guy was run ragged staying on top of all this, but he as basically only making the same amount of money as when he was a one-man band.

Running a working business needs continual calls on ‘is this worth doing or not?’ Not everything gives a tangible ROCE but you ought to know why you are doing something, particularly if it isn’t making money. Of course one of the things that makes running a business hard are that there are all sorts of transactional costs, that raise the cost of changing direction. It is sometimes rational to carry on a line of business even if it isn’t profitable, if the cost of shutting it down and restarting it are high (sacking and rehiring staff, etc), but it’s a hard call to make, as it is hedged all around by known unknowns and risks.

The trouble is most accounting software seems designed to do the compliance thing once a year. The cloud services do a slightly better job that I can see of allowing you to report and graph costs and revenues by item, but all of them look like a damned expensive way of doing the sort of thing that Quicken does for my personal finances. For instance if I want to know what I spend on my car then Quicken give me this

Quicken car costs graph

Tells me pretty much everything I need to know, including that the spikes showing the parasitic costs of owning a car (tax, insurance, servicing) cost me more than the fuel. Quicken will also spit out a report itemising these lines if necessary. What’s not to like? Why can’t accounting software just do that for me, as Quicken did for my multimedia company 10 years ago?

Is there something I am missing about book-keeping/accountancy?

After you’ve been working in companies for thirty years, you get to pick up some of the general principles they used for financial management. I’ve been lucky enough to work in a small company of about ten strong, as well as in bigger organisations. You see more of the guts in a small company, though I was a cocky upstart at the time. Nevertheless, I’ve never learned anything formally about accounting. I’d assumed that a decent knowledge of the Micawber principle, and something that would give me a time display of costs and revenues would be enough.

So I got myself onto AAT skillcheck and had a bash to establish what my level of knowledge was.  I flunked double-entry bookkeeping and sucked at financial transactions:

Double entry bookkeeping FAIL

so it’s possible that there’s something I don’t understand about what accounting software is trying to do that is giving me a hard time here. I managed to up my IT skills score to green on the second go, but the right hand two remained resolutely amber and red, so there’s obviously something about this accounting malarkey that’s outside my ken. Maybe that’s why I can’t find accounting software that tells me what I want to know, because I can’t speak the lingo.

Taking an AAT course isn’t the answer, however, due to the stupendous price of even distance learning. It is interesting to observe that Level2 is in fact the entry level (there are no level 1 courses I could see). So I am at O level rank neophyte level with bookkeeping.

Somewhere something isn’t right here. There seems to be a massive focus on making the numbers add up and compliance, whereas I want a speed and heading indicator. I’ve never had trouble making the numbers add up with Quicken. It’s also hard to believe that after running my own company and working in others for three decades that I could have blissfully sailed past something fundamentally essential in small business finance, but that’s the feedback I’m getting.

So maybe I should wing it with Quicken or GnuCash, which can deliver the strategic direction part for me, and outsource the accounting as before. My accountant 6 years ago was about £150 ex VAT ech year, probably up to £250 these days. He headed me off doing things with would have been dippy from a tax viewpoint and when you look at the price of accounting software, which seems to be regularly updated at a cost then the benefits of learning how to do this job myself start to look marginal. I clearly know jack all about double-entry bookkeeping.

From this review of GnuCash that might help me learn, at least. It appears that some of the features of Quicken actied like stabiliser wheels on a kid’s bike. I didn’t come unstuck, but I never learned how to do it right, either.

The Cast of Characters – List of UK Personal Finance and Accounting programs

Since I had to suffer the pain of doing this research it might do somebody else some good Here’s a list of the obvious contenders, marshalled into rough categories. There is a vendor lock-in and data longevity strategic issue with using proprietary solutions with proprietary formats, so Open Source versions are marked with a *

Small Business Accounting – desktop/installed standalone software

• Sage seems to be the 900 pound gorilla in this space. Lots of people really hate Sage, though I guess lots of people really hate Microsoft, so it’s one of those scale things…
• QuickBooks – sort of 600-pound gorilla…

those two are the big ones in the UK by the looks of it. All the rest bring up the rear

• TAS Books (taken over by Sage, there appears to be a free option)
• VT Transaction + / Final Accounts
• *Ledger – quite spartan, though as a result of the bare bones approach the manual is very instructive on the principles (see comments for user experience)

Web-Based – Cloud (All Your Data Are Belong to Us)

If you’re going to build your business on this you better hope that cloud biz accounting software providers are more stable that personal finance coud providers in the UK, see rant below. If a finance director of my firm advocated this solution and the provider went down I’d fire them for culpable incompetence.

Managing money is deeply embedded into any company structure, and part of why I am mulling this over so much is once you’ve set direction, changing it over is not going to be any fun at all. You can replace the foundations of a structure without dismantling it, but it ain’t easy to do compared to getting it right from the off!

• QuickBooks (online version)
• KashFlow
• Xero
• FreeAgent
• LessAccounting (US based) see comments for user experience
• FreshBooks (Canada based, UK aware)

Personal Finance Management

Desktop

• MS Money – deceased. This is living proof why you should never trust commercial software for strategic long-term requirements.
• Quicken UK – deceased. More living proof why you should never trust commercial software for strategic long-term requirements, though note at least Quicken remains serviceable in 2012
• *GnuCash
• Accountz
• Moneydance (see comments for user experience)
• BankTree

Web-Based – Cloud (All Your Data Are Belong To Us)

I don’t understand how anybody would even entertain this. Maybe it’s just a generational thing, but you put an awful lot of effort into the data entry of things like this. The software vendor owns your balls. Wanna see your data – you pay them what it takes. This is a classic setup for vendor lock-in.

Clearly many other people are a lot more relaxed than I am about this. So good luck to y’all, but don’t blame me if you get price ramped later on! Something that should scare you is to read MS Money is Dead – Five Alternative Programs to keep Track of your Cash from CNet UK from June 2009 (only three years ago), and then observe that the first online service, Wesabe, has gone to a dis, the second online service, Yodlee, looks as American as apple pie and may not handle UK punters any more, the third online recommendation, Expensr, is no more and is now MoneyStrands. So that’s a 100% fail or metamorphosis into something else in three years. Do you feel lucky, punk?

