Mortgage stress test

I’m fortunate enough to only have two debts. One is a hefty and never-diminishing sleep debt. I pay it back when I can but, much like an interest-only mortgage, the principle seems to never decrease. The second is a mortgage. Oxymoronic ‘good debt’.

As of 1st August, the Bank of England will withdraw its affordability test recommendation to mortgage lenders. The test “specifies a stress interest rate for lenders when assessing prospective borrowers’ ability to repay a mortgage“. My own mortgage has already been through that mill once.

At the same time, interest rates have climbed to their highest level in over a decade. Inspired by these events and a recent Monevator post, I did some stress testing of the MedFI household mortgage finance.

Educated guesswork

When my fixed rate ends, I’ll have to re-mortgage. The key factors determining how much the new mortgage will cost are:
1. The value of my property.
2. Loan-to-value ratio: the amount of money I’ll need to borrow from a bank compared to the total value of the house.
3. Mortgage interest rates.

My crystal ball has gone on the blink, so I’ve done my best to make sensible estimates of each of these below.

Property value

Housing market crash

Are a fall in house prices a matter of when, not if? One putative, albeit far from cast-iron, predictor of property prices is Fred Harrison’s 18yr property cycle theory.

Fred Harrison’s 18yr property cycle. You can see ‘land prices’ on the Y-axis; his rationale is that property value is derived from the value of the land it sits on. There are ~14yrs of house price growth split into recovery (5-6% growth/yr) and explosive (>10% growth/yr) phases. These are separated by a mid-cycle wobble, characterised by relatively stagnant prices. A recession phase follows this, with ~4yrs of falling house prices. Adapted from a tweet by the man himself.

Exploring the (de)merits of Harrison’s theory is beyond the purview of this post; in short he predicts the next UK property crash will occur in 2026. Some are forecasting a slowing down of house price increases as early as 2023. Conversely, the chaps over at Property Hub have postulated the crash will occur later (as late as 2029), on account of:
• Double-digit growth only recently started; 2021 was the first year since 2008 where the average UK property price grew >10%
• Lending restraint still fairly established, although the Bank of England did withdraw their affordability test as above
• Investor sentiment hasn’t reached the mania indicative of a near-peaking market

I think Harrison’s theory is of debatable absolute predictability, comes with a fair dose of confirmation bias and, ultimately, simply demonstrates the fact that property prices are cyclical.

However, in the absence of a better model, let’s say there’ll be a property market crash at the time I have to re-mortgage. To model what a housing market crash could mean for me, I used data from the most recent one –  the 2008 Global Financial Crisis.

Average UK house price over time. The pattern roughly maps to Harrison’s 18yr property cycle. Four years of price crash (2008-2012) followed by seven years of price rise (2012-2019). A mid-cycle wobble until April 2020 and since then, a sharp rise in house price. Adapted from the Office of National Statistic UK House Price Index.

There are a few different numbers from the GFC I could use when estimating how far my property price might fall:
• -15.6%. The worst year-on-year decrease in UK average house price (February 2009).
• -18.5%. The nadir average UK house price (March 2009, £154k) vs. it’s pre-crash peak (September 2007, £190k).
• -11.5%. Presuming a crash occurs in 2026, this is the fall in house price at the time I’d have to re-mortgage.

In the end, with nothing better springing to mind, I used an average of those three figures (15%) in my stress test calculations.

The 18yr theory would suggest the crash/recovery phase takes four years. During the GFC, annual house price change remained negative for nineteen months (May 2008 – November 2009). Despite that, it took nearly seven years for the average UK house price to return to the same pre-crash price (October 2007 – July 2014)!

A falling home value at the time I had to re-mortgage would be punitive. Much like other assets, however, the actual loss in value would only be crystallised if we were forced to sell the house.

Yes, a dipping housing market would be certainly sub-optimal. Worse still would be negative equity, whereby the value of my house would be less than the outstanding money owed on the mortgage. Fortunately, there would have to be a precipitous (37%) drop in the property’s value for us to end up in that sort of territory. It’s not an unheard of fall, but at the less likely end of the spectrum in my opinion.

Year-on-year percentage change in UK house price since April 2026. Adapted from the Office of National Statistic UK House Price Index.

Housing market swell

Conversely, my house could increase in value by the time of re-mortgaging. I could use a few different numbers to estimate the increase in my home’s value. As before, I took the average (11%) of a spectrum of price increases for my stress tests.

LTV ratio

My LTV will be dependent on the value of my property (see above) and the remaining loan at the time I re-mortgage.

Fortunately, the amount I’d still owe is quite predictable. Using an amortisation table, I can calculate the outstanding debt at the time of re-mortgaging. Furthermore, I can see how much overpaying the mortgage affects this.

For my stress test I used two scenarios; one paying the mortgage as is, and the other overpaying the mortgage by a set amount each month.

Mortgage interest rates

Future mortgage interest rates are difficult to divine. They’re based on a whole host of economic factors. Interest rates are on the rise though, and it’s a fair presumption that any future mortgage interest rates are going to be higher than my existing rate.

UK Interest rate. The Bank of England base rate (bank rate) has climbed sharply in 2022. It was last over 1% in January 2009, but has sky-rocketed from a historic low of 0.1% to 1.25% at the time of writing. Adapted from The Bank of England.

For my stress testing, I used a few different interest rates: the current available rate (2.5 – 3%), twenty-five year average (~5%) or twenty-five year high (~8%).

Stress testing a re-mortgage

In summary, some presumptions I made for modelling a re-mortgage:
1. My house’s value will be either: higher (+11%), the same as purchase price or, if it coincides with a market crash, lower (-15%)
2. Outstanding mortgage as per amortisation calculations, including an overpayment scenario
3. The mortgage interest rate will be either of the three rates described above (2.75%, 5% or 8%)

The results made for less-than-pleasant reading.

The best case scenario involved overpaying the mortgage and a future interest rate similar to the best available today (2.75%). In that case, mortgage payments would be ‘only’ 13% higher than they are currently. Without overpayments, I estimate they’ll be 20% higher.

At 5% interest rates, I estimate mortgage payments will be 50% (overpay mortgage) to 59% (no overpayment) higher.
At 8% interest rates, mortgage payments will be >100% higher than currently, whether I overpay the mortgage or not.

Mortgage interest cover

A litmus test of my resilience against these rising mortgage costs is my personal home interest coverage ratio.

This tweet from The Escape Artist poses the question – what is your mortgage interest cover ratio?

I ran the numbers as described above by The Escape Artist, though using ‘post-tax salary’ as the numerator doesn’t make sense to me. If mortgage payments rose dramatically we’d cut back on our spending, though the reality is that we couldn’t use our entire post-tax salary to pay the mortgage. There are other bills to pay, hungry mouths to feed and various other essential living expenses.

I decided there was a more pragmatic method for calculating our interest coverage ratio.

Mortgage cover = (current mortgage payment + discretionary expenses) / future mortgage payment

This method presumes you’re already able to afford your current mortgage payments. When the cost of the mortgage goes up, where does the extra money come from? Cutting back on the discretionary expenses would typically be the first line of defence.

On my expenditure spreadsheet, discretionary expenses represent purchases such as eating/drinking out, entertainment (Netflix, new kit for sporting hobbies etc.) and holidays. Reducing this outlay might provide enough capital to make the pricier future mortgage payments. Meanwhile, essential expenses such as bills, groceries, healthcare etc. are left untouched.

I used this method in my own calculations. Reassuringly, our mortgage interest coverage ratio never dips below 1x, even when ‘stressed’ with an 8% interest rate, -15% house value and no mortgage overpayment. Of course those numbers are dependent on a key factor: unchanging income.

Income shock

There are a spectrum of income shocks I could suffer that would impact on my ability to pay the mortgage.

At the ‘tamest’ end of the spectrum, my salary continues to be eroded by inflation. At the time of writing, UK inflation is 8%/yr, quadruple the annual pay rise for junior doctors (2% until April 2023). This equates to a net 6%/yr pay cut, on top of decades of inflation-eroded pay.

My income could falter because of changes to my work circumstances. Those range from opting to work less-than-full-time, to being booted off my postgraduate specialist training programme, to being struck off the list of registered medical practitioners altogether.

At the more macabre end of the spectrum, perhaps I’d suffer a critical illness (or even a life-ending event) that’d strip me of my ability to earn an income.

A more likely scenario is a drop in household income on account of maternity leave/pay and a subsequent increase in (essential) child-care expenditure.

