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I do not think it means what you think it means

Did you know most of the major stock market indices are actually actively managed? And you know what? The active managers do an amazing job.
That immortal line comes from one of my favourite movies, the Princess Bride. In this case I’m applying it to be concept of low cost index trackers being entirely free of judgement based decision making.

Warren Buffett says it: "...investors should stick with low-cost index funds."

Jack Bogle says it: "Index funds eliminate the risks of individual stocks, market sectors and manager selection, leaving only stock market risk"

What are they saying?

Low cost index funds will outperform active stock picking over the long term.

The logic here can be summarised by another Bogle quote: "Don't look for the needle in the haystack. Just buy the haystack."

Don't look for the needle in the haystack. Just buy the haystack.

So that is easy enough, go buy yourself a boatload of VFIAX and you’re done right?

Not so fast!

Did you know that the S&P 500 does not automatically contain the 500 largest US listed companies by market capitalisation?

In fact did you know that the S&P 500 composition is actually chosen by a committee of market professionals, known as the S&P Index Committee?

They meet regularly to review the current composition of the index, compare it to the actual top 500 market capitalisation stocks, and work out what (if any) changes should be made.

According to David Blitzer, the chairman of the index committee, “there are no rigid or absolute rules for the S&P 500”.

He cites the example of AIG nearly going bust during the Financial Crisis, and getting bailed out by effectively being temporarily nationalised by Federal Government. Normally that would have seen AIG removed from the index, however the committee realised that doing so would see index investors further dumping the stock which would only make matters worse.

there are no rigid or absolute rules

This point is worth considering

If the index was constructed the way many novice investors mistakenly believe, that is automatically composed of the current top 500 stocks weighted by market capitalisation, then the composition of the index would continuously be adjusting with the ebb and flow of the stock market.

Therefore index trackers would be required to continuously buy or sell their holdings in the underlying stocks contained within the index in order to try and match that index composition.

Sounds exhausting, right? And expensive.

But wait, doesn't that make the S&P500 index actively managed?

Larry Swedroe explored the argument that this meant the S&P 500 is actually akin to an actively managed portfolio, because the composition of the index is based upon the collective judgement and experience of a committee of investment professionals... just as an actively managed investment fund happens to be.

Ultimately Swedroe concluded that this was not the case, the index sought to broadly represent the overall state of the market, while active managers are deliberately trying to pick only the winners.

Ok, so the S&P 500 is weird, but the other indexes are all passive right?

If you think it is only the S&P500 index composition that gets determined in this way you would be wrong.

The FTSE100, the benchmark for the London Stock Exchange, is reviewed quarterly, with the 100 stocks drawn from a cohort containing the top 110 companies by market capitalisation.

The Nikkei 225, the benchmark for the Tokyo Stock Exchange, is reviewed even less frequently. The composition of the index changes only once annually, in October.

The Australian All Ordinaries Index is similarly rebalanced annually, in March each year.

Argh! Doesn't that mean everything I've been told about the superiority of passive investing is bullshit?

For what it is worth I think the committees behind these indexes do a great job. It is a rare thing to hear investors bloviating about a leading index not reflecting the actual state of a market it purports to represent. This means the committees themselves are largely invisible, as they should be.

The alternative would be something nobody would want to see, a repeat of the 1990s when idiotic analysts and gormless media pundits would attempt divine the content of Fed interest rate decisions based upon the colour of Alan Greenspan’s socks.

What does this mean?

Passive investing removes the need to worry about picking winners.

It lets investors (whether lazy/uneducated/disinterested or otherwise) piggyback on the combined efforts of every executive and employee who contributes to the profits of an index listed company. We may be parasites, but damn it we're profit sharing parasites!

What it does not mean is that the judicious application of professional knowledge and wisdom has no place in the investment world. After all the indexes are defined by such people!

 That isn’t a failing of the tools and techniques, it is a failure of the tradesperson wielding them.

So what?

The likes of Warren Buffett, Neil Woodford, Peter Lynch, and Benjamin Graham prove that there is a valid and valued place in the investing world for active investors. They are the master craftsmen of the investment world, the stock market equivalents of Frank Lloyd Wright, Hans Zimmer and Herman Miller.

It is just that the vast majority of us are not smart enough, lucky enough, experienced enough, patient enough or connected enough to be able to achieve the same sort of long term returns a passive index tracker will yield.

That isn’t a failing of the tools and techniques, it is a failure of the tradesperson wielding them.

Planning to rely on social security? Try living on it first!

Relying on social security to rescue your early retirement once you've burned through your savings? Try it first, a comfortable existence it is not!
I read a lot of personal finance content, possibly an unhealthy amount even, ranging from the mainstream media to the blogosphere.

My hope is that I’ll learn something new. Some new idea. A new approach. A new articulation of an old lesson that finally results in an “ah-ha” style penny dropping moment.

To learn something.

To learn anything... please!

The problem is this involves wading through a ridiculous amount of drivel. “Me too” posts that gradually dumb down key messages as they reverberate around the echo chamber of the blogosphere until all the risks, caveats and context are lost in favour or some pithy tweet or sound bite.


Until eventually we see self appointed experts sagely proclaiming idiotic statements to the masses like “The market always goes up!”.

Or "diversifying across geographies is unnecessary because many S&P500 companies trade globally".

Or owner occupied housing is always inherently the wrong choice.

Or that somebody who has worked in a low-income job for 10 years after finishing school can realistically expect to retire early and be financially ok.

Please! Next thing you know we'll have people in positions of authority proclaiming the world is flat, climate change is a good thing if you want to grow tomatoes in Copenhagen, and that Brexit is good for the UK economy. Oh bollocks, it wasn't all a bad dream!

One of the recurring themes I’ve observed lately is a large number of early retirement evangelists relying on a funding model (or backup plan) of reverting to the government pension to support them in their old age.

For some this approach is a backup should the markets blow up, their investment returns not achieve the very rosy returns forecast by some very optimistic commentators, or the “safe” withdrawal rates proved to be less sustainable than they envisaged.

For others the reliance on a social security safety net approach is the plan.

Reliance on a social security safety net approach should not be the plan.
Do you see social security as a safety net to catch you when you fall? Or are you using it like a hammock?

Be careful what you wish for

However it is worth considering for a moment what this existence would actually look like.

In the UK the state pension amounts to £122.30 per week.

On top of this a single person or couple can receive an additional £260.64 in rental assistance.
There are probably a bunch of other benefits available, however the government has implemented a “benefits cap” of £296.35 per week for singles.

That amounts to £15,410.20 per year.

The average UK wage is £472 per week, or £24,544.

Anybody who lives in a large city like London can attest that living on less than £500 a week doesn’t make for a comfortable existence.

Trying to live in a large city on only 63% of that average wage, which is what the benefits cap would provide, would be a meagre existence indeed.

Now London isn’t everyone’s idea of a dream living location for retirees, it certainly isn’t where I plan to end up. However the numbers aren’t materially different if living in a trailer park by the beach in Cornwall or in deepest darkest Essex.

According to the ONS the average household spends £129.30 per week on essentials such as food, housing, and utilities. Transport accounts for another £72.70.

Collectively that accounts for £202 out of the £296.35.

That leaves only £94 per week for everything else.

Holidays.

Christmas and birthday presents.

All forms of entertainment.

Furnishings.

