Crypto Commentary II

The first part of this series took a broad look at the arguments for and against crypto-assets. Building on that, this second part covers a variety of other considerations when it comes to investing in cryptocurrencies.

If you can’t beat them…

Despite being lauded as free from government interference, the sale of Bitcoin has not managed to escape the clutches of HMRC. Trading of cryptocurrencies is a chargeable event and therefore subject to capital gains tax. More information on paying tax on crypto-assets can be found on this Government page. It would be wrong, however, to suggest that the economic bodies of the UK have been engaging in idle thumb-twiddling when it comes to crypto-assets. The Bank of England (BoE) has published several reports on the topic over the past few years.

As cash continues to decline, the Bank of England is looking at alternative methods of providing the public with the ability to buy goods and services. One of these is the mooted introduction of ‘electronic money’ – a Central Bank Digital Currency. Image from source.

Using suitably British terminology, the BoE believes Bitcoin won’t “cut the mustard”22. They describe multiple factors preventing its widespread adoption in both the near future and longer term. As they point out, even if a crypto-asset does fulfil the economic definition of a currency, this doesn’t mandate its recognition as money for legal or regulatory purposes23.

Overall the BoE labels cryptocurrencies as unsafe, untrustworthy and unlikely to take over the currency market. Variations on the theme are equally dismissed, such as Bitcoin’s supposedly less volatile24 second generation cousin ‘stablecoins‘. The BoE concludes that cryptocurrencies do not pose significant risk to the stability of the UK monetary and financial systems25.

Having said all that, the BoE does concede that “a variety of potential risks to financial stability could emerge if a digital currency attained systemic status as a payment system26. Although this is felt to be extremely unlikely, the Bank of England is unsurprisingly keen to bring cryptocurrencies within its regulatory perimeter.

…join them

Although they are dismissive of crypto-assets, the Bank of England does recognise the potential of the technology underpinning them27. They are modifying the spine of the UK’s payment system to be compatible with distributed ledger technology, and collaborating with other countries to facilitate inter-bank, cross-border payments based on the same tech28. One of the threads of research spawned from the emergence of crypto-assets is whether the UK should develop its own Central Bank Digital Currency (CBDC)29. This is as of yet undecided.

The EU are singing from a similar hymn sheet – they too seem unconcerned about Bitcoin’s threat to financial stability, although are keen for enhanced regulation30. Sweden are prototyping the e-Krona; others will surely follow suit. Overall, to suggest that crypto-assets can remain uniquely and indefinitely outside the reaches of all government bodies seems naïve.

Ethical/environmental considerations

Socially responsible investing is on the rise. Does crypto fit in to a greener, greater investing strategy? Ethical arguments against Bitcoin arise from its historic use, and on-going potential for use, in criminal activity. One study demonstrated that the total percentage of ‘dirty Bitcoins’ (i.e. those from verifiably illicit sources) was less than 1%18 and another that the use of Bitcoin in illegal activity may be declining19. Conversely others have found that nearly half of Bitcoin transactions were associated with illegal activity20. During an interview, Nobel Prize winning economist Eugene Fama wryly quipped that the censorship-resistance of Bitcoin would only have value to drug dealers.

A counterpoint is that just because something can be used for unethical means does not make it in-and-of itself unethical. Fiat currencies and gold have been used in illegal activity; shunning them on this basis isn’t widespread. Furthermore, not all Bitcoin-related activity is nefarious – there are examples of cryptocurrency being used for philanthropic or humanitarian means.

Estimated energy consumption of Bitcoin mining in terawatt hours (2016-2019). The energy required to mine Bitcoin has been increasing and is seen by many as prohibitive to both its continued rise in value and ability to become a dominant currency. Adapted from source.

The nature of cryptocurrency does not make law enforcement impossible, merely reactive. There are also philosophical arguments to be had about the nature of illegality. The US Government leant on third-party payment providers to prevent donations to the Wikileaks Foundation21. Would using Bitcoin to bypass this block be illegal? Or merely an expression of individual freedom against a self-interested government?

Perhaps more worrying is the environmental impact of Bitcoin mining. Often the global electricity consumption and carbon footprint of Bitcoin is compared to that of nations such as Austria, Denmark or Ireland. It is thought to represent half a percent of the world’s electricity consumption and this may rise over time. Some have postulated that the environmental impact may be less than previously thought31, while others are developing techniques to reduce said impact32. Of note, no research has compared the environmental impact of cryptocurrencies against that of existing currency systems.

Celeb watch

It wouldn’t be a post on investing without the inclusion of a quotation from Warren Buffet. Although Buffet concedes it’s a “very effective way of transmitting money“, him and partner Charlie Munger have between them called Bitcoin a “mirage“, “asinine” and “poison. These have prompted various rebukes from those high up in the cryptocurrency world, although the ad hominem nature of their polemics is perhaps in itself revealing.

Tesla eccentric Elon Musk is sometimes proposed to be the real face behind Bitcoin’s anonymous creator Satoshi Nakamoto. The reported owner of a quarter of a Bitcoin, he’s apparently “neither here nor there” on cryptocurrency, though does describe it as filling a niche as an illegal-to-legal bridge.

Über-philanthropist Bill Gates has described going long on Bitcoin as “super risky“. He’s previously said that its role as an unregulated anonymous currency has inevitably led to deaths in a direct fashion. Overall, however, Gates seems to relish the proof-of-concept that Bitcoin has afforded in promoting financial access to those who are impoverished. His Foundation has provided grants for improving use of mobile money and other blockchain-associated technology in Africa33.

Gates’ feelings are echoed by others. Kevin Kelly (of Wired magazine) says that Bitcoin functions as a “lottery“, but that blockchain technology will be useful where central banks are “not very effective…too greedy and charge too much11. UK billionaire Jim Mellon labels Bitcoin a “bubble“, but blockchain a “revolution“. His company are interested in the concept of frictionless micropayments and have invested as such. The prevailing sentiment is that it’s blockchain, and its various applications, that will prove to be enduring rather than Bitcoin or other cryptocurrency.

The value of Bitcoin (blue line) and Ether (red line; the second largest cryptocurrency) over the past year. Changes in their price appear to correlate. Close correlation of cryptocurrency performance would limit within-class diversification, despite the large number of crypto-asset options. Both of these cryptocurrencies fell sharply during the Covid-crash, a sign that crypto-assets may perform poorly in market downturns. Adapted from Yahoo Finance.


If diversity is the only free lunch in finance, should cryptocurrency be part of the buffet? Cryptocurrencies are considered by some (but not all) to be a ‘major’ asset class and perhaps therefore worthy of inclusion in a diversified portfolio8. Crypto-assets are presumably a geographical diversifier on account of their statelessness. Whether cryptocurrencies are suitably lacking in correlation to other asset classes in order to be considered a diversifying part of a portfolio remains to be seen34,35.

In the future, crypto-assets might behave like other currencies (which is part of the argument for their inevitable adoption). If so, we know that securing consistent returns with Forex trading is fraught with difficulty. Cryptocurrencies might behave like gold or other commodities. If so, its future returns mayn’t match those of equities in the long run. Cryptocurrencies might behave like an entirely new asset altogether. If so, we haven’t the historical data to make evidence-based estimates of its future performance. Every which way, long-term investing seems a risky strategy.

Alternative investments

Many baulk at the high-risk nature of direct crypto-asset investing. ETF’s might be a better way to temper that risk, while still enjoying a slice of the crypto cherry pie. Widespread introduction of cryptocurrency ETF’s is, however, currently beset with regulatory/legislative issues, sparse choices and high costs36,37.

Crypto purists will argue that owning an ETF defeats the whole purpose of engaging in the nature of Bitcoin. For those who see it as merely another asset, it might be a perfect alternative. If it is the underlying technology that you see as being most valuable in the future, blockchain ETF’s could be the way forward.

Towards the other end of the risk spectrum, the burgeoning bitcoin derivatives market might tempt investors with an appetite for leveraged products. The floodgates holding back crypto-related investment products will surely open in the not-too-distant future.

FIRE and Crypto

Some say cryptocurrencies are ‘not in keeping with the FIRE mentality’. I think this overly generalises what is ultimately a highly individual approach to personal finance, investing and life planning. As I discovered myself when calculating the average FIRE blogger portfolio, there is no uniform investment strategy involved. (Of note, cryptocurrencies made up <1.5% of the average portfolio.) If Bitcoin continues to display the same volatility in the long run, it would certainly make a poor holding as a major part of a post-retirement portfolio.

Final comments

The quasi-religious fervour surrounding cryptocurrency often makes it difficult to thresh out bona fide points of consideration from pure speculation. There is a poignant conflict of interest in articles written by those who own Bitcoin – its value is dependent on crypto-evangelism stirring up hype and enticing investors.

It’s tempting to ‘get in on the ground floor’ of cryptocurrencies – but the lift mayn’t still be on the ground floor or even going up! As ever with evolving technology, there are vocal supporters on both sides. Certainly the realm of blockchain technology has garnered significant interest and may be a more prudent investment than cryptocurrency itself.

Crypto-assets may come to represent an entirely new class of investment. This doesn’t, however, necessitate an entirely new shape to one’s investment strategy. The future is promising yet unclear; a watchful eye on crypto-assets and their underlying technology is certainly reasonable for the time being.