Much to do about something

What can I do to mitigate against this all? Some thoughts:
• House prices. I’m essentially at the mercy of the markets, bar any normal interventions to keep the property ticking over
• LTV ratio: overpay the mortgage. Or invest?! A story for another time.
• Mortgage interest rates. I’ve no control over the BoE so not much luck here. I could re-mortgage early with a longer fixed term to try and lock in a lower rate if I felt there were worse rises to come.
• Mortgage interest cover. I could decrease discretionary spending in anticipation of re-mortgaging?
• Income shocks. Ensuring I don’t get fired is up there. Critical illness cover and life insurance too. Earning some extra income would be nice…

Ready the lifeboats

There’s a concise summary to all of the above: my mortgage is going to be more expensive in the future. Exactly how much dearer is anybody’s guess. Despite this, I can’t envisage the mortgage becoming entirely unaffordable.

Of course, there’s always the possibility of the perfect storm. A GFC-level drop in house prices + all-time high mortgage interest rates + continued cost of living rises + a concurrent stock market dive + losing my job.

Yet I think of myself as more of a pragmatist/realist than a nihilist, and suspect there’s enough wind in the sails of HMS MedFI to weather the choppy waters on the horizon.

I’ll make sure the lifeboats are prepped though, just in case.

TTFN,

Mr. MedFI

NHS Pension Changes

The NHS Pension is changing. Lengthy prose about the driving force behind these changes (the McCloud judgement & remedy) would be tangential. Instead of dredging the past, let’s look to the future. What’s happening to the 2015 NHS Pension scheme?

Change 1

“Members’ contribution rates would change to be based on actual pensionable pay instead of members’ notional whole-time equivalent pay”

I mentioned a peculiarity of the NHS Pension in my post on Less-Than-Full-Time (LTFT) Finances – those working LTFT pay NHS Pension scheme membership costs as though they were working full-time, but only accrue pension benefits at their LTFT percentage.

For example:
• Full-time basic pay for an FY1 is £29,384/yr. NHS Pension membership costs them the allotted membership rate (9.3%), and they accrue pension based on their (full-time i.e. 100%) pay.
• An 80% FY1 would earn £23,507/yr. They pay the same 9.3% rate as their full-time colleague, whereas they should pay 7.1% based on their actual income. Yet they only accrue pension benefits on their 80% pay.
• A 60% FY1 would earn £17,630/yr. They pay the same 9.3% rate, whereas they should pay 5.6% based on their actual income. Yet they only accrue pension benefits on their 60% pay.

This seems unfair when taken at face value. However, a doctor who worked 80% for their whole career would pay 80% of the pensions costs and accrue 80% of the pension of a full-time equivalent colleague. The cost to the individual of each £1 pension accrued (or conversely the pension generated for each £1 of membership fees) is the same for both full-time and LTFT individuals.

The pensions changes due to come into effect in October 2022 will alter this. (Unfortunately, there won’t be any refunds for those who’ve been affected by this to date: “the mechanism for determining the appropriate rates is prospective only“.)

A reasonable minority (17%) of those consulted opposed this change. One purported issue is that staff may reduce their working hours in order to reduce their pensionable pay to fall within a particular (lower) contribution tier. I think it’s unlikely to be a widespread issue. Maybe it would play a part, though I suspect those looking to work fewer hours have ulterior motives than pension costs.

Another argument against the new system is those working LTFT may earn more pension per pound contributed than a full-time colleague. For example:

Work patternPensions benefitsRelative costRelative cost for £1 of pension benefitsRelative pension benefits for each £1 membership cost
Full-time100%100%11
80% LTFT (current system)80%80%11
80% LTFT (with Change 1)80%76%0.951.06
 
This is based on my own spreadsheet modelling of the NHS Pension, and is merely demonstrative. It models a career spanning from FY1 through to retirement age.

The discrepancy is more apparent if the time period is shortened. For example, between FY1 and ST7, the relative cost of pensions benefits to an 80% LTFT trainee under the new system would be 65% of their full-time equivalent colleague’s.

Whether this is any more or less ‘fair’ is up for debate. There’s more to the story, however, on account of Change number 2…

Change 2

“The structure for member contributions would change”

At present, NHS Pension membership costs you a set percentage of your pensionable (~basic) pay. Said percentage is determined by your ‘contribution tier’, which is in turn dependent on how much you earn annually.

The current system has seven tiers, and the percentage ranges from 5% (for those earning ≤£15,431/yr) up to 14.5% (for those earning ≥£111,377/yr).

Over the next two years there will a phased transition to a new system, with the aim of ‘flattening’ the contribution tiers. From April 2023 there will only be six tiers, ranging from 5.2% (for those earning ≤£13,231/yr) to 12.5% (for those earning ≥£54,764/yr).

The planned changes to the membership cost of the NHS Pension.

The government’s consultation yielded majority (52%) disagreement with this proposed restructuring, though it’s happening anyway. There were various reasons for this disapproval, including concerns regarding:
• Higher earners benefitting more from the changes
• The affordability of the scheme for lower earners.
The BMA’s opinion was that the tier system should be scrapped, with all NHS Pension members paying a flat 9.8% fee.

LTFT

Change 2, when taken alongside Change 1, also impacts on the NHS Pension for the LTFT individual. In short, it make the NHS Pension even more economical:

Work patternPensions benefitsRelative costRatio of membership cost-to-£1 pension incomeRatio of pension income-to-£1 membership cost
Full-time100%100%11
80% LTFT (current system)80%80%11
80% LTFT (with Changes 1 & 2)80%71%0.891.12
 
This is based on my own spreadsheet modelling of the NHS Pension, and is merely demonstrative. It models a career spanning from FY1 through to retirement age.

What does this mean for me?

It won’t influence the pension benefits you receive in retirement.
It will affect how much your pension scheme membership costs you.

Unfortunately, the cost of the pension scheme will rise for FY1, FY2 and CT1/2 doctors. The cost will transition from 9.3% of pensionable pay to 9.8%.

For those ST6-8, the cost of the pension scheme will remain 12.5%.

The cost of the pension scheme will fall for:
• ST3-5’s, from 12.5% to 10.7%.
• Consultants, from 13.5 or 14.5% down to 12.5%

It may feel unfair on those at the bottom of the pay scale, though in my mind it represents a good deal. Sure, your pension will cost an extra £12 (FY1), £15 (FY2) or £17 (CT1/2) each month for four years. You’ll then save at least £75/month as an ST3-5, and the same or more as Consultant for the remainder of your working life.

I estimate Change 2 means my NHS Pension will cost me in the region of 5% less over the duration of my career.

Change 3

“The thresholds for the member contribution tiers would be increased in line with annual AfC pay awards”

The different tiers of pensions cost haven’t been adjusted since their advent in 2015. This has had punitive consequences:

An FY1 starting in 2016 would have earned £23,650/yr basic salary. This put them in the 7.1% contribution tier. Conversely, an FY1 starting in August 2022 can expect to earn £29,384/yr basic salary, putting them in the 9.3% tier.
Over the six years, basic pay went up cumulatively 24%, but annual pensions cost went up 63% (from £1,680/yr to £2,730/yr).

A similar phenomenon has occurred for those ST3-8, who have risen from the 9.3% tier to the 12.5% tier over time. Their cumulative 28% basic pay rise carried with it a 72% pensions cost increase. Staggering!

This, alongside below-inflation pay rises, has taken huge chunks out of take-home pay without any better pension income accrual.

To combat this, from October 2022 the contribution tiers will rise at the same rate as the Agenda for Change (AfC) pay scales. That is, if AfC invokes a 2% pay rise, then the contribution tiers will also all shift up 2%, meaning that everyone should still be in the same tier. AfC is the framework by which the bulk of NHS staff are paid, which is the rationale for choosing it for this particular purpose.

Two-thirds of those consulted agreed with the proposed revamp. There was some disagreement relating to the use of AfC as the basis of the contribution tier increases as it’s not representative of how all NHS staff are paid, including doctors.

In theory, if AfC pay increases are less than those of doctors’ pay it could mean that the same effect occurs as described above. The converse is also true, however. On balance I think it’s a reasonable compromise to use AfC pay scales.

Change 4

“The proposed member contribution structure would be phased over 2 years”

Change 4 is perhaps the least juicy of the tetralogy. In short, the final re-structuring won’t be fully implemented until April 2023.

This change split the surveyed crowd. Approximately half of respondents agreeing with Change 4. The 43% who disagreed were themselves divided into those who wanted faster change and those who wanted things to happen more slowly.

The phased introduction will mostly impact individuals who’ll see their pension contribution tier rise or fall.

Those CT2 and below will see their pensions cost rise and, I’m sure, would prefer a slower introduction of the changes so they can climb the pay ladder first. Conversely, ST3-5’s and Consultants will see their contributions fall and are presumably keen for the changes to be enacted sooner.