Clothing.

The list goes on.

It is certainly doable. It isn't as bleak as sleeping in a cardboard box under a bridge. However it doesn’t sound all that comfortable, or much like fun to me.

You too can wake up with a view over Hyde Park in central London!
Imagine being only £90 away from financial oblivion each week. Car needs repairs? Emergency vet bill? Replacing the washing machine? Doomed!

Perhaps it is best to critically assess what we are told and what we read, particularly on the internet.

Perhaps it is best to seek out a range of objective voices rather than just those singing seductive siren songs of what we want to hear.

So what?

If something sounds too good to be true, then it probably is.

By all means pursue early retirement, but at least make sure you've actually given your numbers a road test before making the leap. If your pile of wealth is too small, and the stock market fairy fails to magically provide that 7% to 11% real return on your investment portfolio that the pundits talk about, then you're going potentially going to be living in struggle town.

The run up to Financial Independence (part 4)

What did I change to achieve Financial Independence? What has changed in the 12 months since then? I say no a lot more, and am much happier for it.
Last time around I ended my post poised on the edge of a metaphorical precipice. A glimpse of mortality had led to my questioning who I was, who I wanted to be, and what I was doing with my life. It ultimately boiled down to the question: “if not now, then when?”.

I took stock of my lifestyle, many aspects of which hadn’t been making me happy for quite some time.

I reflected on what I enjoyed, what made me happy, and what I derived satisfaction from.

Then I looked at everything else I was doing with my (now precious and scarce) time, critically assessing whether each action was in some tangible way contributing to achieving a warm fuzzy feeling of contentment.

If something isn't making you happy then why do it?

Would somebody die if I didn’t do it?

Would the sky fall?

Would the world end?

Almost invariably the answer was no.

If something isn't making you happy then why do it?

Of course there were some exceptions, like emptying the cat litter tray or helping my kids with their homework. In both cases, while unpleasant, these were necessary evils as the long term consequences of not doing them far outweighed the short term benefits of avoiding them.

Saying no to a bunch of stuff is the easy part

Still being able to make ends meet afterwards is a bit more challenging!

I took a deep breath and delved into my personal finances. Believe it or not I don’t much enjoy doing this, in fact it is one of the few things that will have me get me out mowing the lawn or vacuuming the floors just to procrastinate a little bit longer in the forlorn hope it magically goes away.

I do keep tabs on where my money goes once a month, but I’ve never been one for budgeting.

Indeed once I’d reached a sufficient level of financial comfort where I didn’t have to puzzle out how I would pay for something (which is worlds away from being rich!), the whole thinking about money thing seldom enters my head.

In fact one of the main motivators for my starting this blog was to force myself to think through various financial scenarios as they arose. The discipline of writing them up meant I couldn’t just pretend to be an ostrich and stick my head in the sand hoping they would go away.

To my simple mind the key to Financial Independence is cash flow. Have a big pile of (hopefully) appreciating assets is nice, but without selling some of them you can’t pay for the groceries.

On the other hand one of the reasons most of us are employed is to get that warm fuzzy feeling when our bank account gets topped up with our pay cheque. People feel richer at bonus time because more money is flowing in, while they often feel poorer after Christmas or after their summer vacations because money is flowing out to cover credit card bills.

I looked at the money I had coming in

Income from my business accounted for a large portion of it. However if I was going to pull the pin on working then this would reduce or be eliminated altogether.

Next came rental income from my investment properties. These generated quite a bit, indeed a couple of the central London properties each earned more in annual rent than the average UK worker earns per year.

Then there was a mixture of dividends and interest. Collectively these generated a few thousand per year, but weren’t life changing.

So the income side things were looking ok.

Then I looked at the money going out

This is the point in the story where dark clouds gather overhead, sinister music plays, and the hero gets a feeling on impending doom.

In aggregate my investment expenses were more than covered by the investment income... but not much more!

Property mogul

I tend to purchase property based upon extensive research and analysis, identifying locations that are set to experience above average capital growth over my investment time horizon. This approach focuses on the potential of the property, and surrounding area. Getting this right has achieved some pretty impressive returns, but it can mean the rental yield has been more about minimising holding costs than generating a sustainably comfortable income stream.

Over time the value of the properties tended to rise, building up the amounts of accumulated equity I possessed in each property. Each time this accumulated equity crossed the threshold of another property deposit I would extract the equity to finance the next property purchase. This is where flexible lines of credit financing really comes into its own.

It is worth pointing out that I never draw down further than the rental income of the individual properties could comfortably cover, meaning additions to my property empire were entirely funded by the property portfolio itself.

Image credit: William Warby

Cash flow neutral for tax minimisation?

Historically I had tended to run my portfolio at a cash flow neutral gearing level. This was fine while I was in the acquisition phase, but if I wanted to start living on this rental income then I was going to need to change strategies a bit.

My rationale for operating cash flow neutral is a bit dubious. I long ago figured that if I made a profit then I'd have to pay tax on that profit, and I already paid far too much in taxes.

However with a bit of age and wisdom behind me I suspect that line of reasoning to be mostly bollocks, as even if I paid 50% of any profits in tax I would still have been left with the residual 50%.

From an academic perspective it would be interesting to run the numbers and see how differently things would have worked out had I operated with lower gearing / higher income equation. I suspect I would have ended up fewer properties, but am not sure whether or not I would have been financially better off.

Time to reassess

For the first time in a long time I critically assessed each property in my portfolio, reassessing the capital growth prospects and rental yields that were now achievable using a variety of gearing levels including paying each one off entirely.

One property I had owned for nearly 20 years. Much of the above average capital growth I had anticipated when buying the property was now behind me, the areas having experienced growth due to infrastructure improvements or the establishment of a shopping centre nearby, or whatever.

Things don’t always go as plan however. I bought one property on the promise of a neighbouring golf course expansion, and the creation of an exclusive neighbourhood wrapping around the extended course. Unfortunately that didn’t eventuate, due to the local government rescinding planning consent because of the discovery of some rare endangered creepy crawly that happened to inhabit the site.

Too much of a good thing?

Having reassessed the future prospects of each property, I made some strategic sales.

I sold a well located flat in a posh part of London, as the property market in that neighbourhood was driven by foreign investors.

Under the prevalent nationalistic “foreigners go home” government migration policies, combined with the increasingly anti-landlord orientated tax regime, the overseas investors were starting to look elsewhere (like Vancouver, Toronto, and Sydney).

New developments were being mothballed, partially completed ones were not selling, and there remained a lot of uncertainty as to whether this was just part of the normal property cycle or a more structural change in a post-Brexit Britain.

An uncertain post-Brexit property market

The money raised was used to rebalance my asset class allocations, choosing to invest in low cost index tracker funds and low cost bond funds.

In other cases the money realised from property sales was used to pay down the lines of credit over some of the properties I retained.

The end result? A property portfolio that still possessed the promise of capital gains (thought I’m less confident of the long term prospects of the UK based properties post-Brexit), but now after expenses throws off a significant stream of passive income.

Stocks and bonds

I looked at my stock portfolio. Historically I’d been an avid (though sporadic) stock picker. Sometimes I’d even done well in my selections. However I’d done a lot of reading and researching into the argument that low cost index trackers were more likely to outperform stock pickers over the long run.