Mr. MedFI

18 – T. Robinson et al. Bitcoin Laundering: An Analysis of Illicit Flows into Digital Currency Services. Centre on Sanctions & Illicit Finance, 2018. Available here.
19 – M. Boddy. $515 Million in Bitcoin Spent on Illicit Activity This Year. Coin Telegraph, 2019. Available here.
20 – S. Foley et al. Sex, Drugs, and Bitcoin: How Much Illegal Activity Is Financed through Cryptocurrencies? The Review of Financial Studies, 2019, 32(5); 1798-1853. Available here.
21 – S.V. Lucey. More on the Ethics of Bitcoin. 2016. Available here.
22 – H. van Steenis. Future of Finance: Review on the outlook for the UK financial system: what it means for the Bank of England. 2019. Available here.
23 – R. Ali et al. The economics of digital currencies. Bank of England Quarterly Bulletin. 2014, Q3, p276. Available here.
24 – B. Dyson. Can ‘stablecoins’ be stable? 2019. Available here.
25 – Financial Policy Committee statement from its meeting. March 2018. Available here.
26 – Cryptoassets Taskforce: final report. 2018. Available here.
27 – R. Ali et al. Innovations in payment technologies and the emergence of digital currencies. Bank of England Quarterly Bulletin. 2014, Q3, p262. Available here.
28 – M. Carney. New Economy, New Finance, New Bank. 2018. Available here.
29 – Central Bank Digital Currency: opportunities, challenges and design. A discussion paper. 2020. Available here.
30 – EBA reports on crypto-assets. 2019. Available here.
31 – Estimating the environmental impact of Bitcoin mining. Science Daily. 2019. Available here.
32 – Researchers invent low-cost alternative to Bitcoin. Science Daily. 2019. Available here.
33 – Bill & Melinda Gates Foundation Grants: Bitsoko Ghana Limited | Jomo Kenyatta University of Agriculture & Technology | Denominator Group
34 – C. Deka. Bitcoin’s low correlation with other asset classes aids as a portfolio hedge. 2019. Available here.
35 – A. Xie. Bitcoin’s Correlations With Global Financial Assets Soar Amid Coronavirus Crisis. 2020. Available here.
36 – M. Tatibouet. The Trajectory Of Crypto ETFs So Far. 2020. Available here.
37 – T. Deng et al. Crypto ETFs: A Game Of Benefits and Risks. 2020. Available here.

Welcomes and wiltings

August is a transitional month in the medical world. For many it represents the end of their time in one locale as they start anew in a fresh place of work. New hospital. New people. New systems. New responsibilities. The metaphorical leaf has been turned.

This is most apparent for the new doctors, many of whom enjoyed their first day as fully-fledged clinicians on August 5th. Often they’re akin to Bambi on ice; uncertain, unsteady, unsure. The extraordinary events of 2020 have, however, given ice skates to many of these fawns. After working in hospitals for the past few months in interim roles, they are more certain, steadier, more self-assured. Whether skating or sliding, a warm welcome to the new clinicians across the nation.

Inducing ennui

There was a novelty to hospital induction this year. No longer was it merely drawn out, vague and hopelessly disorganised. This year it was socially distanced too. Gone was the packed, hot, narcoleptic lecture theatre. In its place – Microsoft Teams.

The administrative staff tried to coax Teams into working. What is surely now part and parcel of daily office life seemed insurmountably difficult. The staff did battle; they were routed. “Everything that could go wrong is going wrong” we were told. If there was any faith in the induction process left, it was in that moment crushed.

Yet they regrouped and managed to get Teams working! Broken sound, check. Laggy video, check. The lecture on fire extinguishers – back on track. Then the laptop died. Nobody had thought to plug it in. The rout was complete. The war had been lost, all hope abandoned. A mercifully early end to the day.

Fees please

The new academic year also marks a renewal of professional subscriptions. Hundreds of pounds paid just to stay in the game. A big sigh and muttered grumblings mark the occasion. I remind myself that I’ll see some VAT back at some point – it adds something of a silver lining. New role, added responsibilities, added expectations, added pressure. Stagnant pay. Another sigh, more grumblings.


Workplace chatter is often repetitive, on occasion inane. The opinions of every Tom, Dick and Harry on the future of the Covid situation can get slightly wearisome. PPE this, AGP that. As such, the reversion to the true British conversational trope was somewhat welcome – the weather.

The hospital’s air conditioning plant had failed because the weather was too hot! A hopelessly redundant piece of equipment then, it would seem. The wall thermometer read 30’C. With PPE on top the environment was tropical. And not ‘piña colada on a beach’ tropical, either. More like ‘wading through Amazonian jungle being eaten by insects’ tropical.

Cooler weather might bring some reprieve – colder weather will bring none at all. I hear the hospital is full, even though it’s the middle of summer. The winter months seem daunting already. Is it ‘flu? Is it norovirus? Is it Covid? No, it’s superman resistant bacterial infection! Fantastic.

Press on

I hope that everyone medical is settling into their new jobs. May your inductions have been short, your subscription fees be minimal, your workplace be well cooled and your PPE be adequate. I’m sure 2020 has more to throw at us yet, so look after yourselves and each other. Once more unto the breach, dear friends, once more.


Mr. MedFI

Crypto Commentary I

Cryptocurrency is an exquisitely divisive topic. Its ‘marmite effect’ generates a vacuum of reasoned discourse, which is problematic for uninformed investors. Understanding the balance of risk/benefit is important in deciding whether cryptocurrencies might form part of your portfolio. Investing without due diligence, based on the opinions of those who fawn over its ‘world-changing potential’, might lead to significant losses. Conversely neglecting cryptocurrency, on the grounds that some ‘would rather play roulette’ than invest in it, could lead to loss of potential returns for those with the appropriate appetite for risk.

NB I’ll use the terms cryptocurrency, crypto-assets, and Bitcoin (the archetypal cryptocurrency, which commands the majority market cap1) interchangeably. This is for the sake of simplicity and variety, although I appreciate they are different. I won’t be detailing either the mechanics behind Bitcoin/blockchain or its history, as this has been summarised elsewhere2,3.

Crush on crypto

Bitcoin certainly doesn’t lack for ardent admirers. It was designed as a peer-to-peer version of electronic cash, aiming to cut out the middle man4. As such, its decentralised nature is supposed to render it immune to government interference. Crypto-assets are also supposed to protect you from (hyper)inflation and government corruption, growing in value all the while. The rhetoric is that in the future, ‘the people’ of tomorrow’s (brave) new world will seek freedom from untrustworthy governments. They’ll need a monetary system to support this – cryptocurrency.


If we acknowledge that the goal of investing is to increase the value of one’s initial outlay over time, then Bitcoin could certainly have done that. Since 2014, the price of a Bitcoin has risen from $123 to over $11,000! The returns on this juvenile investment option have run laps around pretty much every other asset class over that timeframe. You’d have had to stomach some fairly spectacular volatility along the way, however. For example Bitcoin’s value fell from $18,000 to $3,000 in a single year (December 2017-18). This potential for huge gain/loss is what’s attractive/off-putting for many investors. The pertinent question is, as always, what does the future hold for crypto-assets?

Bitcoin value in USD since inception. The price of Bitcoin has (overall) increased dramatically, but fluctuated wildly too. Adapted from Coindesk.

World domination

Those bullish about crypto’s trajectory aren’t shy about predicting an inexorable rise in its value. The basis of this is the idea that Bitcoin will supplant all existing fiat currencies as the dominant world currency3. Consequently the (maximum) 21 million Bitcoin will contain the value of all the wealth in the world, giving any one Bitcoin a valuation of millions or tens of millions of dollars5. If this is the case, you only need to own 0.003 of a coin to own more than your ‘fair share’ of Bitcoin6 and thus be disproportionately wealthy.

The step-down from these bold claims is that ‘even if Bitcoin only reached the market capitalisation of gold, its price would still dwarf current-day valuations forty-fold3. The argument is that one should therefore spend the ~£30 on that fraction of a Bitcoin, because it might be worth many times that in due course. Sometimes this argument is extended into posterity; ‘you should buy Bitcoin now to benefit your descendants as it will take one or two generations for Bitcoin to reach its zenith’.

The foundations for these ideas of omnipotence are numerous. Bitcoin’s suitability as a currency has been lauded. Its lack of history is a presumed future victim of the Lindy effect. Some believe Bitcoin’s incipient monetisation is making headway, as its value follows both Gartner hype cycles and the sigmoid curvature typical of technological adoption7. Overall, ‘crypto-bugs’ seem extremely confident in the ascendency of cryptocurrencies, both in terms of adoption and, consequently, value.

The adoption of various technologies over time. Bitcoin’s growth is thought to mirror these adoption curves, which is used to support the argument that it will inevitably become ubiquitous. Adapted from source.

Being mean

More impartial crypto-commentators are less optimistic, suggesting that Bitcoin’s value will revert to its (unknown) mean8 or trend to zero. As Bitcoin is not based on any underlying asset, estimates of its value are little more than baseless pseudo-valuations. Some research would suggest that the value of Bitcoin is linked to the cost of mining it and that the price may not end up at zero9, though there is no strong evidence for a robust method of valuation.

Perhaps the ‘best’ reason to invest in Bitcoin is because of innate human irrationality. We’re evolutionarily hard-wired to go with the flow. Greed, fear (of missing out), the ‘what if?’ factor – these drive the market for cryptocurrency. This is an example of greater fool theory. As long as people want to ride the Bitcoin wagon, it will likely hold some value. It’s easy to dismiss the effect of this ‘soft’ psychology in light of cold, hard numbers. It should be said, however, that secondary market sentiment is predominantly what drives gold prices, which have continued to climb on the back of Covid-induced fear.

Auric ambitions

Indeed some see cryptocurrency as gold sans histoire; a commodity that relies heavily on market sentiment for its value. This has led to suggestions for treating Bitcoin like gold, particularly when it comes to asset allocation8,10,11. There is, however, already a debate about whether to own gold or not. Gold bugs are perhaps more likely to be tempted by the allure of crypto-assets, especially those who anticipate an eventual degradation in the current societal structure. For those already reticent to invest in gold, unsecured and volatile cryptocurrency is unlikely to be more attractive.

Performance of Bitcoin (BTC; red line), gold (blue line) and Vanguard’s FTSE All-World equity ETF (green line) over the past year. Bitcoin has been exquisitely volatile, losing 50% of its value during the ‘Covid-crash’. Gold has been less volatile and maintained/gained value since the market downturn in Spring 2020. Adapted from Yahoo Finance.

Bad Bitcoin

The number of issues surrounding crypto-assets are legion. Some are relevant predominantly at the personal investment level. Others are broader issues that will likely preclude the total ascension of Bitcoin as the world currency. Even if a crypto-asset were to become the overarching global currency, there’s no reason that the eventual ‘winner’ has to be one of those that exist today. As the space matures it may be an entirely different entity, evolved out of today’s prototypes, that takes pole position.

Some of the issues facing cryptocurrency
• Personal investing: volatile nature, difficulty in valuation, lack of a compensation scheme, tax uncertainties, technical demand to buy/hold, risk of fraud.
Technical factors: electricity consumption, scalability, protocol risk, exchange shutdown risk, imitators (‘forking’), competitors.
Psycho-social factors: short history, poorly understood, no social accountability, no self-regulation, environmental and ethical concerns.
Economic factors: no underlying asset, volatility, high fees, slow transactions, compromised fungibility of tainted coins, oligopoly of Bitcoin mining, fixed supply of Bitcoin, unlimited supply of cryptocurrencies.