In summary
Change 1 will make the NHS Pension 2015 Scheme cheaper for LTFT Trainees.
Change 2 will make the NHS Pension cheaper (ST3-5, Consultants), dearer (FY1 – CT2) or have no effect (ST5-8).
Change 3 should prevent the cost of the NHS Pension rising disproportionately to increases in pay.
Change 4 means these effects won’t be fully in place until April 2023.

Inevitable

I’ve long opined that changes to the NHS Pension 2015 Scheme are a guarantee. Here, perhaps earlier than expected, are the first wave of alterations.

“We fear change”

Garth Elgar

I honestly would have predicted a more fear-inducing and financially detrimental round of revisions. Indeed, the changes feel as though they’ll impact on my pension in a positive way.

I remain wary of future reworkings, however. Are we being given a penny before a pound is taken from us? If nothing else, this demonstrates that changes to the NHS Pension can, and will, happen.

The prudent individual will, in my opinion, be anticipating such future alterations and planning their retirement finances accordingly.

TTFN,

Mr. MedFI

Less Than Full Time Finances

Health Education England recently announced ‘Category 3’ less-than-full-time (LTFT) training will be available to all postgraduate specialties from August 2022. Category 3 allows doctors to work LTFT through personal choice, though it was previously only available to a select group of specialties.

Working LTFT has a number of pros e.g. better work/life balance, but also cons e.g. prolonging the duration of your specialty training programme. In this post I want to examine the financial consequences of moving to LTFT training.

What makes up your pay?

The first financial consequence of working LTFT is, unsurprisingly, earning less. To explain how things change when you’re LTFT, let’s briefly examine what your pay is made up of. If you have a good handle on this already, you can skip to the next blue header: ‘LTFT pay’.

NB all numbers used are taken from the latest NHS Pay Circular at the time of writing. The below applies to England. The devolved nations use a different, ‘banding’ system based on the 2002 contract.

The foundation of your income is basic pay. The amount of basic pay you earn is related to your training grade (or, more accurately, your ‘nodal point’.)

For example, an F1 is paid at nodal point 1 – a basic salary of £29,384/yr.
By way of comparison, an ST5 is paid at nodal point 4 – a basic salary of £51,017/yr.

This is predicated on working 40hrs/week, although many will be working more than this. Any additional hours are paid at the same rate as your basic pay.

For example, F2 basic pay is £34,012/yr.
This works out as £654.08/week (divided annual pay by 52).
Therefore the hourly rate is £16.35/hr (divided weekly pay by 40).
If an F2 was working 8 additional hours each week, they would earn an extra 8 x £16.35 x 52 = £6,801.60/yr.

Enhanced hours are paid at a different rate. There is a 37% enhancement of the basic rate for work during enhanced hours. Typically these are night hours, although what constitutes such work is slightly nuanced – check the 2016 contract, Section 2; 16 – 19 for more details.

Various allowances are then added-on. There’s an on-call allowance, although the definition of on-call is truer to its original meaning rather the way many will use it now.

On-call is defined as: ‘A doctor on an on-call rota who is required by the employer to be available to return to work or to give advice by telephone, but who is not normally expected to be working on site for the whole period, shall be paid an on-call availability allowance.’  

The frequency of on-calls is irrelevant. Instead, merely its presence in your working schedule attracts payment according to your nodal point. For example, a Psychiatry ST3 (‘nodal point 4’) who has on-calls as part of their work schedule will earn an extra £4,082/yr.

Next there’s a weekend allowance. The renumeration is linked to both the frequency of weekend work and your nodal point. For example, an IMT2 (‘nodal point 3’) working 1-in-4 weekends will attract a £3,020/yr supplement. Conversely, an FY2 (‘nodal point 2’) on an ED rota working 1-in-2 weekends will earn a £5,102/yr supplement.

Those in training programmes for hard-to-fill specialties are given a pay premium too. This depends on the specialty and length of training programme, though as an example a psychiatry core trainee will earn an extra £3,718/yr, whereas for GP trainees on GP placements it’s £9,144/yr.

Working in the big smoke will net you a bit more income too, with the London weighting of £2,162/yr going a (very) short way to off-setting the increased cost of living in London.

Lastly, there’s a £1,000/yr LTFT allowance. It’s paid to doctors in less than full time training, to account for the fact that they’ll still pay full-price exam fees, membership fees and other assorted costs.

For example…
Dr. Dotty is a medical ST4 working in London. Her work schedule includes 46hrs/week, 1 in 4 weekends, as well as 7 nights per 8 week rota cycle.
Her basic pay is £51,017/yr.
Her additional hours add £7653/yr
Her enhanced hours add £4,956/yr.
Her weekend allowance adds £3,827/yr.
Her London weighting adds £2,162/yr.
She has no on-call allowance, pay premium or LTFT allowance.
Her total annual salary is £69,615/yr.

In summary
Your annual (pre-tax) salary is calculated by summating the different components of your pay.

LTFT pay

LTFT trainees are paid according to the same system as full-timers but on a pro-rata basis. It’s not, however, a simple calculation: an 80% LTFT trainee does not necessarily earn 80% of a full-time salary.

Some segments of the overall pay package are converted by multiplying the full-time pay by the appropriate LTFT percentage. These are:
Basic pay. I.e. a 60% LTFT trainee earns 60% of the basic pay.
Enhanced hours. That is, the rate is still enhanced at 37%, but an LTFT doing 80% as many enhanced hours will earn 80% as much.
• Pay premium. I.e. an 80% LTFT trainee earns 80% of the pay premium for being in a hard-to-fill specialty.
London weighting. I.e. a 70% LTFT trainee earns 70% of the London weighting.

A LTFT trainee must work <40hrs/week and additional hours are those worked over 40hrs/week. Therefore a LTFT trainee shouldn’t earn any additional hours.

The weekend allowance calculations are a little more subtle.
Let’s say a full-time CT1 trainee works 1-in-3 weekends. This would attract £3,402/yr extra pay.
An 80% LTFT trainee on the same rota instead works 1-in-5 weekends.
3 (FT weekends) divided by 5 (LTFT weekends) is 60%.
Therefore the 80% LTFT trainee earns 60% of the £3,402 weekend allowance, which is £2,041/yr.

It’s similar for the on-call allowance. The frequency of on-calls, which is not an important factor in earning the allowance in the first place, is important when it comes to working out the LTFT pay.
If a full-time ST6 works 1-in-4 on calls, they earn a £4,672/yr supplement.
Let’s say a 60% LTFT works 1-in-6 on calls on the same rota.
4 (FT on-calls) divided by 6 (LTFT on-calls) is 67%
Therefore the 60% LTFT trainee earns 67% of the £4,672 on-call allowance, which is £3,130/yr.

Naturally the LTFT allowance is an unchanged flat rate of £1,000/yr.

Using the above, it’s easy enough to put some numbers into a spreadsheet and see how being LTFT may affect your income.

As you can see, the calculations for weekend and on-call allowances are subtly different. It’s not a straightforward conversion. Consequentially LTFT trainees can earn, as a percentage, more or less than one would suspect.

Changes to the enhanced hours can also make a big difference, which makes sense given that they are paid at 137% of the basic rate.

For example, a 60% LTFT trainee should work 60% of the nights a full-time trainee would. Yet if a full-time work schedule would include 7 nights in the defined period, the trainee can’t work 4.2 nights. They’d have to work 4 (57% enhanced hours) or 5 (71% enhanced hours). This is decided locally, and will have a knock-on effect for LTFT pay.

The overall renumeration for those LTFT is often fairly close to the advertised percentage i.e. a 60% LTFT trainee earns approximately 60% of a FT salary. BUT this depends on how your local department rota’s and calculates things.

In summary
• As a rule of thumb, a LTFT trainee can expect to earn approximately the advertised proportion of a full-time salary
• There will be local variation in how true this is, depending mostly on your work schedule locally and the relationship between full-time and LTFT work schedules.

Consultant pay

A quirk of LTFT is its relationship to your Consultant salary when you CCT.

If one starts work as a Consultant following full-time training, you enter the Consultant pay scale from the bottom i.e. a basic salary of £84,559.

If one starts work as a Consultant following LTFT, you enter the pay scale on a higher rung. Quite how high depends on the duration by which your training was extended by being less than full time.

I’ll use the exact wording from Schedule 14 of the 2003 Consultant’s contract as an example:

‘Where a consultant’s training has been lengthened by virtue of bring in a flexible training scheme…the employing organisation will, where necessary, set basic salary on commencement at a higher threshold to ensure that the consultant is not prevented from reaching the pay threshold they would have attained had they trained on a full time or single qualification basis’

They give the example of ‘training extended by two years counts as the equivalent of two years’ consultant service’.