Money Strands

I didn’t find anybody else that would deal with Brits, if you’re American than the obvious choice seems to be Mint, which is owned by Intuit, makers of Quicken and QuickBooks.

If I get to hear about other programs SaaS  providers I’ll edit this.

Mervyn King, no child of the 1930s...

Looks like Mervyn King availed himself of the pleasure, in his Today Programme Lecture (Iplayer). There’s a lot of sense in what he said, but two parts of what he said don’t ring true to me.

This was not a Bust without a Boom

One member of the audience did call him out on this one. Mervyn King said

Let me start by pointing out what did not go wrong. In the five years before the onset of the crisis, across the industrialised world growth was steady and both unemployment and inflation were low and stable. Whether in this country, the United States or Europe, there was no unsustainable boom like that seen in the 1980s; this was a bust without a boom.

I’m not sure where Mervyn King was living in 2006 and 2007, but you could smell the boom in the air. House prices were skyrocketing, and in Britain when you have skyrocketing house prices, then home owners feel richer. They go out and splurge on holidays, aspirational knick-knacks like fractional yachts and helicopters, overpriced coffee bars and go out on the town drinking expensive cocktails. Companies launched Shattered! magazine for stressed professional women. It went down sometime in 2008. There’s only so much aspirational twaddle the world needed in 2008, though arguably all those professional women were even more stressed doing the jobs of their sisters made redundant in the crossfire as well as their own.

This boom in the UK, came about because unlike in other countries, home owners in the UK don’t believe in paying off their mortgages. So if their house is worth more, the response is to go to the mortgage company and ask for a bigger mortgage, on the higher price, and preferably interest-only, if you please. That way you get extra money which is the difference between what your house was worth before and it’s worth now, and you go spend it. On Christmas, on holidays, or new cars, or goodies for Tarquin and Jemima.

Everybody in Britain knows you don’t ever have to pay the capital on a house. They bleat like sheep when people have the temerity to clamp down on interest only deals, carping that this puts house prices out of the reach of first time buyers.

Guess what? It’s house prices getting out of reach of first time buyers that is the only brake on house prices in the UK! That’s capitalism for you. For what it’s worth the same sort of thing went on in the US, though a crucial difference in the US is you get to walk away from negative equity due to non-recourse loans.

When I was a child, in Britain we used to believe in social provision of housing for families – you had council houses and families with people in up to junior white-collar jobs quite happy to live in them. A lot of of my schoolmates lived in council housing. The along came Thatcher, who bought aspirational blue collar and middle class votes by giving massive bungs to people to buy these houses at below the market price. They took the bungs, moved on, and people wonder why the average income of social housing tenants slipped down somewhat. It’s because Thatcher paid everybody who could muster enough for a mortgage at the time to move the hell out and up. We still haven’t bloody well learned in 2012 what was wrong with that.

The housing market of the UK has been dysfunctional ever since. It is a toxic swamp of emotionally charged Stuff, sitting there ready to soak up an endless amount of debt. Lower interest rates, and house prices go up. King admitted as much, but thought it was fine, because interest rates and inflation were low.

Merv, me old mate, why is it good that such a huge amount of the UK GDP get’s sucked into housing? It’s an insatiable Beast that keeps us all poor. Buy a house in the 1980s, and you get to pay high interest rates but the house prices were relatively low most of the time. Buy them now and you have to pay stratospheric prices, but hey, interest rates are low.

We did have a boom, Merv. In property, the most dangerous of all assets to the UK psyche. It’s our Jungian Shadow, released by Thatcher giving voice to our innermost darkness, and it feeds insatiably on our finances.

You won’t take the punch-bowl away when the party gets swinging, Merv.

The Americans were chastened by the experience of the Depression, and the nasty tendency of banks to start gambling with depositors’ cash and occasionally blowing the lot. Merv even played out the fireside chat on the radio from FDR talking about the ‘bad banking experience’ that precipitated the Depression after the Roaring Twenties. In 1933 the US enacted

An Act to provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes.

Nearly seven long decades rolled by, a typical human lifetime, and the people traumatised by the Depression no longer raised hoary fingers against the ambitious young Turks wanting to speculate with those deposits. These safeguards were eroded – first US banks could buy speculative operations, and Wall Street chipped away at the firewall that had been installed in the Depression. In 1999 they finally eliminated it, with the repeal of the Glass-Steagall act by Bill Clinton. Heck, those old-fashoned regulations were getting in the way of the free market and the Constitutional freedoms of the pursuit of happiness through speculating and getting lots of money. It’s all different now, what on earth could go wrong?

Seven years later, we learned once again what happens when people running banks speculate with depositors’ money.

So, Mervyn, it will happen again. Those grandchildren you speak of will dismantle the ties that bind the leverage of the banks, because “it’s all different now”.  Another Bank of England governor, as yet unborn, will make the same promise, and it too will be dismantled or rendered toothless before its time is come.

No son of Glass-Steagall will hold the line against the forces of human greed.

Monkey with a Pin is a well-researched diatribe on the ways that the financial industry fleeces the common man of nearly all of any gains he may achieve on the markets, and where gains aren’t achieved they take fees anyway. Just because they can.

It’s hard to argue with MwaP as a comprehensive statement of the problem. However, while there were lots of good recommendations in how to reduce the chances of getting fleeced in charges, I did find it lacking in actionable responses to the more general problem of realising a real return on investment in these desperate post-credit-crunch times.

Pete Comley says that he hopes that new investors should not be put off investing by his ebook. I’m not so sure that would be a rational response from them – the take-way I got from the book is basically for private investors old and new is

Step away from your online trading account. Very slowly. And observe Comleys Laws of Private Investing, taking after two of the Three Laws of Thermodynamics:

1. You can’t Win, because it’s a closed system
2. You Can’t Break Even either, because fees and charges leak away about 6% of any gains to be had. And the gains were only 5% in the first place, so result misery.

