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

Not A Clue

I’m a sucker for a fiction novel. Sci-fi, mystery, fantasy or thriller, it doesn’t matter – I’ll read it. Some of the novels I read are masterpieces within their genre; the Conan-Doyle’s, Christie’s and Asimov’s of the literary world. Others are at the ‘trashier’ end of the spectrum; airport novels for the most part.

The problem with the latter is that most of the stories are too similar, the same contrived plot dressed up in different clothes. The vague, familiar nature of the blurbs can make it difficult to establish whether you’ve actually read the book before. Indeed my mother, who shares this fiction predilection, often buys the same book multiple times without realising it.

I usually alternate said fiction with non-fiction, and in more recent years another genre has entered the rotation – the financial.

I’ve read many of the household names of the personal finance literature. Although each book has its own individual take on aspects of investing or personal finance, in many respects they suffer the same issue as those trashy fiction novels. They’re all so similar. Too similar. Beating the same rhythm on the personal finance drum. 

And now, for something completely different

It was, therefore, with interest that I recently read the latest edition of The Zurich Axioms: The Rules of Risk and Reward Used by Generations of Swiss Bankers, which was initially published in 1985.

I won’t dive into a deep dissection of the book, though in essence it describes axioms (self-evident truths) designed to help the active investor succeed in their speculation. It functions on the oft-repeated premise that the goal of investing is to “get rich”. I would argue that in the current clime, where near-non-existent interest rates are hopelessly outstripped by inflation, investing may merely be the only way to avoid becoming poorer, never mind getting rich.

The guide may seem ill-fitting for the ‘casual’ investor who’s following a Bogle-esque strategy, though reflecting on what I had read afterwards, what made the book so illuminating was just that: it was different.

It challenged the truisms and cliches of investing that I, and I’m sure many others, take as gospel. The holy trinity of diversification, low fees and passive indexes. When your investments lose value you avoid the sin of selling – ‘do nothing‘ the congregation chants as the first hints of a bear market approach. 

Alpha comes before beta

The gospel according to the Swiss states that you must belie these restrictive behaviours if you’re to make it large through speculating:

Why only invest what you can afford to lose? Risk-free get-richism is a fallacy. How do you ever hope to win big if you bet so small? 

Why hold onto nosediving investments? Set a loss threshold and sell when it is reached.

Why hold onto skyrocketing stocks that will invariably peak then crash? Set a gain threshold and get out while you’re ahead.

Why diversify, spreading yourself thinly? Instead pick your perceived winners and back those few strongly. 

I won’t engage in a soporific riposte, as I know there are logical counter-arguments to many of these attitudes. Attitudes that are not wholly suitable for the time-poor, amateur investor hoping to ride the passive wave to some meaningful return on investment.  

Whose side are you on? 

I’m not going to suddenly join the alpha cult and stake my carefully curated assets on a handful of dicey self-selected stocks. 

The value in the book was from having my viewpoint, my philosophies challenged. It’s healthy to engage in such self-doubt and introspection. Even it leads to no change in behaviour, the process is still instructive.

Amongst internet echo chambers and a social media sphere all singing from the same hymn sheet, a different tune can be hard to hear. Those that sing them are often drowned out by a barrage of vehement vitriol. There often appears to be no middle ground. 

Cryptocurrency is the germane example. You’re apparently either a crypto zealot who drank the KoolAid and will suffer by purchasing useless nothing. Or you’re an old fogey who can’t feel the sands shifting under their very feet as the decentralised revolution gathers pace. Is there anyone in between?

One axiom to rule them all. 

There’s a phrase that I often think of whenever I engage in thought or action in investing or personal finance:

I have no idea what I’m doing

I think this is my own axiom. My own self-evident, incorrigible truth. I have no idea what I’m doing.

This mantra helps to keep my grounded. I’ve learnt a lot about financial matters in the pay few years, but I’m no guru. Yes I’ve shared bits of my research on aspects of personal finance via this blog, but at the end of the day I’m an amateur. 

With that in mind, it makes sense to continue to read and listen and learn. Except instead of consuming only that which serves to support my existing principles, only that which massages my financial schema with confirmation bias, I should seek out those opposing viewpoints. 

The trashy fiction? That will stay. A brain needs some rest after all.

TTFN,

Mr MedFI. 

Farfetched

“Yes, I plan to retire at 55” repeated the evening’s host.

A stunned silence settled over the other diners seated at the table. They wore looks varying from quizzical to aghast.

The tense hush was eventually broken by a series of staccato questions:

“Are you serious?”
“How is that possible?”
“Will you tell me your secret?”

The host kept their cards close to their chest, offering a non-committal answer about finances and pensions.

Incognito

If you’re presuming that I bravely announced to a dozen others my intentions for early retirement, you’d be sadly incorrect. My secret identity remains just so.

I was, however, present for the above exchange. During it I chose to focus on my dessert (too cheesy) while everyone else stared, goggle-eyed at the seemingly scandalous claims emanating from the other end of the table.

I actually found myself struggling to suppress a grin. Not that retiring at 55yrs seemed comical. I was tickled instead by the other diners, who appeared to have their heads buried so deep in the financial sand that the very notion seemed outrageous to them.

Yet the fallout from the interlude was brief. Heads returned to their warm, comforting sandpits. Conversation moved on.