The maths involved in calculating how much of a difference this makes becomes tortuous, as there are many permutations based on duration of LTFT during training, %LTFT, duration of training, TOOT etc. In short, it definitely softens the financial blow of starting consultant work later following LTFT training, but doesn’t entirely make up for the lost income whilst LTFT.

In summary
LTFT trainees should enter the consultant pay scale at a higher level once they CCT.

Income boost

One strategy to make up the earnings shortfall when LTFT would be to take on additional locum work. Locum work is typically lucrative and, as such, only a handful of locum shifts may be required to make up a big chunk of the difference between LTFT and full-time pay.

For example if I were an 80% LTFT trainee and did a single twelve hour locum shift each month it would boost my pay to ~90% of a full time trainee’s.

A word of caution, however. Too much locum work, which you’d have to declare on your Form R, may attract the unwanted attention of your TPD and put your LTFT status in jeopardy. It may also clash with the reasons for going LTFT in the first place!

In summary
Locum work can help bridge the shortfall in income, but carries some risk/downside.

LTFT and the NHS Pension

Although reduced take-home pay is probably the foremost financial consideration for those thinking about going LTFT, it has knock-on consequences for your pension too. For a refresher of how your NHS Pension works, see here.

Cost of your pension

As you’ll recall, the cost of being a member of the NHS Pension scheme is a set percentage of your pay. More specifically, your ‘pensionable pay’ is used in the calculations. Pensionable pay is equivalent to basic pay + London weighting if you qualify for it.
The cost of being a member is:
• 9.3% for those earning £26,824.00 to £47,845.99 [FY1 – CT2]
• 12.5% for those earning £47,846.00 to £70,630.99 [ST3 – ST8]
• 13.5% for those earning £70,631.00 to £111,376.99 [Consultant with ≤18yrs service]
• 14.5% for those earning £111,377.00 and over [Consultant with >19yrs service]

A quirk of being LTFT is that your NHS Pension membership cost is based on your pay as if you were full-time, not your LTFT pay!

For example
A full-time ST3 basic pay is £51,107, which would put them in the 12.5% bracket.
An 80% LTFT ST3’s basic pay is £40,814. This would put them in the 9.5% bracket.
However, the LTFT trainee is charged the 12.5% membership cost because that’s the bracket for a full time equivalent!

This seems unfair, and the powers that be appear to be of a similar opinion. The government is planning changes to the NHS Pension from October 2022 (a post dedicated to this will be forthcoming), which should mean that LTFT trainees’ pension costs are in line with their actual salary, not the ‘salary they would earn if they were full time but they’re not.’

Pension accrual

Your pension accrues annually at 1/54th of your pensionable pay. As a full-time trainee only 40hrs/week are pensionable i.e. additional hours are not. As a LTFT trainee, all your working hours are pensionable as you’ll by definition be working fewer than 40hrs/week.

Naturally, working 80%, 60% etc. means your pensionable income is lower, and therefore your pensions accrual is slower. There are too many factors at play to accurately model how much less you’d accrue over the course of a career. Having said that, if all other things were equal then an 80% LTFT trainee would accrue a pension income that is in the region of 80% of what it would be if they were full time.

It makes the pension cost seem a raw deal; paying 100% of the membership cost for only 80% of the benefits. As described, this anomaly should be corrected in the near future.

There are, however, potential benefits to this slower accrual rate. By my calculations, a full-time doctor who progresses from F1 through to Consultant is likely to breach both the Lifetime Allowance (LTA) and Annual Allowance (AA) at some point. An 80% LTFT trainee may avoid the LTA altogether on account of their pension’s lower capital value at retirement. They’ll probably still breach the AA, but later in their career than a full-time trainee.

In summary
• The cost of the NHS Pension for LTFT trainees is currently the same as their full-time equivalent, though this is due to change in October 2022.
• A LTFT trainee’s pension accrues more slowly and they’ll have lower income in retirement
• Slower pension accrual may have benefits with respect to the pensions allowances

Other financial considerations

Maternity Pay

Pay during maternity leave is calculated using your average weekly pay over the eight weeks prior to the 15th week before the expected week of childbirth (see here and here for more information). Although it’s not the most likely scenario, transitioning from full-time to LTFT just before that eight week period could have a deleterious effect, as all your maternity pay would be based off the LTFT salary.

Study Budget

The abolition of fixed study budgets for trainees means that working LTFT won’t affect your ability to pay for courses. The pro-rata reduction in study leave that comes with being LTFT may do so however!

Is it worth it?

The decision to work LTFT is not a purely financial one. Some will see the sacrificed income as ‘money well spent’ for a better work-life balance.

Yet it’s important to avail yourself of all the pecuniary ramifications of going LTFT before taking such a step, lest you be caught with your piggy bank emptier than anticipated.

TTFN,

Mr. MedFI

War – What Is It Good For?

Even the most ardent news-avoider is likely to be aware of 2022’s early bid to outdo 2020 and 2021 as the worst years in recent memory. Russia invading Ukraine is indeed a strong opening gambit.

I found myself in the dark about any financial ramifications of the war. Sadly many conflicts have taken place during my lifetime, though none have occurred during my investing journey until now. What would the invasion mean for my investments? Did I need to make any provisions in my portfolio for the events? Is it time to buy gold bars, pack a rucksack and head into the wilderness?

I’ve navigated the minefield of conflict-associated personal finance clickbait (“top ten tips to maximise returns from the Russia-Ukraine conflict“, or “these three stocks will protect your portfolio in times of war“) and scoured countless articles, videos, tweets and posts on the topic. I think I have my answers.

The Bear’s Market

For war you need three things:
1. Money
2. Money
3. Money

17th century Italian military officer Raimondo Montecuccoli

This succinct summary on the economics of military conflict demonstrate that the financial cost of war has long been known. It therefore comes as little surprise that the Russian economy is taking a serious pummelling following the invasion of Ukraine.

Institutions are ditching any Russia-related involvement at a frenetic pace, while the Russian fiscal bear has been baited by a flurry of economic sanctions. Both Russian equity markets and the Ruble have performed synchronised nosedives off the 10m board, haemorrhaging value faster than you can say экономические санкции*.

The steep decline of the iShares MSCI Russia ETF following the outbreak of war in Ukraine. Source: iShares
The Russian Ruble follows suit, with a collapse in price vs. the US dollar. Source: XE

Russia’s ~$640bn in reserves should come to the rescue. Yet reportedly half of them are held in countries that are restricting access, limiting Russia’s ability to stem this economic exsanguination. Tightening the taps of oil and gas supply may provide some respite, even if only temporarily.

A run on the banks and a doubling of interest rates are increasing the possibility of hyper-inflation, a worrying prospect for everyday Russkis. I do feel sorry for them – I’m sure the average citizen has little appetite for economic hardship so as to indulge the geopolitical desires of their megalomaniacal dictator. In a dark sense, I do quite like the idea of a ₽1,000,000,000 note to add to my international currency collection.

On a personal level, my portfolio’s direct exposure to Russia is a meagre 0.26%. It means I’m unlikely to feel any sting directly from collapsing Russian markets. Equally, any attempt to shed my pitiful Russian exposure would be little more than sycophantic virtue signalling, without any meaningful impact on anything else.

Russia’s economic exports in 2021. Over half the total value is made up of oil and its byproducts, with goods relating to precious metals making up a further quarter or so. Source: Observatory of Economic Complexity

Nobody can truly say how the Russian economy will perform going forward, although turbulence is very much on the horizon. If we heed the advice of another Italian, Machiavelli said “one must never risk one’s whole fortune unless supported by one’s entire forces“. A military academic is quoted as saying Russia has [only] 75% of its conventional military forces in Ukraine. In that case, it sounds as though Russia risks losing big.

The rest of the world

While the Russian economy collapses in on itself like so many matryoshka, what about assets globally?

Many commentators are predicting further rises in the price of various commodities, owing to the economies of Russia and Ukraine being largely based on commodity export.

Russia’s pivotal role in oil production (10% of global total) may see knock-on effects that will increase energy prices and consequently inflation. Certainly the price of petrol in the UK is continuing to rise; £2/litre doesn’t seem an unrealistic prospect at present. Although Russia only provides 5% of the UK’s natural gas, there may be a further hike in gas/electricity prices too.