It’s a great read, and challenges many of the shibboleths of investing, in particular the 5% real ROI that is often bandied about, showing that this conveniently ignores all the dead companies littering the landscape. The  finance industry comes in for a good kicking as well along the way as a whole range of nastly little sharp practices are exposed. If nothing else, it will ram home that you need to keep these guys’ hands out of the till as much as possible.  A lot of that is up to you, in how you invest as well as what you invest in.

You should minimise your churn – I would venture that even the 100% annual churn that Pete Comley warns against is far, far, too high. Mine was 65% in year 2010/11  and 17% in 2011/12, and even those are too high. The first is because of some rank stupidity with BP and reorienting the direction to a HYP, the second due to some minor stupidity with BARC last year

I had come independently to his second insight, which is that you should also buy/sell in significant chunks (>£2000 for typical UK broker charges).

Monevator/TA had already warmed me up to the value of low-cost index funds such as HSBC’s FTAS and L&G’s LGAAAK as a low cost alternative to the ETF passive approach I had initially used, and MwaP reiterated this. I’ve never been drawn to managed funds, though I do favour investment trusts at times. And managed funds of funds looked like a swampy fees quagmire to me, though Vanguard’s LifeStrategy fund is arguably a passive fund of passive funds, which I’m considering for an eventual main index holding.

Index investing – a different view on why it works

Comley made a  case for the benefits of index investing which was much easier for me to appreciate than anything I had found before. Although I could see from Monevator/TA the low-cost aspects, the analytical reason why index investing would be expected to have an edge on an investor buying typical index components seems to be that the index automatically kicks out the dogs that go bust, effectively dynamically rebalancing. This ‘survivorship bias’ is meant to be worth about 1% p.a. I hadn’t understood that before, nor had a feel for just how many firms do go bust over the years, and that gives me a  more favourable view of index investing that just following all the other sheeple…

Am I a typical Pinless Monkey?

Statistically, I unlikely to have investing ‘hot hands’, i.e. an innate talent greater than my peers lying far outside chance. I’ve learned a lot of the issues in the book the hard way – as a speculator in the dotcom bust I churned, chased momentum, sold low and bought high, you name it. I did learn to avoid those things, indeed I feel a lot of investment success is avoiding the pitfalls rather than finding ten-baggers. Although the story of ten- and twenty-baggers is exciting, the main thing is learning to survive in the investment jungle, particularly if you are a stock-picker rather than an index tracker.

Over the last five years, I haven’t bought any stocks that doubled in price (with the exception of Sharesave holdings of The Firm bought in its existential crisis in 2009, which don’t count as I haven’t taken delivery of them yet)  never mind went up tenfold, whereas in the dotcom era I did have this. However, I haven’t held any stocks so far that have gone down the pan, which I had in the dot-com bust. None of my current stocks have dropped by more than a third. The liquidation value is about 4% up on the total invested over  two and a half years. It’s hard to know what that means, because of the shocking volatility of the capital value – the 4% has been up to 7% and down to -7% over the last year, and it ignores some dividend income that appeared as cash in the ISA. There’s just not enough data to say anything useful.

A Different Perspective on Cash

For various reasons, I hold much more cash than I would like, because the path of my future had a lot of uncertainty in it. It is about 50% of my post-tax financial assets and 100% of my AVC holdings now. I really hate cash as an asset class, silently wasting away every year without so much as  by your leave. At least a good hunk of it is in NS&I ILSCs to which that doesn’t apply. I just don’t have Rob’s equanimity about cash, it’s a wasting asset in my view.

Some of that hatred is due to the bad press the financial industry gives cash, by not allowing for the fact that private individuals can get better rates than their benchmark, the Treasury rate. I didn’t really understand that beforehand, and it seems to have come as a surprise to Pete Comley too, so hat tip there for the heads up. I still hate cash as an asset class, but perhaps I should look more kindly on it given the rottenness of the alternatives!

Conclusion – All hope abandon ye who enter here

I learned a lot and got to see things with different eyes from reading MwaP. However, the overall message I took away was somewhat cheerless, it is basically as far as stock market investing is concerned,

The takeaway message for me as far as the stockmarket for private investors is the inscription above the gates of Hell in Dante's Divine Comedy - All hope abandon ye who enter here

Private investors, you’re stuffed, guys. It’s a marginal case at best, and most certainly nothing like this. I’m a glass half-empty sort of guy in general, and prone to gloom and despondency about industrial civilisation at times. Even I didn’t think it was that bad!

I couldn’t see the up-side. My feeling is that on the whole the reason stockmarket investing should work is because you’re effectively buying a slice of a company, which is a real operation that is creating real value somewhere, and that people will beat a path to its door in search of that. I know, it’s sometimes hard to see where the benefit is in somewhere like MacDonald’s, or Goldman Sachs, but anyway, I’ll pinch the words from Warren Buffett speaking in 2011

My own preference — and you knew this was coming — is our third category: investment in productive assets, whether businesses, farms, or real estate. Ideally, these assets should have the ability in inflationary times to deliver output that will retain its purchasing-power value while requiring a minimum of new capital investment. Farms, real estate, and many businesses such as Coca-Cola (KO), IBM (IBM), and our own See’s Candy meet that double-barreled test.

It is possible that I misunderstood the thrust of Pete Comley’s work, but he appears to discount the validity of one possible response to the costs he correctly rails against. That is to buy and hold. Unfortunately, Comley comes to the conclusion that we are in a secular bear market (it’s a real pain that you can’t reference an ebook! The best my Kindle says is Location 2827 of 3880)

Buy and hold is predicated on the assumption that the market will offer a good rate of return. That seems unlikely in future.

To some extent I agree with him when he modifies that by

… strategy likely to be effective until the next secular bull market arrives is one of buying shares only when they are very cheap by historical standards and then holding them.

Cheap in this case is for the S&P to have a CAPE of 5, rather than the current 20-ish which is above the long-run average of 15.