Arguments mitigating some of the above issues have been made:
• Concerns about volatility are brushed off as a function of crypto’s nascency.
• Scalability issues are being tackled (e.g. the Lightning Network).
• Concerns about overt competition are rebuked on account of the network effect.
• Bitcoin’s value must be maintained because of fixed supply.
There are, however, still enough stumbling blocks to make the future of cryptocurrencies rather clouded. As such, many use the term ‘speculation’ to describe buying cryptocurrencies rather than ‘investing’; some use ‘gambling’ instead12.

Insurance, security and fraud

The FSCS scheme currently lets us sleep a little easier. There’s no widespread compensation scheme for crypto investors, although crypto platform Ziglu recently announced a £50,000/customer compensation scheme13. Good on paper, this has been likened to the ‘provision funds’ of peer-to-peer lending platforms, which are barely weathering the Covid storm. Some crypto-asset investors have been stung by insurance that turned out to be fraudulent14.

Not only are bona fide Bitcoin investments unbacked, but cryptocurrency has proved a fertile stomping ground for fraudsters15,16. Naïve investors are low hanging fruit; they’ve been primed by the crypto hype and have rushed to join the gravy train. Concerns about fraud are strong enough that there have been reports of banks blocking transfers to Bitcoin exchanges17. Cautions about the risk of putting money into crypto-assets seem to be largely unseen or un-heeded. Perhaps they are diluted or drowned out by the existing regulatory warning-cry: ‘past history doesn’t predict future performance, investments can go down as well as up, capital at risk’. A ‘boy who cried wolf’ effect, if you will.

Enough to be getting on with

I’ve split this summary of my research into cryptocurrency in half, as it would otherwise be too lengthy for one post. In Part 2, I’ll take a look at what the Bank of England and various renowned investors think of cryptocurrencies, as well as examining the ethical and environmental concerns surrounding them.


Mr. MedFI

1 – Top 100 Cryptocurrencies by Market Capitalization. Available here.
2 – The Definitive Crypto Guide for Beginners and Veterans Alike. Available here.
3 – V. Boyapati. The Bullish Case for Bitcoin. 2018. Available here.
4 – S. Nakamoto. Bitcoin: A Peer-to-Peer Electronic Cash System. 2009. Available here.
5 – Email exchange. Bitcoin v0.1 released. 2009. Available here.
6 – Bitcoin As Real Estate; A Thought Experiment. Available here.
7 – B. Armstrong. What will happen to cryptocurrency in the 2020s. 2020. Available here.
8 – Craig, A. (2019). How to Own The World: A Plain English Guide to Thinking Globally and Investing Wisely (3rd ed.). John Murray Learning. Available here.
9 – A.S. Hayes. Bitcoin price and its marginal cost of production: support for a fundamental value. Available here.
10 – J. Dorfman. Bitcoin Is An Asset, Not A Currency. 2017. Available here.
11 – K. Kelly. The Future of Blockchain . 2020. Available here.
12 – M. Lewis. Should you invest in Bitcoin? Four things you need to know. 2017. Available here.
13 – J. Martin. Ziglu Insures Cryptocurrency Holdings up to £50,000 Against Cybercrime. Coin Telegraph, 2020. Available here.
14 – Online cryptocurrency trading platform shut down by courts. Government Press Release, 2020. Available here.
15 – Cryptocurrency fraud leads to £2 million worth of losses this summer. 2018. Available here.
16 – J. Redman. Hackers Have Looted More Bitcoin Than Satoshi’s Entire Stash. 2019. Available here.
17 – I. Woodford. Santander denies blocking payments to Coinbase, but says some exchange payments are subject to checks. 2019. Available here.

SIPPs and NHS Pension

This post builds on our existing NHS Pension series. Throughout the post we’ve put links, where relevant, to the appropriate prior material. We do, however, suggest refreshing your understanding of the NHS Pension prior to reading on.

One method of saving money for retirement is to use a Self-Invested Personal Pension (SIPP). How does a SIPP fare when compared to the NHS Pension? What are the pearls and pitfalls of using both together?

Head to head

Direct comparison of the NHS Pension and a SIPP is a relative ‘apples versus oranges’ affair, on account of their different styles (defined benefit vs defined contribution). Assuming equal pension contributions, you’d need consistently strong returns (5-6% real returns) on your SIPP’s investments to match the retirement income that’d be provided by an NHS Pension*.

Although the SIPP’s pension pot might compound up to a large amount, you will have to subtract from said pot to provide an income. If you wanted to retire early, your pot would have to be even bigger to afford you an equivalent longer lasting income. The NHS Pension, by comparison, has no pot and will provide you with a consistent retirement income for as long as you live. In sporting terms, the NHS Pension is the marathon runner. It has great stamina and just keeps the same pace up mile-on-mile. By comparison the SIPP is more like a middle-distance runner. It has reasonable stamina so can keep up for a while, but eventually it’ll fade as the NHS Pension continues to jog along.

There are scenarios where you may want to totally eschew the NHS Pension and plump solely for a SIPP. For example, if you see your long-term employment outwith the NHS you may consider using a SIPP instead of having to later transfer your NHS Pension§. It’s unlikely, however, that you’re weighing up the choice between the two and instead are considering contributing to both.

SIPP and NHS Pension

The Taxman Giveth

Pensions are powerful tools to moderate income tax, especially so for those in the higher (40%) tax bracket. This is best shown with an example.

Example 1a
Dr. Danielle is earning £60,000/year. In addition to her NHS Pension, she decides to contribute to a SIPP. She contributes £4,800 to a SIPP. The government will add 20% basic tax rate relief, which takes the total pension contribution to £6,000.
Dr. Danielle is in the higher rate tax bracket, so she claims a further 20% tax relief and receives £1,200 back from HMRC. As such, the overall cost to Dr. Danielle of her £6,000 pension contribution is only £3,600!

Hopefully you can see how significant the tax benefit is. Although pension contributions are tax-free on the ‘way in’ to a SIPP, you will be taxed on that money on the ‘way out’ i.e. when you start drawing a pension. That doesn’t mean you can’t make overall savings though:

Example 1b
Dr. Danielle has now retired and is drawing a pension from her SIPP. She is withdrawing £50,000/year in pension income. This is subject to income tax. She pays no tax on the first £12,500 (personal allowance) and 20% on the next £37,500 (basic rate).
Therefore Dr. Danielle got 40% tax relief on her pension contributions (example 1a) but is now only paying 20% tax on her pension withdrawal – an overall saving of 20%.

You may end up paying the same income tax on your pension as you got in tax relief initially (e.g. 40% tax relief on way in, 40% income tax on way out). There is still gain to be had though – that money has been invested and hopefully significantly increased in value in the intervening period. Contributing to a SIPP in addition to the NHS Pension may help reduce your current tax burden and possibly your future one too.


The NHS Pension is a relatively inflexible beast, although it does have some bells and whistles when it comes to buying more pension. By comparison, using a SIPP will enable you to exert more control over your pension strategy.

There are a plethora of providers and with them a broad range of investment choices. Various industry big hitters offer SIPP’s, stocks & shares ISA’s and general investment accounts. This allows you to have a one-stop-shop for your private pension and investing needs. Should you want to stick to one investing strategy, you could hold the same investments in three separate accounts; the tax-deferred but inaccessible SIPP, the tax-free relatively accessible ISA and the taxable, accessible GIA.

Arguably the most punitive aspect of the NHS Pension is the reductions for claiming your pension prior to your State Retirement Age (SRA). These are hefty. For example, it’s a 45% reduction in pension income for claiming ten years early. A SIPP, however, can be accessed up to ten years before your SRA without penalty. Should you wish to retire early, you could use a SIPP as an income ‘bridge’ for the decade leading up to your SRA. This will allow you to leave your NHS Pension untouched and therefore unpenalised.


Relying on the NHS Pension scheme for your retirement income is an ‘eggs in one basket’ approach. It’s possibly a matter of when, not if, meddling politicians will prune the NHS Pension tree again in the future. There have been iterations of the scheme in 1995, 2008 and 2015. If the trend continues we might expect another repackaging within the next decade. Although we can only speculate, it seems unlikely that it’d be more generous than the existing scheme. 

Using a SIPP might help reduce your ‘pension interference risk’, making you less vulnerable to future reforms. We should note that SIPP’s aren’t immune to future fiscal policy changes either, though it’d perhaps be unlucky for both SIPP’s and the NHS Pension to suffer significant detriment in tandem. A diversified approach is good for income streams and investment strategies, why not retirement strategies too?

The Taxman Taketh Away

The biggest throttle on any SIPP contributions are the Annual and Lifetime Allowances. I covered these pension tax thresholds in relation to the NHS Pension in a previous post.

It’s possible to calculate how much Annual Allowance (AA) remains after your NHS Pension contributions each tax year. To avoid incurring a tax bill it’s a simple matter of avoiding contributions to your SIPP that push you over the AA. In this regard ensuring your maths is correct is vital, as well as being aware of other pitfalls such as AA tapering. It’s possible (/probable) there’ll come a time where you breach the AA with your NHS Pension alone, thus rendering any SIPP contributions taxable.

Example 2
Dr. Dinesh earns £42,000/year and wants to contribute to a SIPP, but is wary of the annual allowance. He uses his Total Reward Statement to work out how much NHS Pension he’s already accrued.
From this he can calculate the opening value (say £8,000) and closing value (say £18,000) of his pension for the year. That makes his pension input amount £10,000 for this year. As the AA is £40,000/year, Dr. Dinesh can contribute up to £30,000 to his SIPP.
Dr. Dinesh contributes £2,400 to his SIPP. He gets 20% basic tax relief on this, which takes the total pension contribution to £3,000.
As his total pension contribution is £13,000, Dr. Dinesh has not breached the AA.

Determining whether you’ll breach the Lifetime Allowance (LTA) with your NHS Pension is difficult. Both LTA and NHS Pension growth are linked to inflation, while the latter also accrues based on your salary. It’s therefore probable one will breach the LTA, but not necessarily certain*. Contributing to a SIPP as well will increase the likelihood of accruing a pension whose value exceeds the LTA. It’ll also bring about an LTA breach more quickly.