A sudden rise in value of Vanguard’s Global Bond Index Fund at the end of February, as investors seek safe investments in potentially uncertain times. Source: Vanguard

On the back of this, some have suggested good bets going forward include:
• Commodities such as oil and precious metals (for obvious reasons)
• Clean energy equities (as nations seek to circumvent reliance on Russian oil/gas) and
• Electric vehicles (Russia provides a sizeable chunk of the global supply of palladium & platinum for catalytic converters)

I’m not sure this is necessarily true. I will, however, be intrigued to see a retrospective analysis of ESG fund performance during this time period once all is said and done. Will they have outperformed classic funds because they tend to eschew ‘sin’ sectors such as oil & gas production, mining and weapons production? Or suffered because of it?

Unsurprisingly the traditional ‘safe havens’ of gold and bonds are seeing some influx. For example, the price of gold has risen by about £100/oz. in the last month – the same increase in price as the whole of the preceding year. Bond yields have also fallen as investors seek safer options.

Tradition would also dictate that riskier assets lose value as investors rein in the risk during times of uncertainty. Cryptocurrencies are a good modern-day example, although the price of Bitcoin has actually increased about 20% in the past month. Perhaps its use as a bypass for classic financial routes is making it an attractive tool for the economically hamstrung Russian, or the Ukrainian devoid of functioning banking infrastructure.

In times of uncertainty one might expect equities to be a poor investment choice as investors choose safer assets. This analysis from historical wars belies that. Source: CFA Institute

That individuals behave according to type is hardly Earth-shattering news. Overall I’m sceptical of anyone trying to tell you that X or Y is a good investment in the current climate. Changing your asset allocation based on the news cycle seems asinine to me.

It’s akin to running a marathon, but deciding on mile twelve that because you passed a runner dressed as Mr. Blobby you’re suddenly going to cartwheel the next mile, sprint the following two and then fail to finish because you’ve expended all your energy on this bizarre new strategy.

Long term outlook

Perhaps counterintuitively, it would seem that conflicts have little intrinsic impact on stock markets. Given that most studies analyse the impact on the S&P500 index, how applicable the results are to global equities is unclear.

The average drawdown following geopolitical events was just 5%, and the average time to recovery less than two months. Source: LPL Research

There is, naturally, still a significant degree of uncertainty and nervousness about the future. Will there be a long, drawn-out conflict that sucks other nations in? Will there be nuclear escalation? Will China decide it fancies some of this annexing lark and invade Taiwan? Reassuringly, the data seems to imply that war, in and of itself, is not a lead weight around economic ankles.

 
A similar analysis found that the average performance of the S&P 500 a year after various conflicts was +8.6%, and positive in 75% of cases. Source: Truist

Rather, it is the sequelae of conflict that are likely to determine whether there’ll be longer-term detriment to equity markets. How things will pan out in this regard is really anyone’s guess. As I frequently say to my patients, if I had that sort of predictive power I’d play the lottery. Which may well be what you’re doing if you egregiously try to time the market or engage in some rogue new investment strategy based on short-term events. Put down the microscope; look at the bigger, long-term picture again.

What to do?

Some things are happening that we’d expect (rising commodity prices, influx to ‘safe’ assets) and some things perhaps aren’t (e.g. crypto rally, equity stability). It makes engaging with the furore seem futile; attempting to cherry pick winners or buy market dips are hazardous strategies at best. The historical evidence would suggest the conflict is unlikely to have material impact on global equities in the long-term, which is reassuring.

Therefore, the best advice I read was the same simple truths one comes to expect when following a passive investing strategy. Stick to your long-term plan, stay the course. Perhaps that’s disheartening to those hoping to make a quick buck during any war-induced economic uncertainty.

The Plain Bagel makes the excellent point that your approach to risk should be proactive, not reactive. If you’ve already plumbed the chance of short term economic disruption into your investing strategy, then you need do very little when it occurs.

Yes, the question “what changes should you make to your investment strategy during a conflict?” can be answered by another person from history. This time, it’s 1960’s Motown artist Edwin Starr we have to thank:

Absolutely nothing.

TTFN,

Mr. MedFI


*Economic sanctions

Sentence: Commuting

In February, as part of the meandering migration of a doctor on a training programme, I moved to a new hospital. Such enforced nomadism brings an emotional blend of weary dissatisfaction, ‘first day at school’ nerves and curious excitement.

The upheaval brings with it novelties; a new environment, new systems, and new people. Usually a new place of work also means a different driving route to etch into the memory. This time, however, the silver lining is a big improvement in my commute.

The cost of commuting

The word that springs to mind when I think of the cost of commuting is petrol. One of modern living’s evil necessities, the black gold byproduct has reached record prices since the most recent nadir of May 2020.

The cost of petrol and diesel over the last ten yers. Since May 2020, the price as increased by nearly 50%. Source: RAC Foundation.

Based on distance, vehicular efficiency and price, petrol has probably cost me between £1,000 and £1,500/yr in recent times. I already baulk at such a figure, before remembering that’s merely the fuel.

Parking is another thorn in one’s side. On principle, I object to the idea of paying to park at my place of work. It means that I tend to leave home earlier than I would have to, park for free on residential streets near the hospital, then walk in. The habit has probably saved me £500/yr or so in parking fees. Sure it costs me some minutes each day, and leads occasionally ‘drowned dog’ status if I forget the brolly, but it’s worth it in my opinion.

Lest we forget that driving to work is predicated on owning a car, insuring it, paying road tax, MOT, maintenance, suffering depreciating value etc. These are costs not wholly derived from commuting, but are present nonetheless.

Mitigating monetary cost

In a bid to mitigate the cost of my commute, I previously ran the numbers on using the train to commute instead of driving. The upshot was:
• Even with a railcard (for which I’m now no longer eligible), the cost of season tickets was greater than that of driving
• Using ad hoc ticket purchases was equally dear, if not more so
• A 3.8% increase in rail fares massively outstrips the rise in doctor’s wages (which is actually a real-terms pay cut, again) even if not RPI/CPI
• There are some hospitals in my region I simply cannot commute to via direct train
• The timings of the trains are often inconvenient, leading to ridiculously early arrival at work and long periods waiting for trains on the way home
• There is a significant chance of the train being cancelled/delayed/bus-replacement-serviced, adding to the timing inconvenience and, if alternative modes of commute such as last-minute taxi are sort, even more expensive.

No, the train is neither more convenient, nor cheaper, than driving. I suppose it carries a ‘green’ bonus though.

The cost of commuting to work is offset by the ability of doctors in training programmes to claim excess travel expenses. That is, for every mile of commuting (car, train or cycle) over 17miles each way you can claim back part of the cost at the ‘nationally agreed reserve rate’. This contractual entitlement is, I suspect, under-utilised.

Time dies when you’re stuck in traffic

FI(RE) can often seem like a community obsessed with money. I put it to you that it’s actually a community preoccupied with time. Recognising that our lives are finite, FI(RE) seeks to maximise the amount of time in which we’re free to do what we find value in.

The time cost of commuting is phenomenal, and I say that as someone whose travelling time has probably been fairly average. Those minutes and hours spent to’ing and fro’ing are simply lost. It’s no wonder working from home has been so popular. Imagine an extra two hours of time each day! Time you’d otherwise be spending stuck behind the wheel in traffic. Or jammed in with the other sardines on the train.

That lost time is damaging. Perhaps not quite as detrimental as that lost to sleep debt, but it’s far from beneficial. A longer commute comes with worse job satisfaction and more psychological strain. One article suggested a twenty minute increase in commute time is as detrimental as a 19% pay cut.

Four wheels bad, two wheels good

My new journey to work has seen me swap the emission-generating automobile for the humble bicycle, in what I can only describe as a win-win-win:

I’m building health. I’m still pushing pedals, but in a far more salubrious fashion than accelerator, clutch and brake.

I’m saving time. It’s a moderate reduction, but a reduction nonetheless.

I’m spending less. It’s difficult to pin the figure down exactly, though I estimate it’ll be the better part of £1,000/yr.

As the days lengthen and the weather improves, I expect the benefits of my new commute will only increase. If I’m honest, it’s the financial aspects that I’m the least excited about. Driving felt like empty time, a life lost on motorways and in traffic jams. Cycling feels productive, a pleasant pedal each morning and evening, an activity I’d choose to do rather than one I’m forced into. The transition sees my previous sentence, hours spent driving to and from work, well and truly commuted.

TTFN,

Mr. MedFI

Animal Instinct

The last couple of years have seen new investors flock to the market. The combination of pandemic-induced savings and the ennui of working from home is perhaps primarily responsible. Easy access to low-cost or free-to-trade investment platforms is certainly playing a part; investing has never been easier for the individual. The recent media motif of ramming the increased cost of living down your throat has maybe made a few more people wake up and smell the investing roses. Or should that be tulips?

Middle of the pack

The annualised returns on asset classes over the past twenty years. Source: JP Morgan

Fortunately for all the new kids on the block the average investor, mediocre though they are, has outperformed inflation over the past twenty years.