I entered the market with my AVCs in March 2009, just after I misinterpreted a performance review that I was headed out of The Firm. At the time everybody was down on shares, and indeed I also thought the centre wouldn’t hold. It seemed worth a go, however, because I was otherwise doomed anyway – I hadn’t made enough preparation to retire early. The next week I read this which stiffened the spine somewhat, and I hit the global index fund AVCs hard with over 2/3 of my salary for a few months.

I liquidated that in March, turning it to cash. It was 20% up (though inflation has eaten 10% of the value of money since March 2009). It is easier for someone who believes that they have nothing to lose to take action in a crisis than someone who fears the loss of all they have in the status quo. My hope is that having threaded my way through the eye of the needle once I may do so again, for instance when the Euronuts finally raise the white flag over the twisted wreckage  and surrender to the tanks of reality crushing their dreams of one single currency to bind them all. In that maelstrom fortune may favour the independent of thought, though as MwaP says,

such periods are so accompanied by ones of negativity, extreme volatility and downright repulsion for shares that you have to be an extremely well-disciplined and far-sighted investor to take advantage of them.

Therein lies the rub. To get exceptional results, you have to take exceptional actions. Fly into the storm, when all around are flying away. What does not kill you makes you stronger.

Perhaps my inner Virgil paused at the gates when my Dante went through the arch and lost his way. I can see how readers might be able to use MwaP to hugely reduce their losses, and that alone makes it definitely worth a read. But I’m damned if I can see how they might be able to use it to improve their gains. If it encourages future victims of the rapacious financial services industry to exit their brokerage accounts and sit firmly on their hands then perhaps that’s good enough

I received what is probably the last P60 form I will get. This is a form that states earnings and tax paid over the year 2011/12 up to the 5th April. I learned that I paid more in tax and National Insurance this year than I have been living on. To the tune of 60-100% more. That’s right. If I retain my car in the coming year I will have paid 2/3 more tax as I am living on. If I don’t keep the car it will be 100%; I will have paid two years’ worth of running costs, in tax. For some strange reason that really pissed me off. It’s not even as if there is any 40% tax in there, FFS!

How the P60 looks to an Ermine

I’m really, really, sick of paying for other people’s children’s private school education and the general benefits culture. And I’ve done my bit for society, I paid too much 40% tax before discovering how to avoid it and turn it into something that works for me using AVCs.

I used to think it was only swivel-eyed nut-jobs that talk about the Laffer curve. Either I have become one of those swivel-eyed nut-jobs, or the Laffer curve swings dramatically to the left for people of independent means.  For the benefit of any of the real nut-jobs Laffer never said that you increase tax revenue if you cut taxes. He merely said in some cases you do. I have never paid 50/45% tax, and never been near. As a retiree I will be a 20% taxpayer, but nowhere near the 40% tax rate unless it keeps coming down.

The idea of the Laffer curve is if you tax people too much, and they give up and work fewer hours or retire early. Well, Q.E.D. in my case perhaps. Tax too little and you obviously get nothing at the limit case of a 0% tax rate, tax at 100% and everyone will be on benefits, so it is postulated that there is a optimum point, where Government realises the highest revenue. The French finance minister Jean-Baptist Colbert put it far more elegantly in the 17th century

The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing

I’ve been plucked enough, thanks. I will never get any benefits*, because most are means tested on capital assets. I’d be lucky if I get my State pension in 16 years’ time, because no doubt that will be means tested by then.

an Ermine is not a Goose and he doesn't like his fur plucked...

I am already over the tax threshold if I take my pension, indeed some of the incentive to take it early and use investments to make up the actuarial reduction is to slow the invisible hand of the thieving barstewards of the government getting their mitts on more of it. I’m seriously looking at using a VCT to lose enough to get below the tax threshold if I have a desire to earn money in future. A VCT is to be looked at more like a lottery ticket rather than an investment, however, one discounted by 30% tax saving.

The reason is I want to be able to play with microfinance and dabble with various ways of making small amounts of money, little bits of writing and perhaps the odd bespoke electronic gizmo, if there is a business case in the horrendous regulatory burden of CE marks, RoHS and testing that’s arisen since I last manufactured electronics for sale. It’s probably not going to be a big part of my life, but I want to see if there is some entrepreneurial streak in this salaryman.

However, I can’t relate to giving up 20% of a lousy £100 earned that way, it would just really piss me off, and most of the ideas I have are non-physical things like writing and software, where you can’t write any input costs off to tax, they are the pure product of mind. I’m not going to rack my brains writing for the frickin’ government to pay for Ray’s Sky TV, thanks all the same. Unless it’s successful enough that I’m earning £2000 or more, in which case I guess I am no longer retired.

Now if I can’t drop my taxable income so I can capture 100% of the fruit of my micro labour then sod it, I’ll not bother, I don’t need to earn money through working, and I don’t have a Calvinist world-view that work is good for the soul. Ian Duncan Smith can stick his work till 70 right where the sun don’t shine in my view.

I am actually prepared to throw away the excess over the tax threshold, in VCT lottery tickets, or in paying an accountant to find a way for me to buy trees or some other slow-paying capital asset to write off as an input cost. Part of the problem is I have never been a sole trader, my previous non-employment forays were as a limited company which precludes lowering one’s personal income thereby reducing tax liability.

The endless fight over the last three years to keep the thieving hands of the taxman off more of my earnings has highlighted just how much of my lifetime earnings disappeared in tax, and I just don’t want to feed the Beast any more. I’ve done my share over the last 30 years and that’s fine. In the unlikely event that I do get a State Pension they will no doubt be back for more tax. Until then, back off, guys.

Don’t come away from this thinking I would have benefitted from Osborne’s tax cuts – I am not even in the top fifth of the UK income distribution, though for some reason I am further up the UK wealth distribution.

I didn’t inherit that wealth. I am further up the wealth distribution than I was up the income distribution for two reasons

• I am an old git at the end of my working life and
• over those 30 years I didn’t buy more consumer shit than my salary could bear. I spent less than I earned.