I sold out of most of my direct share holding positions, retaining only those companies that had significant strategic advantages in their markets, what Warren Buffett describes as a moat. I invested the proceeds in low cost index trackers and low cost bond funds.

The combined stock and bond portfolio now has a dividend yield of around 2.5%, which is pretty low but also fairly reliable.

Where did that leave things?

I listed out my lifestyle expenses, starting with my needs.

The dividend income covered these comfortably. I should never need worry about paying a gas bill or buying groceries again. Result!

Next I added my investment expenses.

These were also covered by the dividend income stream.

Finally I added my wants, the remainder of what it costs to be me (excluding housing). The dividends covered these too. That takes care of things like my broadband bill and Sky Sports subscription. Winning!

So close, and yet so far

It wasn’t all good news however. The eagle eyed among you will have spotted that there is an elephant in the room, my housing costs.

Those exceeded the remaining dividend income. And the rental income. So there remains some work to do.

However the great thing is I had gotten to a point where I could comfortable live without having to work full time, or work for clients whose only redeeming feature is they pay well. Instead I now had the luxury of picking and choosing projects based more on interest than remuneration.

Providing I worked roughly 3 months a year I could sustainably support my living costs without needing to resort to selling down assets. That really appeals to me, as I’m not a big fan of the safe” withdrawal rate concept… I’d prefer die with a big pile of assets to leave to my kids rather than play chicken with mortality, hoping my life runs out before my assets do.

What has changed?

12 months after I realised I was Financially Independent a few things have changed.

I took 7 months off, and didn’t miss working even a little bit.

I looked at working part time, maybe 10-15 hours a week. Unfortunately in my game those kind of roles just don’t exist.

The next best option was to adopt a seasonal working pattern, enjoying the sunshine and warmer weather through the spring/summer/autumn... then hiding out in a nice warm office somewhere over the winter while working on an interesting project. I’m just coming to the end of my first seasonal working stint and I have to say that I’m very much looking forward to resuming my retirement. The re-entry to the work force was brutal, and I’ve found putting up with the office politics and institutional silliness to be more frustrating than it ever used to be.

So what?

Long term I’d like to find a few recurring clients who wish to engage my services remotely for sporadic interesting projects. Whether that transpires or not will be interesting to see.

Relax, work remotely, enjoy life.

I’m playing the long game when it comes to addressing my ridiculously high cost of housing. My kids are happily settled in schools, my wife loves where we currently live, and the prospects of moving somewhere cheaper are somewhat remote. Having moved 13 times in 19 years I must admit the idea of packing things up yet again isn’t one I’m in a particular hurry to repeat.

The run up to Financial Independence (part 3)

Part 3 of the run up to financial independence: How I classify my income and expenses. Plus how to avoid common gotchas and traps for young players.
To me Financial Independence is about cash flow. Possessing one or more regularly recurring income streams can make you feel financially free. The absence of one most definitely has the opposite effect!

Income

I classify my income into two categories.

Passive Income – Money that I get paid regardless of what I’m doing, whether that be lazing on an Australian beach, drinking beer in the sunshine with my mates at the cricket, or while writing this blog post. Examples include dividends, interest, rent, royalties and realised capital gains.

Earned Income – Money that I only receive if I actually turn up and do something successfully. Deliver a project, write a paper, herd cats and shout at people. Examples include billable hours, bonuses, commissions, employer pension contributions, and salaries.

I would include things like gardening leave, maternity leave, study leave, paid holidays, sick leave, redundancy payments and so on in the “earned” income category because in order to have qualified for any of them I would first have needed to work for an employer who presumably hired me to actually do something in return for my pay packet!

 My rule of thumb is if something isn’t causing your bank balance to increase then it isn’t income.

My rule of thumb is if something isn’t causing your bank balance to increase then it isn’t income.

Therefore unrealised capital gains are not income. They remain a figment of your imagination until such time as you actually sell the appreciating asset. This isn’t a big deal for me as I generally don’t like selling income producing assets. Your mileage may vary.

One important thing to note is that passive income will not make you rich. Capital gains may.

Passive income will not make you rich. Capital gains may
If escaping the rat race was going to be a sustainable option then the important figure of the two is the Passive Income.

Expenses

My spending breaks down into five categories.

Needs – nothing but the essentials (excluding housing). Examples include utilities, groceries and medical care.

Housing – the cost of my accommodation. This includes not just rental expenses / the interest component of mortgage payments, but also maintenance costs, property taxes, home & contents insurance, and other housing related expenses.

Taxes – these are expenses like any other, and as such need to be tracked, managed and minimised accordingly. Examples include income tax, capital gains tax and withholding tax.

Investment Expenses – the costs associated with establishing and maintaining those income producing assets. Examples include brokerage, estate agent commissions, and investment platform fees.

Wants – everything else, including feeding my wife’s expensive shoe and handbag habit (despite her protestations these are actually needs).

My spending breaks down into five categories.

To be useful the Needs versus Wants assessment must to be brutally honest. The approach I have adopted is that any expense on the bottom level of Maslow’s hierarchy of needs is a need, everything else is a want... including take away dinners, Lindt orange chocolate and alcohol even if they arrive in the grocery delivery!

Classifying is easy, now for the analysis!

If your investment expenses are greater than your passive income then you are doomed! Either you were dropped on your head as a small child, or you are an idealistic dreamer. Either way you need to give yourself a firm slap to your lower extremities and start plotting an exit strategy.

To avoid compromising your lifestyle investments must be self supporting. If they are not then you end up subsidising them out of your earned income, which is not a sustainable approach if you are at all inclined to jump off the hamster wheel of paid employment.

investments must be self supporting

That general principle said, I am a pragmatist at heart. I fully recognise that some investments (particularly real estate) are opportunistic, purchasing while the price is low with the intent to capitalise when the price is high. Perhaps there is a planning submission for a new shopping centre nearby, or the government has announced a massive public transport upgrade that will see a new tube/train/bus station placed nearby.

Therefore my rule of thumb is that the investment portfolio in aggregate must be self funding, which means some positive cash flowing investments may subsidise strategic acquisitions that are set for a massive capital gain. Again, be brutally honest with yourself here... wishful thinking is not a winning investment strategy!

wishful thinking is not a winning investment strategy!

Financial Independence

You are not financially independent until your recurring passive income streams cover your needs + housing + investment expenses.

Once you cross this threshold by all means do the victory dance and feel good about yourself for a second or two. Then pull your head in, because the quality of life you will exist on at this point sucks.

Back in our university days many of us subsisted on a diet of beer and two minute noodles. However once we turned 27 we started to wear our beer, and realised that there is a reason that living like a student has an expiry date.

Where you live has a huge impact on when you achieve Financial Independence

The housing expense is worth spending some time considering, as after taxes this is likely to be your single biggest expense. For most people it is their choice of living location that determines how financially free they are. You could be happily living in Laos on USD$7 a day... but you would be living in Laos, not in Kensington or Boston or Bondi.

Where you live has a huge impact on when you achieve Financial Independence

The key point here is choice. You are choosing to live where you live. Own that decision. Either make your peace with it or do something about it. Nobody likes a martyr or a victim, either move or stop complaining about how expensive it is!

Financial Freedom

You are not financially free until your recurring passive income streams cover all of your needs + housing costs + investment expenses + wants.