The bad news is that UK inflation is at its highest level since the early 1990’s. Average performance simply may not cut the mustard; there’s a strong prospect of real investment losses even if there’s nominal gain. Many will simply Dunning-Kruger themselves into believing they’re the bees knees; their strategy will prevail. Yet, much like the lame caribou that lags behind the herd, if investment returns are hamstrung they risk being devoured by predators. Predators such as that indefatigable bastard inflation.

UK inflation since 1990. Bar a brief rise to ~5% around the GFC, inflation has remained ~2% for the majority of three decades. The sudden increase to nearly 6% has put the cat amongst the pigeons.

To make matters worse for investors new and old, nascent 2022 has hardly been kind to the markets. The oft-vaunted S&P 500 is down the better part of 10% in the past month. Most major cryptocurrencies are nosediving too, with over $1T of value lost in recent weeks.

The performance of the S&P 500 over the past three months. It hardly makes for happy reading, especially the sharp sell-off in recent weeks. Source: Yahoo Finance

Outright panic has not yet set in, though if the market trend continues I expect some cages will be truly rattled. So, what to do?

Stop nature taking its course

The natural instinct in the face of such danger is to flee. You’d abandon a sinking ship, wouldn’t you? Those who stay to see whether the vessel resurfaces may end up rather soggy. Conniving snakes would encourage you to follow this instinct when it comes to your finances, hissing at you to ‘sell, sell, sell!’

Yet everything we know about retail investing suggests selling in a downturn is a dubious strategy at best. You’ll probably get the timing wrong. You’ll probably crystallise losses by selling too late, then miss out on gains by buying back in too late as well. The dangers of attempting to time the market hardly bear repeating, as they should be well-ingrained in any investor’s modus operandi.

Performance of the biggest cryptocurrencies by market cap. Other than ‘stablecoins’ USDT and USDC, most major cryptocurrencies have taken a sharp dip in value over the past month. Investors are fleeing risky assets; for all the quasi-religious fervour that surrounds cryptocurrencies the sell-off demonstrates how many are merely invested for a quick buck or two. Source: CoinMarket Cap.

If you’re feeling tempted to sell in the face of the current drawdown, which is a minor blip in the grand scheme of things, then I’d question the fortitude of your investing psychology. I suspect many of the new investors in recent years have spent their time crafting beautiful portfolios, or have blindly followed others into a passive investing strategy like so many sheep. Unfortunately, few will have done any research about behavioural investing, done their own due diligence on risk, or thought about how to act when markets are in turmoil. That is, few will have spent time protecting their investments from their biggest threat: themselves.

A post on the UK Personal Finance subreddit last week. If the markets continue to tumble, I suspect we’ll see more questions like these popping up. Source: Reddit

We’re not talking about guacamole

If engaging with your impulses in times of crisis is likely to be detrimental, is the reverse true? Should one ‘buy the dip’?

There are certainly those who would encourage you to do so. ‘Buy, buy, buy!’ bellow the bulls. Said call to action has all the panache of a DFS advert. “Fire sale”, “cheap stocks”, “discounted shares”, “limited time only” etc. Bait designed to hook our primordial brain in the same way as the bright, yellow, “buy 2, get a 3rd free” label in the supermarket.

Although the action is different, the outcome from investing more in a falling market may be similar. You’ll probably get the timing wrong. You’ll probably buy too early, watch your investments fall further and then panic, selling before any (meaningful) gains have been made. Pensioncraft’s recent video runs the numbers, confirming a ‘buy the dip’ strategy is only suitable for nachos.

Hibernation

If neither selling existing investments nor sinking more money into the market are likely to lead anywhere rewarding, what’s the best option?

Burying your head in the sand is, in general, not a fantastic approach. However, in these circumstances it’s probably not the worst one to take. Skyrocketing inflation and rising cost of living? Doesn’t matter, you’re oblivious to it. Investments taken a hefty hit? Doesn’t matter, you haven’t checked them. In a bear market, perhaps the best thing is to do as the bear does and simply hibernate. Tune out, hunker down and see what the world is like on the other side.

If you’re already employing a dollar-cost-averaging strategy, drip-feeding your money into the market each month, then continuing with this chelonian approach is probably most sensible. Let the hares have their panic and drama; we know the tortoise will come out on top in the end.

No room to swing a cat

This ‘see no evil, hear no evil’ approach may seem too blasé for all but the nailed-on passivistas. Yet if you’ve reached a state of financial optimisation; if you’re debt-free, saving as much as possible (without compromising on things that bring your life quality) and investing said savings via tax-free or -deferred accounts (namely ISA’s and SIPPs), then what can you do? It doesn’t leave much room to manoeuvre. Doing nothing may be the most sensible, or perhaps least insensible, option.

My own plan is to ignore the noise. To block out the sound of yet another market cycle. To pay no heed to the ‘buy the dip’ proselytising or panic-selling evangelists. I’m essentially following the path of least resistance, or certainly the one of least deviation.

In short: I’m heading to the Winchester, having a pint, and waiting for all of this to blow over.

TTFN,

Mr MedFI

2021 Predictions Review – Did They Fare Better?

Last year I had a bit of fun seeing how the unlikely predictions of Danish investment bank Saxo Bank stacked up against the realities of 2020. Their score of 1.5/10 last time around was forgivable in a year where we were unexpectedly rocked by Covid-19. Yet the novel coronavirus ain’t so new anymore, leaving their 2021 predictions without an excuse for another poor performance…

1. Amazon goes international, literally

Wrong!

Amazon is worth more than 90% of global GDPs, but failed to acquire Cyprus as was foretold. The behemoth company did acquire MGM in 2021, but haven’t gone full Bond villain by buying a whole country. Yet.

Amazon’s market capitalisation eclipses the GDP of most nations, although they’ve yet to add a sovereign state to their shopping basket. Perhaps they’re waiting for a sale? Stolen from this article.

2. The French invite the Germans in this time

Wrong!

The crumbling French economy was supposed to see Les Français inviting their German neighbours over to discuss an ECB bailout. Institutions such as Air France and Eurostar have required bailouts in 2021, yet the beleaguered economy has just about held it together. Public debt has been stably high, remaining at 115% in 2021 – shy of the >120% predicted.

3. Something, something, something Blockchain

Wrong!

Fake News is a malicious chimaera of digital misinformation, and blockchain technology was pegged as its Bellerophon. Unfortunately the hero is still putting on his armour, as distributed ledger technology hasn’t quite slain the beast just yet. Verification of news sources is one of the (many) mooted uses of the power of the blockchain, though remained more theoretical than practical in 2021.

4. Digital Yuan torpedoes US Dollar

Wrong!

China’s government-sponsored digital currency, the eCNY, has caused less of a stir than predicted. True, the US dollar weakened against the Renminbi during 2021, but not drastically so. Concerns persist over a Chinese financial crisis, triggered by defaulting real estate giants Evergrande, and there was a government-led crackdown on technology companies that in total wiped ~$1trillion from their value. Yet apparently 10% of the population already have wallets for the new CBDC, a promising statistic if it’s not hyperbolic propaganda.

5. Fusion technology leaves clean energy green around the gills

Sort of!

Fusion technology hasn’t made the leaps and/or bounds that were predicted and we’re still waiting for the utopian energy-abundant society it will bring.

Despite this, clean energy equities have certainly had the wind taken out of their…turbines this year. This seems anomalous given that:
1. Most equities have enjoyed huge gains this year
2. Green is still the new black.

The performance of the iShares Global Clean Energy ETF during 2021 left a lot to be desired.

Paradoxically the burgeoning popularity of conscientious investing may be partly responsible for this as the space becomes increasingly overcrowded:

Overcrowding of efficient energy indices rivals that of tech before the dotcom bubble burs. Source: Financial Times.

When the bubble pops will we still be predicting a bright, orange green future?

6. UBI decimates concrete jungle

Wrong!

Covid-19 and WFH lit the touch-paper on the relative urban exodus. In August, prime London commuter location Winchester became the most expensive UK city to buy in. Indeed my own, significantly smaller, town saw an influx of cash homebuyers from the city, swapping their studio shoebox in the big smoke for a sprawling mansion in the sticks.

UBI is invariably successful when implemented properly but it’s yet to become a significant driving force, certainly in the UK. Shorting REITs, as was recommended by the predictors, would have left you out of pocket for sure.

The FTSE EPRA Nareit UK Index has had a strong performance in 2021, gaining nearly 20%. Source: Financial Times

7. Dividends for all

Wrong!