There may well come a time when you’ll need to decide whether the benefits you derive from contributing to a SIPP outweigh the tax bill for breaching either of the two pension allowances. Retiring early, or a cessation/reduction in pension contributions, may mitigate against or even negate this issue. There are numerous factors involved here, including the timing of claiming your pension. Optimising this timing, and the impact of these benefit crystallisation events, falls outside the purview of this post.

At What Cost?

Membership of the 2015 NHS Pension scheme costs a set percentage of your salary each year. In return you get a revaluation process that provides a guaranteed real (i.e. after inflation) growth of 1.5%. This is not to be sniffed at – a consistent, assured, compounding machine. 

SIPP’s have membership costs too. Typically this involves an annual ‘platform’ fee and possibly also charges for buying shares. If fees total 1% of the value of your pension pot, you’ll consequently need returns of 1% on your investments just to break even. You’ll have to consider the effect of inflation too (which could be any number, but let’s say for example it’ll be in the region of 2%). Already you’ll have to make a 3% return on your investments just to stop real-term devaluation of your SIPP. This is not insignificant – the returns on the investments you hold in your SIPP are far from certain. Historical investment data would suggest that over a long enough period of time you’ll come out on top, but this is not guaranteed.

To mitigate the effect of fees you can use the cheapest SIPP that meets your requirements. Employing an investment strategy that maximises returns in accordance with your risk appetite and tolerance will hopefully ensure your investments outgrow inflation and then some.

A minor, but non-zero, cost of using a SIPP is a temporal one. Calculating your remaining annual allowance, managing the account, tracking performance, claiming tax back from HMRC. These cost time; the faff factor may be off-putting for some. 

The sweet spot: a theoretical pension strategy that will:
• require minimal effort to set up and maintain
• maximise the tax relief earned from pension contributions
• reduce future pension interference risk
• minimise the cost of a pension
• increase in value in real terms i.e. grow faster than inflation
• facilitate unpenalised drawing of pension income before SRA
• avoid breaching either annual or lifetime allowance

Crystal Ball Gazing

There are too many personal, professional and financial variables for us to suggest a ‘one size fits all’ winning pensions strategy. For each individual there’ll be a strategy that’s in the sweet spot, optimised for their particular plans. It’s equally impossible to predict how future governments will enact NHS and fiscal policy and its consequent effect on our pension(s). All we can do is plan for the future using what we know today and avoid over-speculating.

I hope that this chapter in our NHS Pension series has given you some factors to consider as you decide whether a SIPP is an appropriate accompaniment for your NHS Pension.


Mr. MedFI

*I’ve made a significant number of assumptions when doing these calculations – many of them pertain to my own circumstances, which may not necessarily reflect yours. You should do your own research in this regard. As ever, the material in our disclaimer applies.

§It is eminently possible to transfer your NHS Pension to another scheme. The NHSBSA provide a guide and factsheet; the BMA also has information on this.

Basic-rate tax relief (20%) is claimed at source by your SIPP provider who receives this directly on your behalf from HMRC. Tax brackets current as of 2020/21 tax year.

Thankfully the fine folk at Money Saving Expert and Money To The Masses have done the heavy lifting by creating comparisons of the cheapest SIPP providers.

Pay rise half-truths

The government this week announced a pay rise for a swathe of public sector employees, among them doctors. If you thought this would bring about high fives, congratulatory back slaps and the medical community celebrating a Covid-induced financial reward you’d be very much mistaken. The announcement contains an (un)healthy dose of spin, papers over cracks and belies the reality for the majority of doctors.

The beneficiaries of the rise

The headlines would have you believe that all doctors are in line for an ‘above inflation’ 2.8% pay rise. This is not the case as the 2.8% figure only applies to Consultants*. This group represents a minority, albeit the most senior portion, of UK doctors. 

The remaining majority of the clinician cohort are ‘junior’ doctors. This unhelpful term describes a broad spectrum of medics, from those in their mid-20’s fresh out of medical school to those with up to a decade’s worth of on-the-job experience. The latter doesn’t seem very ‘junior’ to me. Junior doctors won’t be beneficiaries of the 2.8% wage increase. Indeed it is akin to stating the pay rise applies to teachers (but actually only headteachers), police officers (but only superintendents) or the armed forces (but only generals).

Non-Consultants remain on pay trajectories negotiated in 2018. Both junior doctors (increase of 8.2% over four years) and other NHS staff including nurses and physiotherapists (6.5% over three years) are receiving less than the vaunted 2.8% rise. I’ve posted before about how bona fide inflation might be significantly higher than published figures. If so, all of these pay rises simply don’t cut the mustard when it comes to matching the rise in cost of living.

Behind the curve

If we’re talking about this Consultant pay rise as ‘inflation-beating’ then we must describe their current salary as ‘inflation-decimated’. Wage growth has lagged behind CPI since 2008 and has also been below DDRB recommended increases. The basic starting salary for a Consultant in 2020 is nearly 20% below what an expected, inflation-adjusted wage would be. 

Consultant basic starting salary since 2005. Actual wage (blue line) has not risen as it should have according to inflation (black line). Source for salary figures is the NHS Employers pay circulars 2005-2020.

For junior doctors, sweeping salary changes were made after the 2016 contract negotiations. These have permitted basic pay to (barely) hang on to the coat-tails of inflation. However, the changes to how ‘unsociable’ hours of work are paid may have led to overall pay cuts for some**. Significant pay progression is also lacking as one ascends the medical hierarchy despite the added responsibility and experience – pay is stagnant for up to five years at a time during registrar and Consultant years.

First year doctor [FY1] basic pay (blue line) vs. expected inflation-adjusted pay (green line). Only the new junior doctor contract in 2016 (black arrow) has kept pay near, although still below, inflation corrected levels.
Registrar [ST4] basic pay (blue line) vs. expected inflation-adjusted pay (red line). The new contract (black arrow) has brought basic pay to ‘only’ 3.5% below expected, inflation-adjusted, wage. These ‘junior doctors’ have at least six years’ experience on top of their five year degree.

A word on context. On the spectrum of salary-related changes, a pay rise is better than static pay, which is in turn better than a pay cut or being let go. The reality in the current clime is that many lie towards the latter end of the spectrum. There are also more pertinent contemporary economic issues than doctor’s pay, for example widening wealth inequality. I appreciate this. On the other side of the contextual ridge, there’s a cohort of healthcare workers who have endured supra-normal occupational risk and worked incredibly hard during the zenith of the Covid-19 pandemic. They’re seeing all the lip service to ‘NHS heroes’ and ‘saving the NHS’ backed up with…more hot air. The government’s announcement has been met with derision on social media by some, dubbed as lacking in substance by others.

Inflation-matching increases in salary should surely be the minimum for any job, otherwise you’re being devalued year-on-year. To dole out an ‘inflation busting‘ Consultant pay rise and claim the moral or fiscal high ground in the context of long-term pay stagnation is insulting. Some feel this is little more than government PR point-scoring, conceding an inch now to reclaim a metaphorical mile down the line. A significant proportion of UK doctors already feel undervalued beyond just the financial aspects – the numbers that flock to the Antipodes each year is evidence enough of this. This most recent turn of events will do little to assuage these widespread feelings of under-appreciation.


Mr. MedFI

* And specialty doctors; a senior, non-Consultant, specialist role. In Wales the pay rise is across the board for doctors.

** A quirk of doctors’ pay is that a significant proportion of their salary comes from time working ‘unsociable’ hours. These include night shifts, weekend shifts and work outside the classic ‘8am-6pm’ bracket. The 2016 contract increased basic pay, but both re-defined unsociable hours and reduced renumeration for them. The net effect may have been a pay decrease for those who work a significant number of unsociable hours.

Emergency Fund 2.0

What’s this? A personal finance blog post about Emergency Funds? How unorthodox! What a novelty! Such a trailblazer! Sarcasm aside, we appreciate that the Emergency Fund is a topic done to near-death; it’s perhaps the quintessential personal finance trope. So we’ll try to concisely cut through the usual waffle that you’ve probably read before and focus on what we found more interesting: alternative strategies.

Déjà vu all over again

If you maintain a ‘traditional’ emergency fund you’ll be following the advice of some reputable names, be it financial bloggers (including Monevator‘s The Investor, The Escape Artist and The Frugal Cottage), authors (such as Andrew Craig and Tim Hale), podcasts (such as Meaningful Money and Maven Money) or pretty much any other financial resource (e.g. the Money Advice Service). In terms of how large an emergency fund to have, three months’ expenses is about the average of a broad spectrum of recommendations. The ‘where’ is typically a highly secure, highly liquid, highly accessible asset, which invariably means a cash-equivalent, easy-access account.

Reasons for…
• Prepared for financial emergency
• Have a form of income security/insurance
• Reduced risk of having to use credit or take on debt
• Peace of mind
• Development of financial discipline and restraint
• Confidence to place your other savings in riskier vehicles e.g. equities

You’d be keeping equally exalted company if you refrained from hoarding three months’ of expense in cash, joining an international cast that includes ‘Murican FI heavyweights MMM, ERE, Big ERN and Physician on FIRE, as well as representatives from Canada, continental Europe, The Antipodes and the UK’s very own vulpine blogger, The FI Fox. They cover the gamut of reasons to reject the traditional model and suggest various other methods of financial emergency preparedness.

Reasons against…
• Opportunity cost 1; loss of financial growth by having money uninvested
• Inexorable loss of value as inflation almost certainly higher than interest on cash
• Opportunity cost 2; loss of growth by having to re-build the fund after an emergency
• Temptation factor; spending the money on non-emergencies
• Reduced portfolio efficiency
• Incomplete budgeting & over-labelling events as ’emergencies’ increases required fund size
• One-size-fits-all model is redundant
• The distraction factor; saving for emergency fund distracts from other financial goals
• Demonstrations of benefit are guilty of hindsight bias
• Money is fungible; emergency funds are an example of mental accounting

Crunchin’ numbers

The nay-sayers have done the maths to back up their arguments. The performance of emergency funds held in various non-cash portfolios comes as no surprise. Majority bond/minority equity emergency funds, when compared to 100% cash, improve returns and minimise the loss of capital from volatility i.e. are more efficient.

Having a separate cash emergency fund has been found to increase the variability of the rate of return of one’s total portfolio, while including equities as part of an emergency fund strategy reduces the chance of the fund being inadequate1. Furthermore, the cost of borrowing in the event of emergency is likely to be offset by the improved return on investments. Indeed, a three month emergency fund may only be required for those with a reasonable probability of a significant (>50%) drop in household income2.