At this point your lifestyle is sustainable from your investment income alone. Congratulations, you have beaten the system and won the game of life. You now have the luxury of choice, and from this point forward it is your own fault if you are miserable.

Working becomes optional.

From this point onwards if you hate your job or your boss or your co-workers then do something about it. You have the luxury of choice, so either exercise it or shut up.

Not so fast, you've not mentioned taxes

Note that I haven’t included taxes in the assessment of Financial Independence or Financial Freedom. This is because paying taxes is largely optional, determined by your choices.

If you choose tax advantaged investment vehicles like ISAs or ROTH IRAs then you don’t need to worry about taxes, you have already paid them. Sorry all you Australians, you guys don’t get to play in this space, this kind of account doesn’t exist in Oz.

If you choose tax advantaged investment vehicles like SIPPS or 401k plans then you’ll have to suck up any taxes you incur when you draw down money from these accounts. Conventional wisdom is your income in retirement will drop below the punitive tax brackets… which depending on your housing costs and outgoings may or may not provide you with some consolation.

If you choose taxable accounts then you probably need to talk to a professional tax advisor or financial planner. Society demands that you should contribute some tax, but how much largely depends on the quality of the advice you receive combined with your tolerance for risk.

All retirements are not created equal

If you’re planning to retire earlier than is conventional then you need to plan carefully. Money locked away in pensions is great for funding your dotage, subject to running the not insignificant risk that the government will change the rules between now and when you plan on accessing it.

However if you’re planning to escape the rat race earlier then you will likely need access to funds outside of tax advantaged pension wrappers. The earlier you escape then greater the amount of funds you will need to be able to access.

How much is enough?

I’m old enough to remember standard variable mortgage rates of 18%, and watching my grandparents put in place plans to fund their retirement solely from term deposit interest payments. They did it really hard when interest rates plummeted to what we currently consider to be “normal” today.

I’m old enough to remember inflation rates of 15%, which made anyone focussing on a fixed amount of income feel poor very quickly.

I experienced what it was like trying to get a job without any marketable skills when unemployment rates were over 30%. This would be comparable to somebody attempting to get a job 5-10 years after declaring early retirement. Good luck with that.

I have experienced the disappointment of setting a net worth target of the seemingly astronomical amount of $1,000,000 only to attain it and realise it doesn’t even come close to funding a sustainable retirement.

The average UK annual before tax earnings is around £27,000... which is far from a comfortable standard of living, particularly in London. Achieving this by applying Big ERN’s 3.5% “safe” withdrawal rate would require a net worth of around £771,500.

To earn that same amount while living within the “yield shield” would require a net worth of at least £1,350,000 based on current market dividend yields.

I’m not a big believer of selling off passive income producing assets to fund retirement living expenses, as if you retire at 40 may that means your capital base must be able to sustain you for another 60-75 years... you never know, you might be one of those 115 year olds being interviewed by the Guinness World Records people. Good luck with that if you start selling down your capital to pay for your living costs in year 1!

How much is enough?

Reality check

Now for a reality check. Hardly anybody can afford to live in London on average earnings. Many of the private schools charge around that much per year per student for tuition, nursery fees aren't significantly less. In my neighbourhood you couldn't rent a cardboard box in the park for the average UK wage.

Which brings us back to the choice of living location question. Life is about choices. After the choice of spouse, living location is probably the single most financially significant decision you will make.

It influences what your financial baseline looks like.

It determines who you see as your (and your children's) peers and friends. This in turn heavily influences what you (and they) consider to be "normal".

Choose wisely, or forever feel poorer than you need to!

So what?

This post outlines how I keep score on where I am at financially, and how well I am doing.

Personally I find reading about other people's net worth or income statements on the internet to be singularly unhelpful.

Everyone leads different lives, with different priorities, in different cost of living locations.

Rather than measuring yourself against some (most likely made up) figures off the internet, compare instead yourself today to yourself last month or last year. The basis for measurement and comparison will at least be consistent, and your values are unlikely to have changed materially in between.

The run up to Financial Independence (part 2)

Imagine discovering you were mortal. How would your priorities and time usage change? If money ceased to be a blocker what would you do differently?
Last time I set the scene for my Financial Independence epiphany.

It turns out that when you’re cooped up in a hospital ward during a doctor’s strike there isn’t a whole lot to do, particularly once the battery on your iPhone goes flat (curse your time stealing, battery draining addictiveness Candy Crush!).

Hospitals are scary places

Hospitals are scary places at the best of times, nightmare flashbacks expiring elderly relatives, emergency caesarean sections, and the lasting childhood memory of an egotistical emergency room doctor not bothering to wait for an x-ray before attempting the reduction manoeuvre used to fix dislocated elbows on my arm which was actually broken in 5 places! Seldom has a person more thoroughly deserved a punch in the face.

"Seldom has a person more thoroughly deserved a punch in the face."

Hospitals are scary (and as it turns out, dangerous) places!

Hospitals running on a skeleton staff are especially scary.

There weren’t many patients, as everyone who wouldn’t be killed by doing so had been sent home or turned away.

That meant there wasn’t much for the nurses to do, so as a cost saving measure most of them had been sent home too.

And the catering staff.

And so on.

All that meant the usual constant bustle and stream of distractions was significantly muted.

During the first couple of days those guys in the ward who were up to it held wheelchair races up and down the corridors, which was great fun yet ridiculously competitive. Things very quickly came to resemble a game of “murder ball” (if you’ve never seen a game one watch the video below, the players are without question the hardest of any footballing code), until a Turkish guy named Muhammod was declared the champion.



Eventually Nurse Kiwi Steve had to put a stop to it. He didn’t have too much of a problem with the couple of broken fingers that occurred (boys will be boys), but there tends to be a lot of blood spilt when guys are playing rough while wearing cannulas!

By the third day I wasn’t up to getting into too much trouble, the combination of the bug and the side effects from all the different treatments the doctors had tried caught up with me.

Which left me with a lot of time on my hands.

Celebrate the small (and big) wins

After the doctor had told me there was a better chance of my leaving the hospital in a box than on my feet, I reflected on the life I’d led up until that point.

I had certainly won more than I’d lost.

I’d followed a pretty girl half way around the world, and eventually married her.

I had two great kids.

I had run a successful business, in multiple countries, and made a pile of money.

I had travelled to more than 30 countries.

I had migrated to live in another country... 5 times! (Word to the wise: don’t do this!)

Other times life kicks you squarely in the balls

However life hadn’t all been unicorns and rainbows.

I’d spent 16 consecutive years living under various forms of visa restrictions that constrained where I could live, where I could work, how much I could travel, the amount I got paid and the composition of my remuneration package.

This had significant financial implications also, both through opportunity cost and inefficient tax strategies required to meet silly and ill-considered visa requirements.

Burning money

More than £100,000 had been taxed into oblivion rather than heading for tax advantaged investment accounts or mitigated by prudent tax minimisation arrangements.

On top of that there was a regular need to show bank balances containing significant sums of cash over extended periods of time… so that I could evidence that I could support myself and my family without needing any assistant from the social security safety net to which I was contributing considerable sums via my taxes.

Running ever faster just to remain in place

Professionally I’d had to seek out highly remunerated niches rather than focussing on pursuits that I necessarily found enjoyable or rewarding.

Part of this was visa driven, with minimum earnings requirements increasing markedly whenever the job marketed tightened.