Although it’s a lovely idea, the mooted Citizens Technology Fund and its Disruption Dividends have failed to come to fruition. The aim of the fund would be to “avoid deepening injustice, but also political upheavals, social unrest and systemic risk“. Unfortunately it feels as if all of these issues have gotten worse in 2021, not better.

8. Vaccines save the day, for some

Sort of!

The advent of Covid vaccines did indeed boost more than just immune systems. The UK economy’s recovery continued (albeit in slow-mo), unemployment fell by ~1% during the year and inflation has soared from <1% to nearly 4%. The rise in corporate bond yields was more blunt needle than sharp spike, but they rose nonetheless. If you had shorted junk bonds as recommended you would have come out on top, certainly if you timed things correctly with Omicron’s entrance stage left.

9. All that glitters is not gold

Wrong!

A bumper year for everyone’s second-favourite shiny metal failed to materialise. Silver price actually decreased in 2021, rather than the 100% increase that had been predicted.

Silver price (GBP) decreased in 2021, as did those of other major precious metals. Source (obviously): BullionByPost.

It’s been a shoddy year for precious metals all-round, perhaps unsurprisingly given the great return on equities in 2021. However, the murmuration over equity overpricing, bubbles and dotcom comparisons grows louder, so a sudden migration to gold & friends could well materialise if (/when) the stock market turns south.

10. Emerging markets – assemble!

Sort of!

The technology trifecta (techfecta?) of satellite-based internet tech, fintech and drone tech was supposed to ignite the rocket fuel, vastly accelerating growth in the emerging markets. 

Instead the engine spluttered and cut out in low orbit, and prices have come tumbling back down to Earth. The performance of various Emerging Market equity ETF’s has been less than stellar, and EM currencies have been fluctuant at best.

Vanguard Emerging Markets ETF performance in 2021. (Tracks the FTSE EM Index)
iShares Emerging Markets ETF performance in 2021. (Tracks the MSCI EM Index)

The prediction does, however, reference the “ongoing revolution in fintech payment and banking systems which have already given billions of people access to the digital economy via their mobile devices“. Bitcoin adoption as currency in El Salvador was certainly revolutionary, so I’m going to award a half point here!


Final score: 1.5/10

Verdict: As consistently bad as the French econcomy. Très bien!

TTFN,

Mr. MedFI

Two (by two)

This month marks the blog’s second birthday. The ‘blog in review’ post is perhaps a bit cliché, so I’ve jazzed it up by shoehorning my musings it into a sort of Noah’s Ark theme. Why not?

Owls and Snakes

(Personal) finance is a fascinating world; an endless warren of information. I’ve engulfed media of most any description over the past few years: blogs, vlogs, videos, podcasts, books, internet forums, websites.

After threshing out a fair amount of chaff, I’ve enjoyed some truly brilliant content. Some of the creators I follow have a far greater understanding of the world of finance, economics and investing than I ever will. Others are simply individuals with a penchant for personal finance and an internet connection, not unlike myself.

These wise owls have been a guiding presence, both as an investor and content creator. As I continue to grow from the timid blogger who was convinced nobody would ever read a word he wrote, I offer my thanks to all those who publish such excellent material.

I’ve fortunately not come across too many snakes in the financial grass. Perhaps it’s because I eschew many of the social media platforms on which low-quality financial content can be found. I think that Hanlon’s Razor applies to most of the low effort, partial or otherwise misleading content out there. Yet with more and more financial content being chucked around the inter-webs we have to do our due diligence to ensure we don’t become scammed, intentionally so or otherwise. It’s as true for me as for anyone else.

Bears and Bulls

Two years is nothing in investing timeframes, but the performance of major indices over that period has been mostly generous. Many investors will have benefitted from the rising of the market, myself included.

It’s psychologically reinforcing to see the impressive returns on investing, certainly when compared to holding cash. It goes a long way to smoothing out some imprinted ideas about investing i.e. that it’s a gamble and losing money is a near-certainty. These perceptions run deep, either due to the sustained warnings from the powers that be (‘capital at risk’ etc.) or individual experiences (e.g. extended family losing out significantly in the 2008 GFC).

The performance of the FTSE Global All Cap Index (red line) and S&P 500 Index (blue line) during the lifetime of MedFI. Source: Yahoo Finance.

Such bullish times leave me in no doubt; investing isn’t a frill for those with more money than sense. It is the way to save and grow money for anything beyond the immediate or short term.

It hasn’t been all ‘up’ in the past two years, however. The Covid Crash of Spring 2020 was a brief blip in an otherwise steadily rising market. I’m happy to have experienced this dip early on in my investing journey, even if it was only transient.

Although my mental fortitude held up easily during on that occasion, I believe it’ll undergo much sterner tests in the future. Not only because there’ll be deeper and/or longer downturns in future, but also because my invested capital will be much greater. It’s potentially easier to watch £1,000 become £500 than see £100,000 become £50,000. There will be another market correction at some point. I just have to hope that my future self is sensible enough to not react.

With a growing number of investors, part of me worries that a lot of people are in for a nasty shock when the inevitable downturn happens. Perhaps I’m wrong, but I suspect that many of the novel investors have focussed solely on eking out maximum gains, crafting portfolios designed to rake in those sweet returns.

How many have thought about the behavioural side of investing? How many have mentally prepared for the fall to come? How many are braced to not react when things get tough? I would hazard a guess that it’s not too many, but I’d happily be proven wrong.

Quick Foxes and Lazy Dogs

It’s not all been ‘slow and steady’ in the markets for the past two years. The burgeoning interest in cryptocurrencies has brought with it a series of yo-yoing prices. Archetypal cryptocurrency Bitcoin has increased in price by ~600%, while second in command Ethereum has seen a rise of nearly 2,500% over the same period. A number of smaller cryptocurrencies have seen ludicrous changes in value.

Bitcoin price (USD) from November 2019 – 2021. Source: Coindesk.

‘Pump and dump’ schemes for such cryptoassets, the infamous GameStop/WallStreeBets/Robinhood affair and similar events are other examples of people attempting to make quick bucks rather than following a more steady approach. Undoubtedly many will have succeeded in doing so. I suspect that just as many, if not more, will have felt the cruel sting of loss instead.

I can understand the temptation, yet it’s one I’ve mostly resisted. The thrill of winning big is great, but only just about compensates for the ulcer-inducing fear of losing it all. The lazy man’s, Bogle-esque, investing approach is no guarantee of success but it certainly feels a lot stabler. Getting rich slow is fine by me.

Hares and Tortoises

These varied approaches to investing parallel approaches to Financial Independence. After having decided to pursue FI±RE I hared out of the blocks. I slashed my expenditure harshly and cranked the frugality up to 11. In the time since my attitude has mellowed.

Perhaps an element of that is a worn off novelty, or an unsustainability. I think however it’s mostly that I’ve decided it’s not just about sprinting to the FI finishing line. Quality of life in the here and now is important, just as quality of life in the future is. For me, it’s about finding the middle path between those of wanton expenditure or strict asceticism.

Copy Cats and Parrots

It’s readily apparent from the FIRE Blog Cemetery that even the big names in the PF blogging world don’t last forever, never mind the scores of smaller ones that rapidly fizzle out like so many sparklers.

Personal finance content creators are a dime a dozen:

“with hundreds of investing blogs having published thousands of articles over the past decade, there’s a lot of repetition around.”

Monevator

MedFI is medically themed, but there are a number of other finance blogs written by doctors so it’s by no means unique. Why then, I ask myself, has MedFI lasted these two years? I suspect that there are a few of reasons.

I don’t have an upload schedule, which keeps researching and writing as more of a hobby than a chore.

I’m not driven by either views/subscribers (which I’m sure pales in comparison to others) or blog income (negative to date). I’m sure I could increase the former by engaging in clickbait ‘Buzzfeedism’ and the latter by hosting adverts on the blog. I have zero intention of doing either.

I try not to wax lyrical on the same old tropes, turning over oft-repeated truisms. If I do write about a common topic I at least try and bring some new angle or idea, e.g. emergency funds or the ‘invest vs. overpay mortgage‘ question.

I believe that the blog has been helpful. The NHS Pension Series is my most popular work and even if it has only helped a handful of people better understand their money in retirement then it’s done its job well. I hope that it, alongside other resources for NHS professionals, will continue to help educate my colleagues in financial matters.

Overall I think it’s because I simply still enjoy it.

Unicorns

I have no designs to put down the…erm…keyboard – what does the future hold for MedFI? Nothing mythical, nothing unreal, nothing fanciful or fictitious. I will endeavour to continue doing what I already try to do.

To publish and promote well-sourced, evidence-based, impartial and balanced content that will push only one agenda: helping us understand our finances not just so as to fatten our wallets, but enrich our lives too.