The difference between what I spent and what I earned is my accumulated wealth. I paid taxes on earning it. Unlike disciples of Ayn Rand, I don’t have too much of a problem with that. In the end I have no desire to enter the fear and loathing that is the US healthcare system, and the history of the privatised services show some services are better done in the public sector. Our water supply and railways were all more reliable in my experience before privatisation. The old Water Boards actually built reservoirs in the 1970s in response to droughts, and though the food was rotten, you didn’t have to raise a small mortgage to travel by train in the 1970s, and you could establish what the price of a ticket was a straight function of destination and timing, rather than the byzantine mess it is now.

But what I do have is a problem with being taxed after I have taken major steps to pay my own way. I probably won’t get a State Pension because the buggers will means test it and conveniently ignore my 30 years plus of NI contributions.

In theory I could claim tax credits or Universal Credit. If the government pisses me off so much I will do just that, just to get my own money back. It really is bizarre that I could be entitled to benefits just for watching the TV all day. What the hell is the point of me paying tax, and then going to the Labour Exchange and claiming the same money back? Where on earth is the sense in that, it’s a waste of my time and the DHSS’s time. This is all part of the anomaly of having a low starting tax threshold, and an outrageously low starting NI threshold.

I’m not saying all tax is bad, and my 30 years of it should entitle me to the benefits of the NHS, and returned my debts to society in terms of schools etc. But when it’s getting to the feeling that I have no wish to use my modest talents to create wealth because of the Beast on my back then something is deeply wrong.

This is the counterbalance of bollocks like this, and it damages the UK economy when people who can create things and ideas choose not to. Somebody might want one of my telemetry systems, and if they pay me for it I might spend the payment on crisps and beer, and it would presumably reduce their business costs or allow them to do something they couldn’t otherwise do. Likewise if I interest someone with my writing and it makes me money. If we want to keep a relatively high level of benefits then a high level of taxation is needed to service it, and some people get to write intemperate rants like this rather than working out how to make useful goods and services.

Benefits are there to compensate for transient economic discomfiture caused by losing your job, and also to collectively support those amongst us who for reasons fo physical or mental incapacity can’t work. What seems to have happened is the benefits blanket has widened to encompass those who won’t work, or support lifestyle choices that are beyond their means.

Don’t get me wrong. If I could live in a world where the Fairness Fairy waved her magic wand and we all got to live the lifestyles we wanted to without reducing other people’s quality of life by taxing the crap out of them, I’d be all for it. In the 1970s I was told that we wouldn’t need to work more than two or three days a week and would struggle to find what to do with our leisure time. Unfortunately what happened was that people invented things like iPads and mobile phones, bottled water and Sky TV, so everyone feels they need to spend more money to pay for all these things. Not only that, but half of the promise came true – the world of work only needs about half of the number of people that want to buy all these things.

Thus we have the tragedy of there being jobs for about 60% of the people who want them, but these jobs demand a higher level of skill than many of the potential candidates. However, until recently we believed enough wealth was created in the economy that we could pay a lot of the 40% either middle-class pay by inflating the number of jobs in Government, or a acceptable working-class standard of living in benefits, particularly if they had children or if they claimed to be incapacitated. Only in the last five years did we discover a lot of that wealth was borrowed money.

The losers from this policy are spread across society. The young in general seem to be getting the short end of the stick as the world they expected to move into has been suddenly hammered. The truly incapacitated also take the shaft, because they get lost in the noise of the numerous malingerers cluttering up the system. Those who have built unsustainable lifestyles on the benefits teat are also going to be mightily dischuffed when the gravy train starts to dry up.

Addendum – The Ermine gets an upside for baring his needle-sharp teeth in the mirror!

One of the benefits of writing the first draft of this intemperate rant a week or so ago was that the whole concept of paying too much tax even as a retiree pissed me off so much I reinvestigated the technical reasons that made me believe I had to draw my pension immediately on leaving The Firm, to get a Sharesave scheme that was particularly advantageous. I discovered that the technical reasons ceased to apply to me earlier this month, and since I am still on the payroll I can defer my pension and still get Sharesave.

Since I can only get £10k a year into a S&S ISA there’s no point in liberating my pension commencement lump sum early and then stressing how can I invest a cash lump sum so it doesn’t get destroyed by inflation. The Firm’s AVC cash fund is good enough, and tax-free. So I don’t need to become a basic rate taxpayer, and I may now consider doing some of those microfinance jobs because I will be so income-poor I won’t pay tax on them. As well as that, an additional benefit is each year I don’t draw my pension it goes up by 5% (because the reduction due to early retirement is less), though since I will be a 20% taxpayer on it the increase is in reality only 4%. It’s not easy to get that sort of return on cash at the moment.

There’s also a more indirect business case for delaying my pension for a few years, also due to the distorting effect of taxation. There is an ambition to lift the UK tax threshold from its current £8000 to £10000 over the next three years. Saving 20% of £2000 is £400 worth of tax I don’t have to pay, adding up to £1200 over the next three years. It isn’t a lot of money, but I am sure I can spend it better than the Government, and it compensates me a bit for not having the utility of the money now. I also don’t need to buy expensive VCT lottery tickets until I can get my head around the issues. And I have more years to sling the redundancy money into ISAs before I have to work out how to invest my pension commencement lump sum.

*That paragraph was written before I discovered I can defer my pension, which opens up more opportunities. I may well claim working tax credits, if you can’t beat the buggers, join ‘em… In which case the statement I’ll never get my go at the benefits teat won’t hold. I still won’t build a lifestyle on the extra money, though. I’ve seen what happens to people that do that and it ain’t pretty.

I have saved a six-figure sum in pension AVCs, up to the absolute limit that I can save (25% of the total FS fund value) before being forced into an annuity for which I am too young.   All the AVCs have to be converted to cash, which has already happened, then tax-unwrapped as a tax-free wodge of cash on leaving work.