Or (more often) whenever some ambitious politician wanted to improve their standing with the tabloid reading, right wing leaning, nationalistic voters who were ever fond of blaming their woes on those troublesome foreigners who were apparently “taking their jobs and stealing their women”. It appears to have worked for them too, one is now the Prime Minister while the rest have profited handsomely from Brexit.

Part was down to the high cost of housing and childcare in a high cost city.

Part was down to lifestyle inflation, in my case not so much a taste for more expensive consumer goods, but rather the need for things like an after-school nanny while both parents worked, holiday care to cover the 10+ weeks of school holidays that kids get each year.

Travel had long been a big part of my life. As any parent of school age children can tell 4 plane tickets during school holidays cost a hell of a lot more than 2 plane tickets outside school holidays used to! Similarly renting kid friendly holiday house in high season, or a hotel suite that can sleep 4, tends to be significantly more expensive than staying in a youth hostel or bed and breakfast once may have.

What do you do next once you've achieved your goals?

I thought about my goals and ambitions.

When I was a kid my ambition was to be a millionaire.

I’d ticked that box by the time I was 30, and felt pretty good about it.

I set my next financial goal as the doubling of my net worth.

I’d ticket that box before I was 40, and must sheepishly confess I didn’t notice until several months after it had occurred.

By then I’d seen through the illusion that money equals happiness. It certainly helps, but it is at best an enabler. It sounds like fortune cookie wisdom, but happiness comes from within and not from an arbitrary bank balance number.

I briefly considered setting another financial wealth goal, but realised I would just be going through the motions by picking an arbitrary number for the sake of it.

It had been a long time since the addition of an extra £1 to my net worth made any tangible difference to my day to day lifestyle. Aiming for a bigger bank balance wouldn’t make me a better person.

Instead I set my goal to being happy and content, which turns out to be a moving target. Contentment today can easily lead to boredom or restlessness tomorrow!

Happy and content

Focus on the happy

That brought me around to thinking about the happy.

On reflection I realised that I wasn’t, and hadn’t been for quite some time.

I was certainly fortunate, and very grateful for how my life had so far turned out.

However I had been struggling for a long time with a sense of frustration and feeling unfulfilled. Like most people with full time jobs, I was selling my life off a day at a time on the sleep/commute/work/commute/sleep hamster wheel. Increasingly I was questioning the value of doing so.

I worked in a high paying niche in well paying industry.

I chose to live a short commute from where the majority of my clients are based, so that I would be able to spend some time with my kids each night before they went to bed.

Typically a shorter the commute comes at a higher cost of housing.

Which in turn meant I needed to earn a lot to pay for it, hence the high paying niche in a well paying industry.

Vicious circle, no? Around and around goes the hamster wheel, as life gets a day shorter with each rotation!

Life in the rat race

It turns out that I may in fact not be immortal

Then all of a sudden I found myself in a hospital bed, no longer immortal, and as such unable to take it for granted any longer that there would always be time for living and enjoying. Instead a scary, yet brutally honest, question uncomfortably arose: “if not now, then when?

"if not now, then when?"
If I wasn’t getting a warm fuzzy feeling of achievement most days then what the hell was I doing it for?

If I wasn’t feeling content, or at least happy, with how I was choosing to spend my days, then didn’t mean my priorities were questionable? I mean I could be taking my kids to the park, or going for a walk along the river... but instead I was sitting through some bullshit project status update meeting or handholding some indecisive executive who was more afraid of being held accountable for doing something (make that doing anything) than the long term impact of continuing to do nothing.

If my time really was up, was I content that I’d spent it on pursuits I enjoyed or found rewarding?

These were all good questions for which I didn’t have good answers.

So what?

Something needed to change. At the time I had never heard the phrase Financial Independence, but the concept it represents is certainly what I was looking for. Next time I will talk about how that came to pass.

The run up to Financial Independence (part 1)

Let me tell you about the time I ran out onto Wembley Stadium, nearly died, and found myself on the road to Financial Independence.
This week marks the first anniversary of the date I conceded to myself that I was actually Financially Independent. I was going to write a post reflecting on how that year lived up to my expectations, what changed, what didn't, and where things go from here.

But first I thought I would set the scene a little, by telling the story behind what motivated me to learn about Financial Independence in the first place.

Let me tell you about the time I ran out onto Wembley Stadium

In March 2016 I ran (then jogged, then shuffled... my kids called me "Slow Dad" for a reason!) a half marathon, taking 15 minutes off my personal best time over the distance.

The chances of achieving a good time began auspiciously. By the time my echelon eventually made it to the starting line the announcer informed us that the race leaders had already reached the half way point and were travelling at world record pace! That was certainly inspiring.

What he didn’t tell us was that the course second half of the course was mostly uphill!

The race organisers had planned a dramatic finish to the race, with runners emerging onto the hallowed turf of Wembley Stadium.

As they entered the stadium each runner’s name was projected up on the giant scoreboard, while a small but enthusiastic crowd very generously cheered the exhausted runners home over the final hundred metres around the outside of the pitch.

I must admit it was a very cool feeling to see my name up on the same scoreboard where sporting giants likes Usain Bolt, Jonah Lomu, Lionel Messi, and even Michael Schumacher have all worked their magic.

The hallowed turf of Wembley Stadium

I’d managed to out stubborn that bastard chimping saboteur voice in my head that was telling me I was too tired, too sore, and way too smart to continue pushing myself beyond my now exhausted (and thoroughly undercooked) reserves of stamina.

I had told myself not to be soft, that if I was going to bother doing something I should do it right, and that only failures fail while if I were determined enough I would succeed.

Turns out I was wrong.

After a half marathon, nothing beats a relaxing holiday

The next day I flew out on holidays, enjoying a fun day at the super fun Wild Wadi waterpark in Dubai before visiting with friends and family for a great couple of weeks in Australia.

Wild Wadi water park. Image credit: Sarah Ackerman

On my return to London I was jet lagged, dreading the prospect of returning to the client site I was working at, and generally feeling quite flat. I put all that down to the traditional post-holiday re-entry problems, slapped myself upside the head for being soft, and valiantly soldiered on to work.

Turns out I was wrong again.

It is all good fun until somebody ends up in hospital

A couple of days later I had been admitted to hospital.

A few days after that the mystery that ailed me hadn’t responded to any of the treatments the doctors had tried, and they had exhausted all but one treatment option.

A friendly yet very worried grey bearded senior doctor had a very confronting conversation with me, telling me that I’d likely be dead within 48 hours if this final “treatment of last resort” failed to cure me.

Dead within 48 hours.

Either way, being the “nuclear” option, the side effects of the drug were likely to be almost as bad as what I was fighting.

The doctor certainly wasn’t wrong about that!

Sometimes in life there aren’t any good options, and all you can do is choose the least bad one.

Fortunately the treatment worked, and I lived to tell the tale. Yay for me!

Swiss cheese, systemic failure, and aligned stars

About six weeks later I returned to the hospital for a final check up, and to hopefully get the all clear.

As best I can understand, what the doctors concluded was I’d pushed myself way too hard when running the race, and flattened my batteries. While I was splashing about at the Dubai water park an uncommon yet opportunistic bug native to that part of the world took advantage of my rundown state and stowed away inside my body. It made itself at home over the next couple of weeks, before seizing the opportunity when I was next run down (the jet lag resulting from the 21 hour return trip from Australia) to stage coup d'état.