Factors that facilitate maintaining less of an emergency fund:
• reliable cashflow: stable job, dual-income household, additional income opportunities, passive income
• fewer or no dependents
• available credit and/or low cost of borrowing
• debt free
• adequate insurance and appropriate budgeting
• reasonable savings rate (or high ‘regular income to fixed expenses’ ratio)

A simple model3 has previously been used to answer the ‘should I have an emergency fund?’ question. Let’s say the chance of an emergency occurring is 100% i.e. guaranteed. We can plug in the [nominal] interest we’d expect on both our cash emergency fund (say 1%) and an alternative investment (say 7% for equities). We’ll set the cost of borrowing money at 20% APR (e.g. credit card). The output tells us that, using these figures, a 100% cash emergency fund is better only if emergencies occur every 10 months. Even if you could only muster 3% investment return (e.g. bonds), emergencies would have to be happening like clockwork every 12 months for the emergency fund to be worthwhile. Using a 60% chance of an emergency occurring annually, an emergency fund is only sensible if the rate of return on investments is within 1% of that for your cash. Food for thought, for sure.

Emergency Fund 2.0

If you have the risk tolerance to eschew the traditional approach, there are plenty of proposed alternatives to the classic one-pot, all-cash emergency fund. Easily the most popular is the pyramidal (a.k.a tiered) strategy. There are variations of which asset classes occupy the different tiers of the pyramid, though in essence they all favour low risk, highly liquid vehicles as the metaphorical capstone. As you descend the pyramid, the vehicles become higher risk, higher return and less liquid in nature. Such an approach is undoubtedly intuitive, although you may still have significant amounts of money earning poor interest in the upper tiers.

An example of a tiered emergency fund. Instead of holding the emergency fund as 100% cash, the money is spread amongst assets of varying liquidity and risk, in order to increase return. Credit cards should ideally be 0% APR and come with other rewards. Physical cash is sometimes recommended in case of system failures that preclude access to bank accounts. Easy-access and limited-access (e.g. Premium Bonds, regular or fixed-term savers) accounts are, at present, almost identical with respect to interest earned. The first investment tier is predominantly (if not 100%) bonds and held in a general investment account (GIA), so as not to sacrifice ISA allowance if you have to withdraw from it. Equities held in an ISA and real estate/home equity form the bottom tiers of the pyramid.

Another variation is what we’re going to call the credit shield-wall approach. Employing this strategy relies on two things:
1) Access to a suitable amount of credit. This might take the form of a credit card(s) or home equity (e.g. HELOC‘s in the USA – a UK equivalent might be using an offset mortgage account).
2) Reliable enough cashflow or high enough savings rate to ensure you can rapidly repay the borrowed money, ideally before any interest is accrued.

The ‘spongy debt’ acts a shield-wall against your other investments, allowing you to hold no emergency fund whatsoever; all of your spare cash is invested in the highest-return vehicle you can tolerate. The downside is that, should the shield-wall fail (e.g. not enough credit, credit card not accepted, multiple emergencies, concurrent reduction in cashflow), you may end up on the wrong side of compound interest and/or have to sell some of your other investments in a sub-optimal fashion.

The pyramidal and credit shield-wall strategies could be blended to form a sort of vanguard/rearguard (or Mayan temple) approach, with fewer, broader tiers that combine different asset classes. For example, cash and credit might form the vanguard, bonds and restricted savings accounts the middle guard, and equities (inc. home equity) the rearguard.

A ‘bond’ ladder emergency fund is perhaps more suited to the USA, given their access to CD‘s, but the theory is interesting nonetheless. You take the cash that would form your emergency fund and, instead of having it sit as a sad, depreciating lump, put it into fixed-rate savings accounts at regular intervals.

In practice
Let’s say your emergency fund would be £3,600. Instead of holding it all in one place, you put a twelfth of the cash (£300) into a 1-year fixed-rate account. The next month, you put £300 into a different 1-year fixed-rate account. Each month thereafter you put £300 into a different fixed-rate account until all of your £3,600 is used up. At the end of a year, the first account matures and, if you have no other use for the cash, you put it straight back into another fixed-rate account.

The beauty of this is that, once it’s all up and running, your emergency fund is in a perpetual cycle of accruing interest if it’s not used. The longest you’d have to wait for access to your cash is one month, during which time you can perhaps use other methods of financing an emergency. The drawbacks, however, probably outweigh the benefits. As well as taking a year to get up and running, the rates of interest on such accounts are so poor that it doesn’t really justify the loss of liquidity. A variant on this stratagem could be to use regular savers as well, although there are fewer options and their returns are only marginally better.

Emergent events don’t necessarily take a homogenous form; they aren’t always one-off, totally unpredicted, high cost occurrences. In reality one might suffer staccato low-cost spending shocks or a longer-lasting income shock. If emergencies aren’t of uniform nature, shouldn’t emergency funds reflect this heterogeneity? Enter, the trident approach. This multi-pronged, horses-for-courses method involves engaging the little grey cells initially, with the benefit of a more streamlined strategy at the end. Think about the different financial emergencies that you might face – estimate the cost of an event and the probability of it occurring. Next, place the money to cover that emergency in an appropriate asset class. You might end up with something like this:

Equities might be suitable for low-chance, medium/high-cost emergencies. For events that are more likely, the reduced volatility of bonds may be preferable. You might decide to use credit for medium/high-cost, high-probability events rather than holding large sums of cash. Cash is reserved for events that are low in cost but likely, to reduce over-reliance on credit.

This compartmentalisation of risk is more refined than using a large cash emergency fund to crack whichever walnut crosses its path. It’s by no means perfect, however, as the estimates you make are only as good the evidence they’re based on. Equally, believing a second low-probability event won’t follow soon after a first is akin to gambler’s fallacy and may scupper your best laid plans.

We stumbled across all sorts of wacky methods of how to optimise your emergency fund. The alternatives we’ve gone through are designed to give you a flavour of the spectrum of possibilities; emergency funds need not be a one-trick pony.

Decisions, decisions

Covid-19 has been financially polarising. Some are being kicked while they’re down. Others have engaged in financial reflection, revelation or even redemption. Either way, it’s demonstrated perfectly the need to be prepared for financial emergencies. The vast variation with regards to the extent, and nature, of required emergency funds mean there’s no ‘best’ or ‘winning’ strategy per se. Ultimately one’s emergency fund won’t just involve a strategy optimised for return, but will balance return against the behavioural aspects of your own personal finance too.

1 – J Scott et al. “Is an All Cash Emergency Fund Strategy Appropriate for All Investors?” Journal of Financial Planning. 2013; 26(9); 56-62.
2 – YR Chang et al. “Emergency Fund Levels: Is Household Behavior Rational?” Association for Financial Counseling and Planning Education. 1997.
3 – CB Hatcher. “Should Households Establish Emergency Funds?” Association for Financial Counseling and Planning Education. 2000; 11(2): 77-85.

Ethical Investing; Fifty Shades of Green

Key points:
• Socially responsible investing (SRI) is increasingly popular and prominent.
• Investing using an SRI strategy may not compromise risk-adjusted returns.
• Care must be taken to examine the credentials of SRI funds, rather than taking the label at face value.

Ethical investing is just one of the many monikers of an investment strategy that aims to look at more than just financial returns. It takes a ‘look under the bonnet’ of a company or fund to check its credentials as a contributor to positive change. ’Socially responsible investing’ (SRI) is no new kid on the block either; the increasingly popular approach has roots in centuries-old investment principles (cf. Jewish, Shari’a, Methodist and Quaker investments)1

This heterogeneously-named investment strategy has been growing steadily since the turn of the century, as evidenced by the rising number of: UN Principles of Responsible Investing signatories2, funds incorporating ESG (environmental, social and corporate governance) principles3, value of products with ESG links4 and number of ESG indexes5. SRI is no fad, no (pure) ego-massaging exercise nor a get rich quick scheme. It’s a reflection of the changing currents of social conscience, a focus on quality (not just quantity) and ultimately a desire to ameliorate the world we live in, even if only for posterity.

The rise of SRI. There have been consistent increases in: searches for sustainable investing news articles (grey line), UN PRI signatories (dark blue line) and assets invested in ESG products in Europe (light blue line). Source: Schroders.

At what cost?

Our pre-research preconception about SRI was that it must be more costly, in the same way that organic vegetables are more expensive than their pesticide-laced cousins. Being selective about the nature of investments would naturally have a corresponding impact on the cost of such products and/or their returns. We’re not alone in this thought process; concerns about investment performance represented nearly a fifth of the deterrent to investing in ESG funds (although we note that it caused less consternation than: a lack of viable options, a lack of qualified expertise and concerns about greenwashing)3

We could reconcile this cost as the price of ‘responsible’ investments, although underperformance would provide a relative FI quandary. Plump for SRI, accept poorer returns yet take solace in the tan you develop basking in the sun at the top of the ethical high ground? Or attach the blinkers, select whichever strategy provides the best returns and gallop to the FI finishing line, knowing you may’ve trampled on Mother Earth a bit in the process? Fortunately, there’s an increasingly large body of research attempting to answer the pertinent question: does SRI underperform compared to an unhindered investing approach?

The exponential rise of ESG in Europe; a 123% increase in funds incorporating ESG principles since 2013. The proportion of retail investors using an SRI approach grew 9x over the same time period. Source: Eurosif 2018 Report
The rise of ESG in the USA; an 18x (or ~14% annual) increase in SRI assets since 1995. Source: US SIF 2018 Report

SRI vs. Conventional Investing – Fight!

Socially responsible companies appear to perform better financially. One paper did find ethical banking to be less profitable than conventional banking6, although another found companies with stronger ESG credentials perform better than their lower-scoring counterparts7. Companies with better sustainability credentials demonstrate comparatively better operational performance8, 9, less volatile stocks10 and exhibit less risk11. Prudent sustainability practice has a positive impact on investment performance8, and a literature review found positive correlations between a company’s sustainable activities and its financial results12.

Negative screening, i.e. excluding companies not deemed to have the appropriate level of SRI credential, is the largest ESG category worldwide4. One analysis of negative screening looked at indexes of the original ‘sin stocks’ (alcohol, gambling, tobacco, weapons, adult entertainment and nuclear power) and found that applying an ethical screen didn’t significantly impact on investment performance13. These results for the ‘Sextet of Sin’ were echoed in a later study14, however applying broader screening to exclude other ESG issues did result in portfolio underperformance compared to an unscreened portfolio. 