The tax system identifies people with lump sums as rich bastards ripe for the picking so it’ll take me over 10 years to get the equity part into ISAs. I’ve made a hash of the post-work tax planning. For technical reasons I will have to draw my pension, actuarially reduced because it’s early, but still over the putative £10k basic rate tax threshold for 2015. So I need a long-term investing strategy, to give me an income for the next 40 years. Preferably one that doesn’t add to my tax burden.

Pensions are designed to avoid investing a lump sum all at once – either you get a defined benefit, like mine, or you have restrictions placed on how you draw down your pension or have to take an annuity. That is to avoid retirees blowing the lump sum on as frenzy of cruises and fast cars, resulting in penury afterwards. The most common question I’m asked when people hear I’m leaving with a payoff is ‘what am I going to spend it on?’ It’s a strange way of thinking. I’d rather give the lump sum a chance to earn some money before running it down

There’ll be some people that will need to invest a lump sum like me, so this post might be of some interest in showing the thought process. It’s not advice – I might screw things up, and my risk tolerance and background are unusual in some ways.

A strategic overview

Initially, my pension is easily enough for my running costs plus a reasonable entertainment budget. It is to some extent RPI linked, but I will slowly lose the fight to inflation as the decades roll by. Inflation contains a lot of consumer frippery and iFads that I don’t consume, but which generally come down in price due to technological advances. Needs and services tend to go up over time. If I buy less of the stuff that is getting cheaper relative to the stuff that is getting dearer then overall I will experience > RPI inflation.

I started work in February 1982, without any long-term vision or strategy of life. You can get away with that at 21 because you have fifty-odd years of life remaining (as it was at that time, current 21-year-olds will be happy to know they are up for nearly sixty years from now).

It looks like I have picked up a decade of life expectancy in the intervening 30 years, I’m not sure why. I’m up for another thirty years according to the ONS. So I probably stand pretty much midway through my adult life. If I look at my family history I might be wise to think in terms of income for 40 years, rather too much than too little…

Let’s just get up in the crow’s nest and look out for icebergs in the seas ahead. What’s likely to happen in the next 40 years?

Relative decline of the UK (short, med, long term)

I expect the UK to fall down the pecking order over the coming decades, largely due to our decadence and nasty tendency to live beyond our means, combined with the rotten state of the education system because we don’t dare discriminate between the bright and the dim bulbs in case it hurts the dim bulbs’ feelings. We may turn this around – there is probably enough nascent dynamism in the country and the British have a decent track record of resilience in the face of adversity, but the low-water mark is still some way off IMO.

A relative decline doesn’t necessarily mean an absolute decline. Living standards in the UK have fallen in the last couple of years, but compared to the 1960′s London I was born into, we enjoy a fantastic standard of living. The problem is that humans are relative – people felt better about their lives in the 1960s than they do at the moment, because they felt things were looking up.

economic storms across Europe (short, med term)

Large swathes of Europe are not just bankrupt but seem hell-bent on becoming destitute. In the immediate future there’s an extremely high risk of a godawful crash as the Eurozone goes titsup and an awful lot of what used to considered wealth simply evaporates because it isn’t backed by anything. That’s the cheerful interpretation, for the Mad Max scenario look no further than George Soros in the FT, who opines

Far from abating, the euro crisis has recently taken a turn for the worse. The European Central Bank relieved an incipient credit crunch through its longer-term refinancing operations. The resulting rally in financial markets hid an underlying deterioration; but that is unlikely to last much longer.

The fundamental problems have not been resolved; indeed, the gap between creditor and debtor countries continues to widen. The crisis has entered what may be a less volatile but more lethal phase.

There are opportunities there. That explosion will probably trash share prices across the region, possibly the world. The brave and the reckless, who are prepared to fly into the storm rather than trying to run before it, may find value is cheap as they pick over the wreckage. The successful must have internal reference points. When the falcon cannot hear the falconer and the centre loses hold there will be no external references to steer by.

Will I hold my head when all around are losing theirs? Buggered if I know. I’ve seen three recessions up close and personal and was a teenager in the 1970s oil crisis and stagflation. I was a heavy investor in 2009 after appreciating the logic behind this, indeed looking at my AVC contributions I stole a march on the article by a couple of weeks, but it did stiffen the spine. However, desperation concentrates the mind, and a 40% tax-free discount makes courage easier. Even a dog can be a great investor with a 40% leg-up.

a multipolar world (med, long term)

The power centres of the world economy are shifting, and it’s not really possible to say where they are shifting to. America is bankrupt but has the advantage of being the money creator of last resort, China is an enigma within a conundrum, they seem to be top dog at the moment but it is questionable if they will get rich before they grow old. India seems well-placed, though it could do with reining in the backhanders. Russia, well, do you feel lucky, punk?

It’s pretty unclear where the engine of growth will be in the decades to come, or if there will be one. We will have resource wars, beginning with oil wars. We’ve already had a few, Iraq and Libya spring to mind, Iran is on the hit list. As for that growth, perhaps Uncle Sam will dust himself down, spit on his hands and show everyone how it’s done. Maybe Africa will do something with all that Chinese money and a few of the rotten ageing dictators will get bumped off and the economies soar. Perhaps Peak Oil will come along and the entire economic system must fall until some of us work out whether trade still has any meaning in a energy-starved world. Who knows?

Go East young man – diversify

There’s only one way to handle that lack of knowledge – bet on several outcomes! Diversification comes in to flavours, coarse high level asset class diversification and fine level equity diversification, equities being a subset of the asset classes. I have now lost all equity geographical diversification from the UK, which I had emphasised in the AVC holdings.

Monevator has a listing of asset allocation strategies in his Lazy Portfolios Make Asset Allocation Easy post. That illuminated my thinking greatly, though I was initially confused as hell because all but the Harry Browne portfolio as asset allocation strategies as it said on the tin, but the Harry Browne one is in fact a asset class allocation strategy with a 1970′s era equity allocation.