My doctors hadn’t seen the bug before. They hadn’t even heard of the bug before. The bug apparently wasn’t one they screen for routinely because it just doesn’t occur in this part of the world, and unlike an episode of House M.D, in the real world hospitals have to weigh up cost of testing and treatment versus the probability of them finding something. Unsurprisingly therefore, there was no standard treatment for it.

The grey beard doctor told me I was very fortunate, and that the only reason I remained alive was because of a “Swiss Cheese” series of unlikely events coinciding to make it so.

Reason's "Swiss Cheese" model
Reason's "Swiss Cheese" model. 
I must confess I had to go and look up what he meant. Apparently when investigating catastrophic failures such as airline crashes or nuclear power plant meltdowns, some big brained researchers named James Reason and Dante Orlandella worked out that often times there wasn’t a single fault that was responsible, but rather a series of otherwise unrelated failures that cumulatively caused a systemic failure.

They likened this to a stack of holey Swiss Cheese slices. For the end result to have occurred a failure (represented by a hole) in each system (represented by a cheese slice) must line up with failures in the other systems (other holes in other slices), effectively resembling a contiguous hole from top to bottom through the stack of cheese slices.

Anyway in my case the layers of Swiss Cheese were that the “treatment of last resort” was only an option because it was suggested by the former university roommate of the grey beard doctor...

Who 40+ years previously had happened to spend a few months in the Middle East, and while there had one time observed somebody else being treated for what looked like the same bug...

And I had only gotten to see the grey beard doctor because he was doing rounds for the first time in 20+ years while all the junior doctors had gone on strike during the week I was in hospital...

Finally speaking of doctors, I had only gone to see one at all because my wife nagged me into getting checked out after the first signs of trouble.

Moral of the story?

It could be seen as confirmation of my long held suspicion that exercise is actually bad for you!

An actuary I once worked with had a theory that your heart was only good for a certain number of beats, and fitness fanatics use theirs up faster than couch potatoes. Personally I don’t put much faith in his theory.

My wife is convinced that the moral was that she is always right and I should always listen to her. Personally I don’t put much faith in that theory either!

No, personally I think it was a much needed kick up the backside to take stock and reassess my life, my choices, and my priorities.

So what?

While a bit overly dramatic for my tastes, these experiences gave me a wake up call. Next time I will talk about how it motivated me towards achieving Financial Independence.

Grand Master of Procrastination

You are the boss of you, take ownership of your time. Learn to recognise, accept, then work around your shortcomings by pushing your own buttons.
I had set aside today to complete a university assignment that is due early next week.

The assignment wasn’t a big deal, 2500 words that should have taken about 3 hours to complete... had I just sat down and done it!

A promising start

I got up, had breakfast and was all ready to get started.

Then I defrosted the freezer instead.

Then I went and read Monevator’s weekly round up, followed by Miss Mazuma’s heartfelt defence of the Avocado Toast guy, followed by TFS’s tongue-in-cheek rant against rich entitled folk.

Then my 4 year old son wanted to build a Lego garage together, but instead of throwing up a quick couple of walls (which would have sufficed) we built a 12 storey six foot tall monstrosity, with interconnected walkways, stair cases, slides, and so on. It had picnic areas, a helicopter landing pad, and even an ice cream shop.

Then I took myself away from the distractions and finally opened up my computer... and completed my PAYE tax return that was not actually due until January 2018!

Clearly my heart wasn’t in it.

Now it was lunch time, time for a well earned break.

Grand Master of Procrastination

A couple of sandwiches later I sat back down at the computer, starting to despair. Trying to get myself to knuckle down was like trying to get my kids to do their own homework, only funnier. Force myself to sit down and do something I clearly didn’t want to do was about as difficult (and productive) as trying to nail jelly to the wall.

If at first you don't succeed... go do something else?

I decided rather than force it, I would start out typing up something I might enjoy. Like this blog post. The idea being that I had plenty of time, the words would start to flow, and then I’d be able to seamlessly move over to the assignment.

That got me to thinking, how did it come to this?

Back when I was a university student ~20 years ago I learned the hard way there wasn’t much mileage in being super organised and completing assignments early.

The few times I did during my first year, either the lecturer subsequently changed the question or provided some form of guidance or clarification as to where the big marks lay.

Inevitably I’d approached things a little differently, and as a result I had to effectively complete the assignment a second time.

Which sucked mightily, because the reason I’d completed them early in the first place was to ensure I’d have the time to work on the assessment due in the other 5 courses I was concurrently studying at the time!

Climbing the corporate ladder for fun and profit

A few years later, after 74 rejection letters, I landed in the full time work force as a freshly minted Accountant.

I’d seen through the slavery of unpaid/low paid internships, and the long cons that are graduate programmes.

If I was going to be graduate cannon fodder then at least I wanted to earn a decent wage while being exploited!

Instead of targeting graduate level positions I aimed one rung higher up the ladder (which effectively beat the typical graduate programme starting salary by about 50%).

I observed that in the workplace you get asked to do things.

Lots of things.

All. The. Fucking. Time.

Every time a random idea appeared in the head of a lackwit boss or gormless co-worker, it would shoot out of their mouths in the form of some ill-conceived request that inevitably landed on someone else’s desk (often mine).

I also observed that more than half the time that same boss or co-worker never asked about their request again. The need went away, priorities changed, the urgency diminished, or it just plain got forgotten about.

This taught me a valuable lesson: that somebody else’s panic does not have to become my own.

somebody else’s panic does not have to become my own
It also taught me to be the master of my own destiny, within the remit of my role I would choose what I worked on, when I worked on it, and in what order I would complete the tasks I had been assigned. If a task had no apparent value, or was clearly bullshit, then I just didn't do it. I didn't make a big song and dance about it, just put the request in my bottom drawer and sat on it.

somebody else’s panic does not have to become my own

You are the boss of you. Take ownership of your time

This epiphany has served me well throughout my working life, though I suspect it made me an even bigger pain the backside to manage than I had already been!

However it also meant I was much less stressed out doing busy work than any of my co-workers, which in turn meant I usually had the time to volunteer for interesting projects or to tackle the real value add tasks.

Both get you noticed, in a good way, far more than those colleagues for whom the only tangible measure of their productivity was how many hours they occupied a desk (unless you work for a large American investment bank or a large consultancy, in which case the amount of time you are seen to be at work is far more important than the actual value of any output you may happen to produce!).

This "don't sweat the small stuff" approach meant I had a far more enjoyable work life than I would otherwise have experienced.

don't sweat the small stuff
Unfortunately it also reinforced a behaviour if I ignored most unpleasant task they would eventually go away.

Learn to recognise, accept, then work around your shortcomings

Luckily I recognise, and accept, this shortcoming in my character.

I have learned to work around it.

The reason I semi-regularly sign up for organised long distance running races isn’t because I’m an obsessive runner. Or super competitive. Or even that I particularly enjoy the atmosphere and camaraderie associated with sharing the experience with thousands of fellow runners. To be honest I could care less about all those things.

No, the real reason is because I recognise that I’m lazy.

Procrastinators are lazy... and good at it!