Comparison of the performance of the FTSE4Good Global Index (blue line; +21%) vs. the FTSE All-Share Index (red line; -6%) over the past five years. Caution is required, however, as the FTSE4Good index still includes companies in the Oil & Gas, Mining and Gambling sectors, which aren’t necessarily in keeping with an SRI approach. Source: London Stock Exchange.

How do SRI investments perform compared to their ‘conventional’ alternatives? There are some conflicting reports about whether an SRI approach is more likely to under- or over-perform, for both the UK and globally7, 15. One analysis found there were reduced returns when investing ethically16; another suggests that the higher fees which usually accompany SRI funds will impact on overall returns17.

A meta-analysis found that, comparing SRI to conventional investing, the occurrences of outperformance (40%) or similar performance (43%) were much higher than underperformance (17%)12. A 2020 Credit Suisse report concludes that there’s no strong of evidence of ESG fund/index under- or over-performance4. Multiple analyses support the idea that an SRI approach performs no better or worse than a conventional investment approach, and that risk-adjusted returns could be expected to be similar4, 7, 12, 15, 17-20.

Within recent memory there’s been the 2008 Global Financial Crisis (GFC) and the 2020 Covid-Crash; it’d be naive to think there’ll be anything other than plenty more downturns in the years ahead. How does SRI do in a downturn? Studies have found that Islamic indexes (i.e. investing according to Shari’a principles) outperformed conventional indexes during the GFC21 and that Islamic mutual funds even outperformed other SRI funds (2005-2015)22. SRI funds may also be more resilient during other tumultuous times23. Morningstar’s analysis of how ESG ETF’s performed in the Covid-Crash demonstrates that the majority weathered the downturn better than an equivalent non-ESG fund24

A drive towards sustainability may improve future investment returns given that data suggests the rising global temperatures will have a deleterious effect on world GDP25, 26. Overall, the evidence we reviewed would suggest that an SRI strategy would historically not have significantly compromised risk-adjusted investment returns.

In Practice

Many investors will choose to invest passively in low-cost, global equity, index-tracking funds as the mainstay of their portfolio. The ever-popular Vanguard have recently launched two new ESG funds: the ESG Developed world all-cap and the ESG Emerging markets all-cap. With fees of 0.20% and 0.25% respectively, both track the corresponding FTSE All Cap ex. Controversies/Non-Renewable Energy/Vice Products/Weapons Index. How do they stack up compared to their non-SRI equivalents?

The relative performance of the iShares MSCI World SRI (red line), MSCI World ESG-Enhanced (blue line) and Core MSCI World (green line) ETF’s since October 2019. Although all three lost value during the Covid Crash, the two SRI-type funds appeared to weather the storm slightly better. Graph adapted from: Yahoo finance.

The closest comparison to the new ESG Developed world fund is the FTSE Developed World ETF. It’s cheaper (0.12%), an ETF and does not contain small-cap companies. There are also some minor differences between the two when it comes to the geographical and sector weightings. Interestingly, Morningstar’s assessment of the sustainability of the two funds is near identical. It’s a similar story with the Emerging Market non-SRI equivalents; the Emerging Market index fund (0.23%) and FTSE Emerging Markets ETF (0.22%).

Blackrock’s iShares funds represent another cadre of popular investment choices. Their MSCI World SRI ETF and MSCI World ESG-enhanced ETF are both SRI options. Although their OCF is the same as an iShares’ non-SRI equivalent (0.20%), their sustainability ratings are far superior. Their performance appears to be slightly better too (see graph above).

We’ve chosen to highlight only a few of the plethora of available SRI investment products. The expanding breadth and availability of such vehicles mean that it’s increasingly possible to replicate the low-cost, globally diverse, passive portfolios of which many FI(RE) proponents are so fond.

Fifty Shades of Green

What about the holdings within these funds? The top 5 in any of the aforementioned SRI funds are a combination of: Apple, Microsoft, Amazon, Facebook, Alphabet, P&G, Roche, Home Depot and NVIDIA. The associated links demonstrate that none of these companies are exactly squeaky-clean when it comes to ethics, be it Roche pricing the less wealthy out of new drugs or the ever-controversial Facebook being booted from S&P’s ESG Index.

We’re not suggesting that SRI should involve only investing in companies that have never been involved in any sort of controversy, you’d be left with a shamefully small pool of choices! As fellow blogger FIREvLondon highlights, there are “dubious activities” in all spheres of industry – companies aren’t ‘green’ or ‘not green’, responsible or irresponsible, ethical or unethical; it’s a spectrum. What this does demonstrate is that just because a fund has SRI, ESG, Green or some other synonym shoehorned into its name, it doesn’t automatically make it so. It’s important to do your due diligence when it comes to choosing an appropriate SRI fund, rather than buying one that merely pays lip service to the idea.

It’s not all sunshine and lollipops when it comes to SRI; there are still various issues afflicting the strategy. Perhaps foremost, the lack of a standardised definition and inconsistent terminology is confusing for both institutional and retail investors. This opacity creates difficulty in understanding the comparability of SRI vehicles, especially given a lack of governance and poorly correlated ratings systems4. The scene is set for nefarious salespeople to slap SRI labels (and higher fees) onto products, in a bid to appeal to the values of the sustainability-conscious investor. Despite the evidence above, it’s also important to remember that the comparable performance of SRI funds in recent (<10yr) history might reflect other economic or geopolitical factors, rather than their ‘SRI-ness’ per se.

Time to Make a Change?

The winds of change are gusting. SRI is on the rise and, in time, may become the new minimum requirement for investments as the public conscience pushes inexorably in a sustainable direction. The broadening choice of socially responsible investments are increasingly compatible with a variety of portfolios/strategies and the arguments against them are dwindling. For those wishing to FI(RE) and keep the planet in good enough knick to enjoy that early retirement, SRI may be the perfect way to go.


Mr. MedFI

1 – The Origins of Socially Responsible Investing. 2020. The Balance. Available here.
2 – UN Principles for Responsible Investing Annual Report 2019. UNPRI. Available here.
3 – European SRI Study 2018. Eurosif. Available here.
4 – Credit Suisse Global Investment Returns Yearbook 2020 Press Release. Credit Suisse. Available here.
5 – 30 Years of ESG Indexes. MSCI. Available here.
6 – F Climent. Ethical Versus Conventional Banking: A Case Study. Sustainability 2018, 10(7); 2152
7 – AJR Traaseth & UE Framstad. Ethical Investing – A Study of Performance. Copenhagen Business School. 2016. Available here.
8 – GL Clark, A Feiner, M Viehs. From the Stockholder to the Stakeholder: How Sustainability Can Drive Financial Outperformance. University of Oxford and Arabesque Partners. 2015. Available here.
9 – M Khan, G Serafeim, A Yoon. Corporate Sustainability: First Evidence on Materiality. The Accounting Review 2017, 91(6); 1697-1724. Available here.
10 – Why ESG? Arabesque Partners. 2020. Available here.
11 – DD Lee, RW Faff. Corporate Sustainability Performance and Idiosyncratic Risk: A Global Perspective. The Financial Review. 2009, 44(2); 213-237. Available here.
12 – M von Wallis, C Klein. Ethical requirement and financial interest: a literature review on socially responsible investing. Business Research. 2014. 8; 61–98. Available here.
13 – S Lobe, C Walkshäusl. Vice vs. Virtue Investing Around the World. 2011. Available here.
14 – PJ Trinks, B Scholtens. The Opportunity Cost of Negative Screening in Socially Responsible Investing. Journal of Business Ethics. 2017, 140; 193-208. Available here.
15 – R Morgan. Socially responsible investments cement longer term outperformance in market turmoil. Charles Stanley Direct. 2020. Available here.
16 – Y Belghitar, E Clark, N Deshmukh. Does it pay to be ethical? Evidence from the FTSE4Good. Journal of Banking and Finance. 2014, 47; 54-62. Available here.
17 – Y Yang. How do socially responsible portfolios perform? Nutmeg. 2020. Available here.
18 – C Revelli, J-L Riviani. Financial performance of socially responsible investing (SRI ): what have we learned? A meta‐analysis. Business Ethics; A European Review. 2015, 24(2); 158-185. Available here.
19 – J-C Plagge, DM Grim. Have Investors Paid a Performance Price? Examining the Behavior of ESG Equity Funds. The Journal of Portfolio Management Ethical Investing. 2020, 46(3); 123-140. Available here.
20 – SJ Niblock et al. Risk-Adjusted Returns of Socially Responsible Mutual Funds II: How Do They Stack Up in Australia? The Journal of Investing ESG Special Issue. 2020, 29(2); 80-97. Available here.
21 – O. Al-Khazali, HH Lean, A Samet. Do Islamic stock indexes outperform conventional stock indexes? A stochastic dominance approach. Pacific-Basin Financial Journal. 2014, 28; 29-46. Available here.
22 – E Castro et al. Relative performance of religious and ethical investment funds. Journal of Islamic Accounting and Business Research. 2020, 11(6); 1227-1244. Available here.
23 – S Arefeen, K Shimada. Performance and Resilience of Socially Responsible Investing (SRI) and Conventional Funds during Different Shocks in 2016: Evidence from Japan. Sustainability. 2020, 12(2); 540. Available here.
24 – B Leitao. How ESG ETFs Have Performed in the Sell-Off. Morningstar; ETF Research & Insights. 2020. Available here.
25 – International Monetary Fund. 2017. The Effects of Weather Shocks on Economic Activity: How Can Low-income Countries Cope? World Economic Outlook Chapter 3, 117-183. Available here.
26 – ME Kahn et al. Long-Term Macroeconomic Effects of Climate Change: A Cross-Country Analysis. 2019. CESifo Working Paper, No. 7738, Center for Economic Studies and Ifo Institute (CESifo), Munich. Available here.

Positives and Negatives

Life is full of opposing forces that might be balanced, or even harmonised. Good and bad. High and low. Yin and yang. Pleasure and pain. Credit and debt. Overt focus on the negatives can lead to a spiralling nihilism, whereas blissful ignorance of them might promote an unrealistic mania. We’ve reflected on a few of these factors from the past months and thought we’d share them.