TTFN,

Mr MedFI

ESG Cop Out

I’ve recently been re-examining my investing strategy though emerald-tinted lenses.

It’s over a year since I first researched ‘greener’ investing and it’s an investment motif that continues to gather pace. As of this summer, ESG funds are the fastest growing segment of the European funds market.

Last year I found some evidence that ESG investments, although pricier, may not lead to significant underperformance vs. traditional funds. Although the space remains young, a recent comparison of ESG and non-ESG fund performance reinforces this conclusion.

And yet, I’ve not altered my investment strategy in this regard.

Greenwashing

I think my biggest concern with ESG finance is greenwashing; the fad of pinning ‘green’, ‘SRI’, ‘ESG’, ‘choice’ or any other euphemistic label to an investment in exchange for higher fees and/or worse performance. I suppose I don’t like the idea that I’m being taken for a fool.

For example on the savings front, NS&I launched their Green Savings Bonds earlier this Autumn. They come with a three year, fixed interest rate of 0.65%. Alternative fixed-rate products come with rates of about 1.8%.

Yet you can reconcile yourself with the pitiful interest rate because, “the Government will publish details about how the money is being spent and what the environmental benefits are, so you can see the difference you’re making.

The areas that HM Treasury will spend funds raised through Green Bonds and Gilts on:
• Clean Transportation
• Renewable Energy
• Energy Efficiency
• Pollution Prevention and Control
• Living and Natural Resources
• Climate Change Adaptation

Digging a little deeper, the money raised from the bonds will actually “be held in a general account” and the treasury “plans to allocate an amount equivalent to the proceeds raised from Green Savings Bonds, to its chosen green projects, within two years.”

Perhaps I’m overly sceptical but it seems a plan that can easily be weaselled out of, as is the Government’s want (/modus operandi).

False advertising

What about pensions? Being green may help the planet survive long enough for you to enjoy your (early) retirement, so a responsibly invested pension sounds reasonable.

In a recent trip to the big smoke, I saw an advert for an ‘ethical pension’, replete with language intended to sink its tenterhooks into the ESG-leaning individual. “Feel good about your future”, it said, “stay true to your values” and “make your pension greener”.

I took a peak under the hood of these ethical pensions vehicles. I honed in on the 90% equity (a.k.a “adventurous”) fund. It contains a motley mishmash of other funds, with a wonky geographical weighting (UK weighting 30-35%).

What about its ESG credentials? Well the fund factsheet states that some components may still invest in companies associated with nefarious activities, provided they earn no more than 10% of their profits from said activity. As such, the provider “cannot guarantee that our Plans won’t contain some degree of the activities we aim to exclude“! Oh.

The holdings within the fund are hardly ethically squeaky-clean and, with a 0.6% platform fee and a 0.7% fund fee, its significantly pricier than other (ESG) investment/pension fund options.

Clear as mud

This mislabelling of investments partly stems from the broad variety in ESG classifications, ratings and regulations. Various companies have different methodologies for calculating ESG ratings – a lack of consensus is a hindrance, if not outright harmful.

The FCA, in their update on the guiding principles for funds within the sphere, say that many fund applications “are poor-quality and fall below our expectations“. They elaborate:

“fund applications in this area often do not contain sufficient, clear information explaining their chosen strategy and how this relates to the assets selected for the fund.

Their conclusion that “consumers find it difficult to assess whether authorised funds meet their needs and preferences…there is potential to undermine trust and deter consumers from this segment of the market.” about sums up my own feelings on the matter.

Stick

For any individual, their investment choices represent just one aspect of their life that can be altered for environmental reasons. So call me a planet-hating, returns-chasing, capitalist pig, but at this juncture I’ll focus on optimising others rather than change my investments.

For, at the end of the day, I’m not looking to smooth over viridescent guilt by chucking money at an ESG-labelled fund. I want to know that my mouth and my money are doing actual good, not paying sycophantic homage to ESG principles.

I have no doubt things will improve in the realm of ESG investing, although wonder whether, much like the battle with our self-inflicted climate woes, it may be too little, too late.

TTFN,

Mr. MedFI

King Without A Crown

On our final night of holiday we basked outside in the warm evening air, soaking up the bustling atmosphere of the square and enjoying a cerveza . During the natural lulls of a conversation that ebbed and flowed, I had a chance to survey (read: people-watch) the co-patrons of the small café.

In one corner two friends chatted animatedly in fast-moving Spanish. At the adjacent table a German and an Argentinian, both middle-aged, flirted in accented English. A second romance? A fling with infidelity abroad? Further back a teenage girl sat moodily with her parents, staying at the table only long enough to photograph a garish cocktail for Snapstagram before meandering off into the bustling plaza.

The elderly couple next to them had barely said a word to each other as they nursed their drinks. La cuenta arrived and the gentleman fished into his pocket. He withdrew… coins. A lot of coins. He began counting out the requisite amount, before depositing the remainder back into the pocket from whence they came.

Long live the king 

I smiled whilst observing the old man and his coins, and thought of our own brushes with cash during the vacation. We were armed to the teeth with cards that functioned fee-free abroad. Mrs MedFI hadn’t been keen to bring any physical money, though I had insisted on dusting off the store of travel Euros I keep for just such continental occasions. 

Lo and behold our very first monetary interaction after arrival – the airport bus – required cash. Several groups of disgruntled tourists, who had banked on being able to use their cards, slunk back to the terminal to find either a cash machine or a taxi. One crisp €10 note later I boarded, all the while suppressing a grin and an “I told you so”.

The cash trend would continue for buses, trains and taxis. Paper and metal triumphed over plastic. I thought of the investing cliché and mused that, certainly when travelling abroad, cash remains king. 

Usurped

Yet the regal asset is in sharp decline. The graph of decreasing cash payments tells a story you’ve already heard. When did you last handle banknotes? When did you last pay in coins? The pandemic, and concerns about the hygiene of cash, have accelerated a trend already driven by convenience, cost to retailers and concerns about cash-related criminal activity (see India c.2016).

The decline of cash payments in the UK. Source: UK Finance (June 2021)

I remember my dad routinely withdrawing enough cash for the week and stuffing it into his wallet. Now I only visit the cash machine to pay for my haircuts, as well as keeping a token £1 coin handy for the supermarket trolley. For everything else, there’s a card. 

Smash piggy bank in case of emergency

Although petty cash is dying, cash remains a somewhat viable asset. Little, if anything, surpasses it in terms of liquidity, accessibility and lack of volatility. As such it carves out its portfolio niche predominantly by being Mr. Reliable.

It’s what you turn to when disaster strikes, or even for just short-term purchases. Much like a loyal, albeit rather arthritic, pet dog, cash isn’t going anywhere fast.

Over time, however, the inexorable erosion of cash’s purchasing power by inflation makes it poorly suited for much else. Keeping (non-emergency) cash beyond the short-term represents a significant opportunity cost. Indeed, pitiful interest and rising inflation rates make holding more than the bare minimum in cash an exercise in financial self-flagellation.

Mild salsa

Yet I not infrequently read about people aiming to ‘buy the dip’. Hoping to engage in some egregious market timing, some will build up a cash pile in order to strike while the iron is icy cold, buying up ‘discounted’ assets during a downturn.

You could point to Buffet’s Berkshire Hathaway as an example of this – they have nearly $150bn in cash on their balance sheet. Other S&P 500 giants are similarly laden with cash. Such behemoth companies are poor comparators for the individual investor however.

It’s not all corporations though. Alpha antagonist Ramin Nakisa recently published a ‘Market Crash Shopping List’. Perpetual murmurings of an impending market crash may persuade individuals to stockpile cash ahead of a purported fire sale.

It’s a strategy I don’t personally subscribe to. I think, certainly for the ‘amateur’ investor, such puerile market timing and speculation distracts from more concrete goals: filling your ISA allowance, increasing tax efficiency through pension/SIPP contributions and maintaining a high savings rate.

Constitutional monarchy

Much like the British Monarchy itself, extant banknotes and coins may soon become largely ceremonial. Perhaps only the purview of collectors like myself. They are likely to still be favoured by those of a certain generation, yet will be increasingly shunned by newer iterations of consumer. There’ll be a fair clamour for scrapping such money altogether.

Physical money is becoming extinct. Perhaps the impending ascent of central bank digital currencies will kill off any remaining specimens. In the future there’ll undoubtedly be a society that is, for all intents and purposes, cashless. In my lifetime? Quite possibly.

For the time being I’ll keep ‘foreign currency ± USD’ on the travel packing checklist, as cash has proven its utility abroad time and time agin. Just don’t forget to pack the Afghani’s if you end up in Taliban territory.

TTFN,

Mr. MedFI