However I am also stubborn, and stubborn beats lazy.

stubborn beats lazy
Therefore if I’ve shelled out for the price of admission then I will make myself turn up for the event rather than see the ticket price wasted.

Once I have started a race, I will make damn sure that I finish it.

And the effort of hauling my idle self around a silly number of kilometres is much less painful if I’ve put in some training for the event.

Therefore to get myself exercising semi-regularly it requires the motivation provided by the fear of going into a race undercooked. Otherwise I’d stay sat on my backside writing blog posts that poke fun at the followers of the 4% rule.

Outside influences can ensure accountability

Which brings me back to studying.

The reason I’m doing this unit isn’t because it would particularly aid the profitability of my business. Nor because I am chasing yet another qualification to stroke my ego or enhance my employability.

No it is because I am genuinely interested in learning the finer points about a somewhat dry topic that would cause most healthy minds to turn tail and flee at great speed.

However I also know that this won’t be a rollicking Peter Hamilton or Brandon Sanderson plot, with George Martin-esque characters or an early Jeffrey Archer twist in the tale.

Therefore the chances of me actually sitting down and forcing myself to wade through vast quantities of turgid academic writings on the matter are about as good as those of me lacing up my trainers and going for a run in the rain on a cold winter morning just because I should.

Push your own buttons to achieve the behaviours you desire

How do I get myself to read it then?

Sign up for a post-graduate university unit, pay some tuition fees for the privilege of having deadlines imposed and a need to grasp the concepts well enough to convince an assessor of my work that I have at least a vague inkling about the subject matter they are teaching.

And yet here I am, nearing the end of a blog post and about to actually start that much procrastinated over assignment.

Procrastination over Personal Finance... a common affliction

Before I go I wanted to note the one other time that my mind dances, dodges, and does anything possible to evade performing a task that I know I should do, but seem to be able to find an infinitely long list of preferable things to do instead.

No it isn’t getting a proctology exam.

Nor going to the dentist.

Ironically (given where you are reading this), it is actually looking at my own personal finances.

More precisely looking at my family’s spending, savings rate, and evaluating whether or not our living costs at growing at a greater rate than our passive income streams will support.

Don’t get me wrong, I think monitoring and understanding this stuff is super important.

It is just no fun at all.

Nor is it likely to make me happy, let alone give me a warm fuzzy feeling of inner peace.

Dances, dodges, and evades
This picture has nothing to do with my post, but it is cool nonetheless.

For a bunch of different reasons (families are complicated) I’ve always found it much easier to generate more income, than it is to tighten belts or cut back on spending.

Partly that is because we don’t lead a particularly extravagant or big spending lifestyles.

And partly because we happen to call an expensive part of a super expensive city home. It is the cost of housing that is a killer, and the lifestyle trade-offs required to achieve a material difference on that front just don’t pass the smell test for me.

No matter how much we would like it to be otherwise life is about compromises, and every choice we make comes with an associated opportunity cost of other things we have forgone.

So what?

I am very fortunate to run a profitable business that offers an in-demand service (for the moment) to a wide range of clients who are (for the moment) willing to pay a pretty penny for the privilege.

I am also very fortunate that I long ago got my finances in order, following the basic principles of personal finance, that have allowed me to become financially independent.

For the most part it is good to be me. Except for the procrastination part, and the assignment I must now go complete.

Living off capital is playing chicken with mortality

The fable of MooDoona. Planning to sell down capital to pay for your living costs? You are playing chicken with mortality! Good luck with that.
Once upon a time there was a man, we’ll refer to him as Dave, because that was his name.

Dave had a cow named MooDonna, who was a “wonderful magical beast” in the true Homer Simpson sense. She was seemingly ageless, year after year churning out a veritable multitude of renewable foodstuffs including butter, cheese, milk, ice cream and yogurt. He also has a supply of manure he can sell.

One off steak dinner, or renewable source of butter, milk, cheese, ice cream and yogurt

One evening Dave was found himself parked in front of some late night television. He’d hoped to see something witty featuring Jon Stewart or John Oliver, but instead found himself being hypnotised by late night television advertising. After numerous repetitions from breathlessly excited, cosmetically enhanced, big haired presenters imploring him to “ring now, but don’t send any money... we’ll bill you” Dave was ripe for the picking.

And then an advert for certified Aberdeen Angus Steak appeared.

Certified. Aberdeen. Angus. Steak.

A marketing con if ever there was one. Angus cattle are the most popular breed of cattle in the world (according to the authoritative sounding American Cowboy website). There is absolutely nothing special about them.

It is the biggest marketing manipulation since Haddon Sundblom came up with the Coca Cola Santa Claus campaign of 1931 (prior to which Saint Nicholas wasn’t a jolly fat man in a red suit we all know and love today... the current version turns out to be a marketing campaign based upon a 1832 Clement Clarke Moore poem!).

Dave loved a good steak.

The next day a slightly sleep deprived Dave took MooDonna to his friendly neighbourhood butcher, where she was promptly turned into a succulent 32 ounce t-bone steak served medium rare with béarnaise sauce and some sweet potato fries.

Empty plate. Image credit Jon Scally

Once Dave happily digested his way through a meat induced food coma he fancied some cheese and a tall glass of ice cold milk.

Except there wasn’t any.

The next day Dave was making himself a packed lunch to take to work. He went to the fridge for some butter, but there wasn’t any.

There wasn’t any the next day either.

Or the next.

After a few days Dave came to regret selling off MooDonna. He had traded a seemingly infinite supply of dairy goods for a single (wonderful) steak dinner.

Dave was lonely. And hungry.

It sucked to be Dave.

It sucked more to be MooDonna, though she was beyond caring at this point in the story.

There is an old saying that “you can’t have your cake and eat it too”. It turns out this expression applies just as well to beef cattle as it does to cakes... or money.

You can either have money or spend money, but you can’t do both.

Living off capital is playing chicken with mortality

When I read the masses of personal finance bloggers worshipping at the altar of the “4% rule” I think of Dave.

I think Dave was short sighted.

I think Dave traded his scarce capital for a one off return.

I think once Dave’s capital was gone, he went hungry.

If MooDonna was Dave's only store of wealth then he is now going to starve. Or rely on social security. Or sleep in doorways and beg for change outside his local Tesco.

Living off capital is playing chicken with mortality

Income gets taxed more heavily than capital gains

Yet here is the thing.

The financial equivalent of MooDonna’s butter, cheese and milk are dividends, interest and rent.

All three of which are taxed as income.

In fact all three are added to a person’s earned income. This means they are often taxed (apart from a diminishing allowance at the low end of the earnings spectrum) taxed at their highest applicable marginal tax rate.

That means the chances are pretty good that much of Dave’s earned income is actually taxed more favourably than his passive investment income.

Think about that for a second. Tax payers are penalised, in that they are taxed more harshly, for earning passive income. Doesn’t that sound counter intuitive to you? It certainly sounds wrong to me, governments should be encouraging people to establish additional income streams, as it reduces their demands on the pension/social security system.

In fact the story gets even worse.

In the UK capital gains are taxed at more favourable rates than earned or passive income.

If your income + capital gain puts you in the basic tax rate then you pay 10% capital gains tax on the sale of an asset (excluding your own home… which is also stupid, but the subject of another post).

If your income + capital gain puts you into the higher rate tax bracket then you pay 20% capital gains tax.