All work and no play makes MedFI a dull boy?

During the two months of April and May, our working pattern was amended to staff a ‘Corona-rota’, a souped-up version of the normal roster. It felt like near-constant work, the usual ebb and flow of shifts lost as we toiled literally day and night against this novel disease. The statistics, however, belie that feeling; for the most part I worked pretty much the exact same amount (in terms of hours and days) as in the antecedent two months.

I suspect this feeling of being stuck in a perennial work/sleep cycle was being driven by a lockdown-induced lack of alternate activity, although the general vibe of the community played a part too. The other contributing factor was a 5% increase in the amount of hours worked overnight. The increased night work and day-night switching massively increased my sleep debt and contributed to a more zombie-like state than usual. A positive corollary was, owing to the way in which doctors’ pay is calculated, a subtle increase in pay during Corona-rota times.

We’re not talking ‘hero pay’; indeed at the risk of sounding insensitive during a time when many have faced furloughing, unemployment and other significant impingement on their finances, the amount wasn’t very much at all. Think Pizza Express for two, sans alcohol. With this small amount of extra capital, and on course to fulfil our ISA allowance thanks to our savings rate, we chose to do something novel. We eschewed our normal investing strategy of using low-cost, global equity indexed funds and bought individual shares in a company. Whether they rise or fall, it felt good to mix things up and enjoy a first attempt at a different type of investing. 

PPE positives

When occasions arise that one needs testing for some disease, there exists a period you spend quietly praying that you test negative. Interestingly, now that Covid-19 antibody tests are increasingly available for NHS staff, the opposite seems to be the case. People want to be positive; to have had the disease and not even known about it. The sensitivity of the antibody test (i.e. whether it can actually detect whether you’ve had the virus or not) isn’t 100% – equally it’s not yet known whether having the antibodies confers long-lasting immunity. Still, most of our colleagues have expressed a desire to test positive for the antibodies anyway. 

We received a text alert quite soon after having our test: NEGATIVE. So negative, so quickly. No Covid-19 antibodies found flying around our blood stream. We hadn’t unknowingly contracted and cleared Covid-19 without so much as a sniffle. The upshot of this is that PPE seems to work! We’ve been face-to-face with dozens of patients undergoing aerosol-generating procedures and spent many hours in the Covid-19 bay(s). Despite that, despite the flimsy plastic gowns that rip like tissue paper or the now-recalled ‘safety goggles’, we’ve managed to avoid catching the virus so far.

Positivity from negativity

The recent wave of international protests have brought the injustices and inequalities of the world back into sharp focus. The disproportionate number of arrests (27%) and incarcerations (40%) of African-Americans compared to their percentage of the US population (13%) demonstrates significant inequality. The cause for this is undoubtedly multifactorial, although racism within the justice system appears to play a part.

It’s easy to point the finger trans-Atlantically; this is an American problem, no? No. The statistics are just as damning for the UK. People of BAME ethnicity represent under 15% of the UK population, yet are up to three times more likely to be arrested than caucasians and represent nearly 30% of the UK prison population. Again, this disproportional representation probably reflects a medley of factors that affect BAME communities.

In a worryingly similar trend, patients from BAME backgrounds are more likely to die as a result of Covid-19. Those from ethnic minority backgrounds had a two-to-four times higher chance of hospital death. Over 30% of intensive care deaths were in those of BAME background, a disproportionately high number. Similarly, deaths in BAME healthcare professionals were between two and three times higher than expected when compared to their representation within the NHS workforce. There are multiple reasons cited for these statistics, such as workplace factors, higher occupational exposure, higher levels of deprivation, pre-existing comorbidities, economic vulnerability and, sadly, racism/discrimination.

It seems hard to fathom any positivity in the face of such inequality. Awareness, education, and bringing about true systematic change are perhaps the positives to come out of this. In FI(RE) it’s often about being passive, from portfolios of passively managed funds through to passive income. Much like our new foray into buying shares, the evidence of the on-going inequality in our society means that, when it comes to promoting equality and justice, we should all be taking an active approach instead. 


Mr MedFI.

Chasing Inflation

As many readers will already know, inflation is “the change in prices for goods and services over time” or “a general increase in prices and fall in the purchasing value of money1,2. As often with dictionary definitions, the words don’t necessarily convey the true meaning of the term. So we’ll borrow our own example:

Do you remember eating Freddo bars when you were younger? When we were still young whippersnappers they cost 10p each. Imagine our dismay when we learned they now cost 25p. In 20-odd years, the price of a Freddo bar has risen by 150%. This is an example of inflation: the price of objects rises over time. Put another way, the purchasing power of your money falls over time. At the turn of the century £1 could buy ten Freddos, but now £1 will only buy you four.

Author’s note: we appreciate that inflation is a complex topic and a broad term with multiple different measures. We want this to be a widely appealing and informative article, rather than a slog through the economic principles and terms. For the sake of simplicity, we’ll be using the CPI(H) when we talk about inflation.

Inflation has a few relatives too: its diametrically opposed twin brother deflation, its boastful older sister hyperinflation (responsible for the $100 trillion banknote), its nefarious first cousin shrinkflation and its awkward second cousin stagflation.

In order to maintain our money’s purchasing power, we have to augment the value of our savings by earning interest. At minimum, we want the interest earned to match inflation. If inflation is 2% in a year, we want our money to grow by 2% over that year in order to retain our Freddo acquisition ability. Simple. If we can’t get the interest rate to match the inflation rate, something (e.g. 1% interest) is better than nothing. We can buy fewer Freddos than the year before, but perhaps more than the guy who had his cash stuffed in a shoebox. 

Global inflation rates in 2018. Adapted from source: World Bank.

Ideally, we want to outstrip inflation. We want inflation to be coughing on the dust thrown up by our runaway interest-generating wagon. If inflation is 2%, we want our money to be growing by three percent, five percent, ten percent; the more the better. You could pick any number here but ~5% is not a preposterous proposition. We want to be drowning in anthropomorphic frog chocolate bars come the end of the year.

Hopefully the above is not news to many of you. The more interest you can earn on your money, the better. Matching inflation should be the bare minimum goal; where should we set this low bar?

Requiem for a Savings Account

The rate of inflation varies geographically. With some exceptions, most people will only need to worry about the rate of inflation in the country in which they reside. If you did want to be more global in your approach, the average global inflation in 2018 was 2.75% 3

Let’s, however, set our minimum desired interest at the rate of UK inflation. The Office of National Statistics (ONS) is fairly consistent at publishing the most up-to-date rate. Though it does change month-to-month, for the last 12 months the highest inflation has been is 2% 4. Going back a bit further it’s been under 3% since 2012, but let’s use 2% as a current target. 

A savings account, you’d imagine, would be a reasonable place to start the search for an inflation-matching interest rate. Yet a quick look tells us that, at the time of writing, the best available instant-access savings account provides 1.05% interest. You could eke slightly more interest by locking your money in a notice (1.25%) or 5yr fixed-rate (1.8%) account, or gamble on the expected returns from Premium Bonds being greater than the advertised 1.16%. Other savings vehicles are not much better. The ‘regular savers’ offer a rate of up to 2.75%, though only on small sums. The realm of cash ISA’s (1.3%) and cash LISA’s (1.25%) isn’t much better. In desperation you turn to a current account and find that the best available offers 2%…on up to £1,500 for one year only 5.

UK Inflation(%) since 2010. Though inflation fluctuates, it has been under 3% since 2012. Source: Trading Economics.

It’s clear that the available interest rates from bank accounts aren’t up to scratch. Agreeably it may be appropriate to tolerate a degree of depreciation on small sums and/or over short time periods. Bank accounts do have other benefits, such as security and ease of access/transfer, but their utility as a medium-to-long-term savings vehicle is poor.

Our best laid plan to match inflation with interest has crumbled all too quickly. You might say that the interest offered is nearly there? Close enough to inflation? We’re not so sure….

Real inflation

What if the true, bona fide rate of inflation is higher than that published by the government? That is, what if our money is losing its purchasing power quicker than we suspect? Since first reading about the prospect in Andrew Craig’s ‘How To Own The World‘, this idea has gnawed at my brain 6

According to Craig,  there are “…ways in which governments ensure that inflation numbers end up always being lower than the true increase in your cost of living (so you think you are wealthier than you actually are…”. He goes on to describe these methods: substitution, geometric weighting and hedonic regression. It’s easy to scoff initially, the ‘tin foil hat’ radar pinging relentlessly. Yet a dig through the ONS site turfs up these terms. 

Substitution does occur and, if the new item is sufficiently different from the old item, its cost is ‘imputed’ (*checks thesaurus*: estimated). Re-weighting happens as well; between 2019 and Feb 2020 there was a 9% increase in the weighting of Recreation and Culture and a 6% increase in Education. Conversely, the weightings of the Food, Clothing and Transport sections were decreased 3% each. Hedonic regression is in the mix too, sitting alongside ‘option costing’ and ‘quantity adjustment’ as part of the package of tools used to make ‘direct quality adjustments’ 7.

We’re not suggesting that the whole thing is a sham, although the broad spectrum of uses for, and users of, inflation does provide a strong incentive to keep things neatly in check8. There have been examples of governments overtly manipulating inflation data (looking at you, Argentina9) but we’ve not seen any evidence that’s the case here.

Overall there is an element of subjectivity and estimation involved in the methods used. With enough slightly fudged numbers, be it deliberately or not, the end product could look rosier than it actually is. Even the ONS states that “The methodology for estimating the accuracy of the CPIH, CPI and RPI [measures of inflation] has not yet been fully developed…” 10.

The Freddo Index. Graph showing the actual rise in price of a Freddo Bar (blue line) compared with the expected rise in price based on inflation (green line). The price is rising faster than expected; does the published rate of inflation under-represent the true change in the cost of living?

The Freddo Index

We didn’t find an abundance of robust data reinforcing the claim that the true rate of inflation is higher than the published one. One report used its self-styled ‘essentials index’ to demonstrate that the cost of essential items was rising faster than inflation11. It found that the cost of essentials rose 7.8% in 2011 and 3.7% in 2012, even though the inflation rates for those years were 4.5% and 2.8% respectively. One US-based article implied that the rate of inflation must be higher than published because of the rising cost of a burrito over time, the so-called burrito index12

Let’s return to our old friend the Freddo bar. The ‘Freddo Index’, tracking the price of the snack over time, demonstrates how the cost of the wee chocolate bars has drastically outstripped inflation (see graph, above). The price grew 150% between 2005 and 2019, though inflation says it should have only risen ~40%. There was shrinkflation afoot too, as the weight of a Freddo was reduced from 20g to 18g between 2010 and 2011. Even if the price remained the same, you got 10% less chocolate bar in 2011 compared to 2010 and therefore had suffered from 10% inflation. It’s not just chocolate bars either, as you can see below.