Let’s take a run through them (the original 2009 post is more explanatory though TA’s later update is more actionable)

1. Allan Roth. Nope. I may be reckless, brave, even mad, but I’m not young.

2. David Swensen. I’m not an Ivy League endowment fund with a 100-years plus investment horizon. Not unless we go through the Kurzweil singularity and I don’t know about you but I’m not sure I want to live for ever in a world of beings increasingly smarter than me.

3. Rick Ferri’s Core Four

Too much developed world for my liking. I think the developed world is likely to become a lot less developed over the next 10-20 years. So it doesn’t meet with my world-view. Rick Ferri may well be right, but heck, it’s my life so it has to go along with my beliefs, even if I turn out to be wrong and this sort of thing happens.

4. Bill Schultheis Now we’re getting somewhere, the spread is similar to my mind to Tim Hale’s which I preferred but this is the first one I’d be happy with in terms of equity asset spread (I lop out bonds and gilts from every spread because of my specific circumstances of having significant fixed pension income)

5. Harry Browne’s Permanent Portfolio. Fascinating geezer, Harry Browne, with his seminal How I found Freedom in an Unfree World. He’s somewhere to the right of Ayn Rand who looks like a pinko Communist in comparison so it’s kind of disturbing that his was the one that really resonated with my world-view. It matches my expectation that there are serious challenges ahead, his choice of four orthogonal asset classes is what I like. His domestic-only equity target is very much of his 197os world where the developed world ruled, so it needs adapting to the modern world. It’s more an asset class allocation strategy.

6. Six Ways from Sunday. I just didn’t get this, so no dice. I actually share Scott Burns’ viewpoint that energy is the ultimate currency, so I did pinch one ETF idea from him.

7. William Bernstein’s No Brainer. Same issues to my eyes as Rick Ferri’s portfolio, too much developed world IMO.

8. Harry Markowitz. Attractive simplicity. I don’t do bonds because of my special circumstances (a FS pension that is pretty close to bonds in characteristics of fixed and index-linked  income). I probably want to weight more than the World ETF, but if I had a DC pension sum to invest this has a lot to be said for it., Being a fiddler, I’d weight to the UK (because that’s where I am) and after that underweight the developed world (because of my world-view). Thereby buggering up the simplicity, so not right for me and my resources.

9. Tim Hale – much to like here, though again I’d lop out the government bonds and index-linked gilts due to my specific circumstances. And translate the Vanguard funds into something I can access in an ISA without paying the earth. The bonds and gilts I’ve eliminated  is 40% of the portfolio, but the capital value of my FS pension is a lot more than the free capital I am investing, so taking a high-level view I am overweight fixed income.  I may get his book from the library to catch up with his thinking. I will use the equity distribution to illuminate my equities later.

Asset Class spread

Asset class diversification gets you out of the stock market in periods of irrational exuberance like 1999. And into it in times like 2009 when the world is caving in, and only Warren Buffet stands between the shattered wreckage of Wall Street and the Four Horsemen thundering in from all points.

As far as asset class diversification, I am drawn to Harry Browne’s Permanent Portfolio, which is roughly

25% stocks in the country you live in, 25% bonds, 25% cash and 25% gold

But since I’m an inveterate fiddler, and prepared to accept the consequences, I will consider this as

• 25% equity portfolio
• 25% bonds I shall consider my final-salary pension
• 25% cash I will hold as NS&I ILSCs (I don’t know what a money market fund is, this seems to be US-specific)
• 25% gold I will consider as including my non-financial investments.

I don’t know what Harry Browne was thinking of doing with his gold, but if he considered it his SHTF Bug-out stash I wonder if he considered the weight of it, he was a lot richer than I am and it was cheaper in his time.  I wouldn’t want to run with it, particularly with in the form of coins. I may add some in the form of an ETF, but I’m happy to think about that later. My non-financial investments also fall into a similar role in that they gain as the financial system falls, but they don’t have the portability or divisibility of gold.

We should also remember that Harry Browne lived in a country where householders are encouraged to keep a shotgun handy and are entitled to take down intruders within the curtilage of their property. In Europe we are somewhat namby-pamby and effete for such gung-ho defence of one’s chattels,  so holding physical gold is a lot less attractive for me than for Harry Browne.

Now the majority of my free cash savings come from pension AVC savings, and by the time I leave I will have driven this all the way to the 25% tax-free pension commencement lump sum limit. Given that the pension itself is in the fixed interest part, I’ll never balance that at 1/4, it will always be bigger.

this is not a canonical Harry Browne asset class spread but I start from where I am

Well, always bigger until this prediction comes to pass and the shares section eats the lot like Pac-man. Rebalancing keeps the right-hand-side in relative proportion but the whole would squeeze down the pension section The reason the fixed interest isn’t 3/4 of the pie is because I have existing savings  and the non-financial assets are substantial. And no, I still don’t include my house as part of my net worth because I have to live somewhere.

It’s obviously not pure Harry Browne because the cash and non-financial investments put together are about the same as the shares, which reflects my prejudices. I’m easy with that. I understand Harry Browne’s rationale and if I were working up from scratch over a working life I’d stick to his equal split. But I’m not, so I am going to do it my way, and take the hit for being an opinionated git if necessary.

The equity part of the Harry Browne portfolio, updated with Tim Hale

So I’ll take the equity portfolio, retain my HYP which is largely UK based, and already includes Aberforth for UK smallcap, turning it into a bastardized Hale variant like so:

• 20% HYP (for the UK part)
• 5% Aberforth Smaller Companies
• 20% s Dev World ex-UK Equity, consisting of four HSBC funds as used in the slow and steady portfolio. Asia Pac seems to be developed world in investing terms.
• 16% some sort of Global Emerging Markets LGAAAK seems to fit.
• 6% db x-trackers Stoxx Global Select Dividend 100 ETF (XGSD) TER 0.5

No, not doing any sort of index-tracking select dividend. I got slaughtered with IUKD a while back until TI educated me and  TA showed me the 4% running costs that, basically, you can’t automate value plays. The huge attractors of value traps will always kill you. If you want to file that flight path you have to fly it on manual, or get sucked into the black holes on auto.

