Single point of failure

By Slow Dad - October 24, 2016

Apply the technology concepts of “avoid single points of failure” by utilising a “shared nothing” resiliency approach to your portfolio.

If you only have one of something, and it breaks, then you're screwed

I’ve spent much of the last 20 years working in the world of information technology. One important lesson the best and brightest preach is “avoid single points of failure” by utilising a “shared nothing” approach to resiliency.

By adopting this approach you can obliviously binge on Netflix while behind the scenes computers misbehave and errant backhoe drivers dig up cables. In fact Netflix developed Chaos Monkey to prove their resiliency by continuously simulating random failures, because real life outages just don’t provide enough drama!
Netflix Chaos Monkey
Netflix Chaos Monkey
How well does your personal financial setup cope when subjected to a “shared nothing” perspective?
avoid single points of failure by utilising a shared nothing approach

A typical personal finance setup

Consider a typical setup of a person chasing financial independence on the road to early retirement.

Store of wealthPurpose
Bills account
(fee free current account)
Channel income into allocating investment funds and paying bills.
Credit Card
(fee free reward / cash back)
Pay outgoings using card, pay off balance in full, collect cash back / reward benefits.
Emergency Fund
(fee free interest bearing savings account)
Wheels come off” cash stash to cover the predictably unpredictable… emergency repairs, travel for funerals/sick family, making bail.
Self Invested Pension Plan
(low fee brokerage account)
Tax deferred saving for when you are probably too old and grey to enjoy it. Collect the free” money from the tax man and employer matching.
Shares ISA
(low free brokerage account)
Accessible and tax free on capital gains, dividends, and interest.
Taxable brokerage account
(low free brokerage account)
Where your accessible today investment funds go once annual ISA limit is used up.
Managed funds Delegate the investment selection to somebody else.
Individual stocks / bonds Stock picking for when you’re feeling smarter than the market.
Now unleash the Chaos Monkey!

Your bank could go broke. The FCSC deposit protection scheme will refund up to £75,000 of money you lose, but that can take between 7 and 21 days of you lodging a claim. What if your mortgage payment or school fees are due during the period you can’t access your funds?

Your broker could go broke. Your investments are held on your behalf in a nominee account, administered by a custodian. Providing the broker’s record keeping is accurate you won’t lose anything, however until the custodian arrangement transfers to a new broker your investments won’t be accessible. How will can you do your 4% rule sell down during that limbo period?

Your custodian could go broke. The FCSC investment protection scheme will eventually pay back up to £50,000 of holdings, but this can take up to 6 months after you lodge a claim. £50,000 doesn’t buy much in the way of financial independence!

Your investment fund goes broke. Sorry, no government guarantee to the rescue here. Investing is a risky business.

Stealing, stupidity, or stuff ups. You’re inconvenienced and potentially out of pocket until it gets resolved. If it gets resolved.
Breaking your only egg in your only basket
Breaking the only egg in your only basket... that is going to ruin your day.

So what?

The lesson here is diversify your exposure to each risk, failure can occur at any link in the investment chain. Hopefully all those FIRE community folks putting all their eggs into a well diversified fund like VTSAX via a single bank, broker, and custodian won’t ever have problems like these.

But they could.

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  1. Another one - you fall victim to fraud when some Russian hacker manages to transfer funds out of your account in some debatably-legal way. One I heard of recently: a high end kitchen supplier was hacked and his account was used to issue a bunch of very-nearly-correct invoices (i.e. corresponding to recent work that hadn't yet been invoiced) , whose payment details were not the usual ones. Some of his clients duly paid up. Who's liable for the loss here? Not the bank!

  2. Ouch! Fire v London there is no workable way to validate the payment details on a legitimate looking invoice for work you've genuinely commissioned.

    I fear that one comes back to buyer beware, and am oddly inclined to tip my hat to the hackers for viably gaming the system.

    Perhaps the moral of the story is to rent, and let the landlord worry about paying for renovations ;-)!