Now think about that for a second. The capital gains tax rate is half that which is applied to income, either earned or passive!

Is stupidity contagious?

This means the government is actually encouraging short sighted behaviour like Dave’s, taxing people heavily for retaining an income producing asset, while taxing them lightly for selling that asset off.

Had he kept MooDonna he would pay up no capital gains tax, but up to 45% tax on the income she produced.

On the other hand if sold MooDonna, he would pay only 20% tax on the one-off price she fetched.

The story actually gets a bit worse.

Unfortunately the government is using the taxation system to attempt the execution of social policy, and as such capital gains made on the disposal of residential investment properties are slugged with an additional 8% capital gains tax.

Therefore not only is the short sighted disposal of income producing assets being rewarded, but the direct ownership of an asset classes that has a long history of generating wealth for individual investors is being actively discouraged through punitive tax rates.

Stupidity is encouraged

Urban legend has it that Fidelity once conducted a study to identify which of their clients achieved the best investment performance, and what common characteristics they shared. It turned out they were dead, or had forgotten they had an account.

Moral of the story: unsurprisingly buy and hold investing performs better than regularly trading or selling down capital.

What is the answer?

To my simple mind the focus should be on encouraging those behaviours that have the most beneficial outcomes.

One of those outcomes is to encourage people to provide for the own financial needs, via the creation of a multitude of income streams.

Passive income streams scale much better than earned income streams do.

For example a guy I once met was a member of a unremarkable and unsuccessful band. At some point he wrote a song that they regularly performed at gigs, but that had no real commercial success. Somehow that song got noticed and used as the theme song for a successful kids cartoon show made in Japan. Now the guy gets sporadic royalty cheques that over time have been enough to finance the purchase of an apartment.

He performed a little bit of work.

Once.

That has subsequently generated ongoing income without any further effort on his part.

The effort required to earn £1 in dividends as the same as that required to earn £1,000,000 in dividends.

On the other hand there is earned income, where the individual sells off their life by the hour in return for a salary. They only have so many hours in the day that they can sell.

Some people seek further earned income, trading some of their free time for side hustle income. A noble intent, but if most people were honest with how they value their time then their side hustles probably aren’t financially worth their time. They are more like (hopefully enjoyable) hobbies that earn a little income, blogging for example!

So what?

If anything the tax system should discourage the disposal of income producing assets, rather than encourage it.

Dave should have to think twice about whether disposing of MooDonna was financially the right thing to do, with the default answer being no.

Learning from the best

Always listen, yet question and challenge what you are told. Copying answers will get you to your goal sooner, but only if you copy the right ones!
When you own a business that makes its money by successfully solving problems for clients then you end up working for a very diverse cast of characters.

Sarah, the author behind Tortoise Happy, recently complimented me on my frequently proclaimed “trust, but verify” caution.

Never unquestioningly accept what you are told

That got me thinking back to who the super smart, yet very demanding, South African gentleman who regularly trotted out this phrase. This guy could spot a single errant figure hidden amongst a printed A4 page full of numbers from a distance of 10 paces.

The “trust, but verify” message was regular trotted out while he was “triangulating”... his term for independently validating whatever he had been told by someone to ensure he wouldn’t be caught out by believing a line of bullshit someone may have tried to feed in.

This has been amongst the most valuable lessons I have learned over the years, to never unquestioningly accept anything I’m told.

Always trust, but verify
That in turn led me to reflect on the other key messages or ways of thinking I have picked up while delivering projects.

Always trust, but verify

Always ensure the size of the problem warrants the cost of the solution

An impatient Frenchman, sporting what looked like a small dead animal stuck to the bottom half of his face, used to encourage his staff to “spend the firm’s money like it was their own”.

Whenever a member of his staff were preparing a business case, or reviewing a tender, or even thinking of raising a purchase order they would subconsciously hear these words delivered in his heavily accented voice in their heads.

He had a way of staring down his staff and demanding to know whether they personally would spend this much money on whatever the project or purchase being debated happened to be. Invariably the staff member would break eye contact, stare at their shoes, and mutter something to the effect of “no”.

This approach certainly made it very difficult for the firm to purchase any kind of (inevitably overpriced) “Enterprise” software!

This lesson taught me never to accept that asking prices and value provided are seldom similar amounts. By focussing on how much a problem is actually costing, it becomes easy the appropriateness of a proposed solution, or indeed whether it is worth worrying about at all.

This avoids solving a £20 problem with a £2,000 solution.

spend the firm’s money like it was their own

Ensure the size of the problem warrants the cost of the solution

Value other people's time like it was your own... use it thoughtfully yet sparingly

A guy who sported a wig resembling a bike helmet used to mercilessly apply the “So What?” test to anything he read or was told. After a successful career as a Big 4 consulting firm partner, he had made the transition into becoming a serial failure as a Chief Technology Officer.

After washing out at yet another site he had an epiphany, and rebranded himself as a professional Interim Chief Technology Officer.

From that point forward his remit was to roll into a site like a wrecking ball, cancelling projects, make staff redundant, run a critical eye over outsourcing and supply agreements, and construct a playbook of corrective actions necessary to rectify a failing department.

At that point he was usually thanked for his time, paid handsomely to go away, and a newly recruited permanent Chief Technology Office would be able to appointed with a clean slate, a plan to fix things, and without having any blood on their hands.

Some useful lessons learned I've learned via the application of the "so what?" test:
  • No meeting needs to take longer than half an hour.
  • Meetings should only include those required to make decisions. No need for passengers.
  • A slide deck should be no longer than 3 slides. They should contain only the options being put forward to the audience (including one recommended option) and the decision that the audience is being asked to make.
  • An email needs never be longer than 5 sentences. If your point requires more than that to make then you either don’t understand the problem enough yourself, or you need a meeting not an email.
  • People should be measured by the value of their output, not how many hours a day they sit at a desk or how much slideware they produce.
  • Wherever possible questions should be phrased in a manner that can be validly answered with a Yes or No answer.
  • A good blog post is a short, to the point, blog post ;-)
Applying the “so what?” test to what I read certainly helps sift those rare nuggets of wisdom out from the vast quantities of substance-light blather and bloviating out there on the internet.

Apply the “so what?” test
Apply the "So What?" test

Get the right person to the solve the problem... often this won't be you

An old Swedish guy, who was a very seasoned campaigner, taught me two very valuable life lessons.

Firstly he used to regularly greet me on the phone with the phrase “I have a problem, now you have a problem”.

His philosophy was that nobody liked a complainer, so therefore nobody should talk about problems with people who would be unable to help solve them. Therefore a problem shared was a problem delegated.

He certainly felt better after our conversations, I wish the same could be said for me!

I have a problem, now you have a problem
Get the right person to the solve the problem

The second lesson was to never drink beer in the sauna. And if you do, never jump straight onto a flight straight afterwards. The effects of the alcohol are hugely magnified, while the rapid sobering up that shortly follows results in a mighty hangover.

So what?

The take away here is to always watch and learn from those people around you, particularly those who are further down the road upon which you are travelling. It is a much easier to copy proven answers from someone smarter than you, than it is to figure everything out for yourself the hard way.

Select carefully from whom you choose to seek advice, but pay attention to everything you are told regardless of the source. Very occasionally you’ll stumble upon a nugget of wisdom that would be easily overlooked, but when correctly applied could be potentially life changing.
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