I’m going to swap that sucker with a gratuitous addition from Scott Burns’ portfolio to reflect my views on impending Peak Oil. And yes, it probably does overlap LCTY to some extent, life is just like that. It’s nothing like what IUKD is claimed to do, but since a HYP has a bias to what IUKD should do but doesn’t I don’t feel value is unrepresented.

• 9% Global exUK DW SmallCap
• 10% HSBC FTSE EPRA/NAREIT Developed ETF (HPRO) – this is property
• 10% Lyxor ETF Commodities CRB (LCTY)
• 10% db x-trackers Stoxx Europe 600 Oil & Gas ETF (XSER)

The proportions are higher than in the original article because I have chopped out the 40% for the gilts and Government bonds, which I don’t need, due to my fixed income.

There’s a lot of noise and hum associated with running something like this, so many funds, and rebalancing. Passive investing bores the bejeesus out of me, so one attractive alternative is to buy a Vanguard Lifestrategy 100% Equity fund ISA from Hargreaves Lansdown and be done with it. And then do the same next year. And the next. And the next, and so on. The HYP would skew that to the UK somewhat, but so be it.

The one thing that scares the hell out of me is Vanguard is so astronomically big. Big rewards mean big temptations. Somewhere, in that big monolith, I am sure there may be a young Nick Leeson or Bernie Madoff in the making, dreaming of riches beyond belief. Perhaps he is there right now, sitting behind the glowing light of a computer terminal in a ventilation shaft with nobody looking over his shoulder. Power corrupts, and it only takes one of them to get through…

ISA and temporal diversification

The annual limit on ISAs may work to one advantage, enforcing temporal diversification. Just as if you are going to quit the market to buy an annuity you should wind down your position over five years, the reverse is true on entering it. As it is I need > 5 years to enter anyway. There’s an argument to say I should use several ISA providers too, but this mitigates against rebalancing, as holdings in separate providers can’t be rebalanced across the divide. This isn’t a problem in the early buying years, but once the ISA has reached steady state it is. I’ll probably compromise and keep the HYP with iii and use a different platform for the rest.

What’s with all this passive rubbish all of a sudden?

I’m unashamedly active with my HYP, in the choice of what to buy, though I try and be Buffetesque in buying and holding; my churn is low, trading is not something I have any skill for. The income from that will be the first line of defence as my fixed income falls below the waterline. The UK is not a bad place at all to seek income from a HYP.

I can do okay with a HYP in the UK but if I want a slice of anywhere else I either have to pay someone like Anthony Bolton to understand it or I can go passive. There’s no point in me trying to pick stocks in areas I only know of as shapes on a map, but I’d like exposure to them. So the scattergun approach of passive investing becomes attractive in the face of no cheap alternatives.

Passive investing gives me concerns in big developed world indices tracked by lots of ageing Baby Boomers about to sell out of the stock market on retirement, like the FTSE100 or the S&P500. I don’t track the FTSE100, and I hate trackingthe S&P500 and would avoid it if I could – I’ve split the US one into 3% S&P500 and 2% US dividend aristocrats because doing the same as everyone else is never a good thing in investing. There seems no S&P allshare open to me. For all the other global stuff which won’t be tracked by loads of people I am relaxed about passive investing. In the end I want to do other things with my life than obsess about far-flung stock markets.

Perspective is also important. I will add value to DW’s project and the time may well come when my financial assets will be less significant. She has managed something I only managed on the side – and that is capturing the entire fruits of her labour by working for a company owned by herself.

There’s a common thought-pattern that you can never become rich when you trade your time for money.  I love the American directness of this straight-between-the-eyes approach

This might offend some people, but as long as you are working for someone else, you are not working for yourself. With that kind of attitude, you are actually thinking as a poor person does. If you are not investing into yourself and your own business, you are going to stay in the position where you are.

I can’t complain too much, I did okay working for other people, and wasn’t entrepreneurial enough to work for myself full-time. I don’t regret it – in the end you will only know joy if you can recognize what enough looks like, and it looks different for each one of us.

From age 25 I managed to do 1 and 2 of these, and as I came within five years of retirement I did the whole lot.

1. spend less than you earn
2. never pay interest to borrow money for consumables, only productive or cost-reducing assets
3. save six month’s running costs as an emergency fund
4. pay off your mortgage before you reach retirement age, preferable five years before so you can use pension tax breaks to the full
5. minimize fixed recurring costs such as mobile subscriptions, Sky TV, gym and magazine subscriptions. Of those you keep, make sure you get utility from them.

I’ve had good luck in some areas, such as being employed 95% of my working life, and unemployed only 1.6% of it (the rest was when I did an MSc with a grant), and having a final salary pension in a company with a normal retirement age of 60. I’ve had rotten luck in other areas - buying my first house in the Lawson boom and writing off half of it to negative equity.  I trashed over £10k chasing momentum in the dot-com bust. But these were mistakes I could afford to make. You can be too fearful of making mistakes – and then you will never take opportunities. Getting the balance right is the key…

I am not a City banker, my job probably classes as middle management if equated to the rest of The Firm. Earning a little bit  more than the UK average isn’t the secret to early retirement. There are plenty of people who earn a lot more than I do but can’t make ends meet.  The secret to early retirement is pretty much in these five tips on how to stay on top of your finances over a working life-time. These are strategic and high-level rather than immediately actionable. Indeed, if you want to use them it helps to start at half my age

They worked for me, and I’m toying with the idea of going along to the Write on Finance Blog Up in Leeds. I will have finished work by then, and DW has identified a Turkish Baths at Harrogate which is 12 miles away. She has a weakness for that sort of thing. And I’ll take the opportunity to say hello to these old friends, the Devil’s Arrows, as mediaeval Christians titled the three prehistoric standing stones by the side of the Great North Road.

Devil's Arrows, Boroughbridge

I like that. There is something special about a construction that has been standing sentinel for four thousand years.

This is an entry in the competition to win a 2 night hotel stay during the Write on Finance Blog Up Leeds which runs 22-23 September 2012; gold sponsor is MoneySupermarket