How far I’ve come

I suppose that a majority of the diners simply sifted the idea into the discard pile. Perhaps rationalising with denial – surely it’s not possible? Or taking the stance that the early-retiree-to-be is a statistical abnormality. An outlier. An anomaly. Maybe that guy won the lottery? Or struck gold?

I wonder what would have happened at dinner if I had followed suit by declaring similar, albeit earlier, intentions? Indeed there was a brief temptation to start explaining how “it’s relatively simple to do if you practice financial discipline and start investing“. I might as well have announced that I was a rabid Covid denier, and would also be explaining why the moon landing was fake and 9/11 was an inside job.

The latter may have gone down better.

The event demonstrated just how my framing of finance has changed. For most of my life retiring early had seemed something that only multimillionaires could do. Now it’s an eminently tangible prospect.

Moving in FI(RE) circles it’s easy to lose perspective. It’s easy to be blinkered to what lies over the bubble’s event horizon. It’s easy to forget how niche FI(RE) truly remains, or that simply investing (without designs for early retirement) continues to be relatively uncommon. This was a welcome reminder of how far I’ve come.

Fuzzy feeling

It’s hard to describe why the whole affair made me feel happy. It wasn’t exactly schadenfreude. It was as if I had a naughty, or guilty, secret. An inside joke that only I was privy to. A kernel of hopeful ambition that brings comfort.

Perhaps I was happy because I felt as if I was ahead of the game. Because for what all these others seemed so farfetched is well within the realms of my possibilities.

TTFN,

Mr. MedFI

Pre-Release Book Review; ‘Invest Your Way To Financial Freedom’

Robin Powell (The Evidence-Based Investor) and Ben Carlson (A Wealth of Common Sense) are two personal finance content creators who need no introduction. As such, I eagerly took up the opportunity to review their soon-to-be released literary lovechild “Invest Your Way To Financial Freedom; A Simple Guide To Everything You Need To Know”.

Disclaimer:  I receive no financial incentive for this review.


Ground level

The book is pitched at UK-based twenty- and thirty-year olds hoping to achieve financial independence, a demographic into which I fall. The guide is also entry-level, so I did my best to put aside my existing knowledge, viewpoints and biases in order to read it in the guise of a wide-eyed investing newcomer.

With regards to the subtitle of the work, it is a misnomer.

The book is undoubtedly a simple guide. It’s easy-to-read, largely jargon-free and does well to steer clear of dense examples. I’d argue, however, it doesn’t tell you ‘everything’ you need to know. It lays a solid foundation for sure, touching on core financial concepts. All the personal finance tropes are there:

Pay yourself first. No reward without risk. Diversification is the only free lunch in investing. Time in the market not timing the market. The best portfolio is the one that allows you to sleep at night. The best investment strategy is the one you’ll stick with. Money is a means to an end, not an end in and of itself.

Yet the information rarely leaves the realm of that broad base. This is no bad thing – the unadorned overview should allow the interested novice to pursue the avenues of inquiry they feel most appropriate. No, the book does not tell you everything, but provides an excellent series of pillars on which to build your financial future.

Best behaviour

Other than a slightly jarring step-up in financial speak at the beginning of the chapter “What To Invest In“, the rest of the book does well to create a smooth journey through saving and investing principles. It beats the passive investing drum, appropriately so given its evidence-based motif.

Overall it is suitably deplete of investment analysis. Naturally equities are top billing in the worked examples, with bonds cast in a supporting role. There is, however, only passing mention of other asset classes and few specific examples of investing in X or Y. The authors prescribe principles, not portfolios.

What stood out for me was the strong theme of that oft-overlooked aspect of wealth-growing; behaviour. The book features sage advice on investing behaviour, including that of the financial celebrity A-team: Buffet, Munger, Graham, Bogle et al. I particularly enjoyed the notion of mental compounding; stacking up the mental victories to provide positive, psychological momentum.

This is pertinent for those thinking about making their first foray into investing. The ‘capital at risk’ warnings that are found around every corner on the route to investing can be utterly dissuasive. I know, having avoided it for many years due to the fear of certain bankruptcy. Carlson and Powell do well to counteract this with a simple message: start as small as you like, but just get started. Their pithy recommendation to “get out of your own way” encapsulates perfectly the behavioural side of personal finance.

I would therefore suggest that both titular aspects of the book are incorrect. “Behave Your Way To Financial Freedom” would be a more apt title in my opinion, albeit one that mayn’t sell as well.

The best of a good bunch

The use of an evidence base, rather than mere opinion, to inform the reader resonates strongly with my own approach to my blog (and my investment practice). In the chapter “Treat Your Savings Like A Netflix Subscription” the exploration of finding the ‘quality of life’ vs. ‘quantity of money’ balance chimes with my feelings on the matter too.

The authors allude to an unfortunate side-effect of the growing availability of investment products – complexity – and counteract it well with axiomatic financial principles. Indeed, the book served as a good reminder of key concepts which, if you’re exploring the depths of the investing warren, can become obscured or forgotten.

In their list of personal finance commandments, I think there’s one that’s more pertinent than all of the rest: talk about money more often. The lack of financial education at school, combined with the British taboo on discussing monetary matters, can lead to an information vacuum. That space is ripe to be filled with the empty, baseless advice of shills, charlatans and ‘finfluencers’. Everyone beginning to explore their financial self could benefit from filling said void with the truths found in this simple guide instead.

TTFN,

Mr MedFI