Price of a pint of milk: actual (blue line) vs. expected (green line). Source.
Price of a litre of petrol: actual (blue line) vs. expected (green line). Source.
Price of a pint of bitter: actual (blue line) vs. expected (green line). Source.

These graphs all demonstrate that the cost of goods, from milk to beer to petrol, has often risen faster than inflation alone would dictate. Appreciably the determinants of the price of a good or service are much more complex than merely rising with inflation. The pattern, however, is concerning. It lends some soft weight to the idea that our money is devaluing faster than we realise. This begs the question: how accurate a marker is the published rate of inflation?

Investing: No Longer Optional?

We can’t keep up with inflation through traditional bank accounts and, adding insult to this injury, the actual rate of inflation might be higher than we think. Equally, the future rate of inflation is unclear, an unknown unknown13. There are arguments for both rising inflation and disinflation/deflation14. Whatever the rate, we need to be matching it to avoid our savings depreciating.

Investing, with its concomitant risks, is typically seen as a vehicle for the growth of savings. Now, it might be one of the few remaining bastions for those simply wishing to avoid the inexorable erosion of their purchasing power. Is the choice now between the risk of losing money by investing (but perhaps keep up with/outgrow inflation) or the guarantee of losing money by tolerating sub-inflation interest rates? It seems a damning state of affairs. Especially so for those with delicate financial positions who cannot tolerate the risk of investments losing their value; they are hemmed into a losing position.


Mr. MedFI

Deflation: at the end of the year my £1 coin buys 10 Freddos, not 4.
Hyperinflation: at the end of the year my £1 coin buys 0.0001 of a Freddo, not 4.
Shrinkflation: at the end of the year my £1 coin still buys 4 Freddos, but each bar is only half the size it was at the start of the year.
Stagflation, we realise, cannot be simply explained using our Freddo analogy and for this we apologise. 

1 – Inflation and Price Indices. Office for National Statistics. Available here.
2 – Lexico Dictionary. Available here.
3 – Inflation, World Bank Open Data. Available here.
4 – Percentage change year-on-year of the consumer price index (CPI) in the United Kingdom (UK) from 1989 to 2019. Available here.
5 – Money Saving Expert: Banking & Savings. Available here.
6 – Craig, A. (2019). How to Own The World: A Plain English Guide to Thinking Globally and Investing Wisely (3rd ed.). John Murray Learning. Available here.
7 – Consumer Prices Indices Technical Manual (2019), 9: Special issues, principles and procedures. Office for National Statistics. Available here.
8 – Users and uses of consumer price inflation statistics. Office for National Statistics. Available here.
9 – Citizens Not Fooled by Fake Statistics. UCLA Anderson Review. Available here.
10 – Consumer Price Inflation QMI, 7: Validation and Quality Assurance. Office for National Statistics. Available here.
11 – Measuring the Real Cost of Living (2013). Tullett Prebon. Available here.
12 – If people knew the actual inflation rate, it would implode the entire system. Available here.
13 – The economic outlook, 1.2: The MPC’s projections; CPI inflation. Bank of England. Available here.
14 – Inflation post Covid-19: to be or not to be? Available here.

Johari, Rumsfeld and overpaying mortgages

There’s a common question we come across again, and again, and again. You’ve probably seen it before, or at least a variation of it. It goes like this:

“I have extra money left at the end of the month, should I overpay my mortgage or…”

There are many options for the second part of the question, although “…invest the money” or “…contribute more to a pension” are the two most frequently occurring ones. The topic has been covered roundly, including articles by Monevator (not once, but twice), a more recent variation on the theme by Gentleman’s Family Finances and various other sites including Money Saving Expert. We found ourself lapsing into a state of relative apathy towards the question. Not that we find it in and of itself uninteresting, but reading the same old, carbon-copy responses became wearisome. 

Part of the issue is that, although the cut and thrust of the underpinning economic argument remains fairly consistent, the different personal factors involved are too numerous to create a suitable one-size-fits-all answer. Undoubtedly being in such a situation is fantastic; you literally have so much money you’re unsure what to do with it! Whilst mulling it over, we decided to use a different framework to address the question. We thought we’d share it with you; perhaps it will help you in your search for a solution as well. 

Johari and Rumsfeld

The Johari window is a tool originally designed for understanding oneself and your relationship with other people, using a 2×2 matrix of what is known and unknown to both you and to others. It’s primarily a learning exercise, as you seek to find that which fills your ‘blind spot’ or is ‘unknown’. As this information becomes known, i.e. migrates into the ‘arena’, your knowledge of yourself improves. Similarly, sharing items that populate your ‘façade’ box will improve inter-personal ties.

The original Johari window, a tool in self-improvement. Adapted from Wikipedia.
The Rumsfeld box, a variant on the Johari window. Adapted from here.

The window can be adapted in a system based on the famous words of former US Secretary of Defense Donald Rumsfeld. Both the Johari window and the so-called Rumsfeld box can be used in a broader fashion than just self-awareness, and using them as a framework is exactly how we chose to tackle the ‘overpay mortgage vs. other’ question. Populating the matrix with factors that influence an answer to the question creates, in our opinion, a clearer picture of the balance of risks/benefits. With this more robust understanding in place, answering the question becomes that bit easier.

The ‘Known Knowns’

These are factors that lie in an open forum, of which both you and everyone else is aware. Examples might include: current Bank of England base interest rate, current mortgage interest rates, inflation, interest from savings accounts, and historic stock market performance. Items in this box can help build the foundation of an answer. We know that if mortgage interest rates were lower than real investment returns, the maths alone would dictate that you’d have made more money by investing than overpaying the mortgage. 

Factors in this box are relatively ‘low risk’. That isn’t to say the risk of losing money is less, but that these items are more certain in their nature. As such the impacts they’ll have are more predictable and consequently they’re less risky.

The ‘Unknown Knowns’

The ‘unknown knowns’ are perhaps the most difficult to define. These are components that are known by others but unknown to you. One example might be a deeper insight into some of the economic phenomena that will affect the answer to the question. A good proportion of the FI community won’t have a significant grasp of economics beyond the extent of their own research, which may have ignored, misunderstood or otherwise left out pertinent information.

The other collection of factors in this box are things that we do not care to know; facts we wilfully ignore as they do not fit our existing schema of understanding, facts we dismiss out of confirmation bias. There’s a wide spectrum of elements this could cover; personal, professional or purely financial. An example could be that, despite having never experienced a market crash before, you’re certain you’ll be immune to the urge to (panic) sell as the market crumbles – yet what we know about human and investor psychology says most people won’t be. Another might be that, instead of over-paying the mortgage, you’re dead-set on investing in Cryptocurrency because you feel it’s a guaranteed path to El Dorado – yet the data shows Cryptocurrency has proven to be a highly volatile (and therefore unreliable) investment.

Bitcoin price index since 2014. The value of Bitcoin has been highly volatile, changing by thousands of percent in both directions. Choosing to invest in Bitcoin because you focus on times when the value has significantly risen, whilst ignoring data suggesting it can sometimes precipitously fall, is an example of confirmation bias. Source:

These elements carry higher risk; they are unknown to you and the impact they may have is less predictable. As such the goal is to move them into the ‘known knowns’ box. That might be through broader or deeper learning, or acknowledgement of when you’re succumbing to your own biases. Being mindful of the presence of these factors is possibly enough, even if you’re unable to shift them all into the ‘known knowns’ box. 

The ‘Known Unknown’s

Constituents of this quadrant of the matrix tend to be of a more intrinsically personal nature. Within this domain lie several considerations, such as:
• your relationship with money, savings and salary
• your psychological approach to debt; does the mental weight of owing money override other factors?
• personal facets including your age, family situation, expected longevity
• more detailed financial factors e.g. your exact mortgage details (term, rate, overpayment facilities, proximity to LTV brackets etc.)

It is sometimes difficult to decipher your own feelings on these matters and a healthy dose of introspection is sometimes required to get a grip on them. One way of better understanding these personal factors is to plan scenarios and try to anticipate your response. That might be any combination of: outrageously good/bad investment returns, significant rise or fall in mortgage interest rates, loss of or bountiful increase in income, or changes in other personal circumstances.

The ‘known unknowns’ are likely to impact on various other facets of your financial and personal success, so understanding them is important beyond the scope of the ‘overpay mortgage vs. other’ question. Fortunately, the elements in this box will tend to be of lower risk as you can, with enough aforethought, somewhat predict the impacts they’ll have. 

The 2×2 matrix we’ve used to help answer the ‘overpay mortgage vs. other’ question. The matrix can be applied to a broader array of questions which are both financial and non-financial in nature.

The ‘Unknown Unknowns’

The unknown unknowns are items and events masked by the haze of the future, clouded in the fog of war, refracted by the crystal ball. Tucked in just below the dividing line of the two right-hand boxes is the actual, future return for any given investment. Nobody can know for sure how it will perform. Some may have the resources to try and predict returns, which translates into the cost of investing in an actively managed fund. The reality is that, certainly for the vast majority of us, future investment performance is a relative unknown unknown. 

We’re in the midst of an unknown unknown now – who could have accurately predicted the advent of the Covid-19 pandemic, or known the timing of its subsequent socio-economic impacts? The 2008 global financial crisis was similarly sprung upon the vast majority of people who were none the wiser. Sudden, life-changing events also fall into this category, e.g. changes in the health of you or your family, changes in employment or relationship status.

As a result of being largely unforeseeable, these elements carry a relatively higher risk. Agreeably the unpredictable nature of factors in this box make them difficult to plan for – is there any value in considering them? Disregarding factors in this box might compound the effects they have. As they’re the type of events that might necessitate a reasonable amount of financial liquidity, tying up all your money in relatively illiquid vehicles (e.g. mortgages, pensions, investments) leaves you at their mercy. Conversely, the problem with overweighting importance to this domain is the trend to nihilistic thinking. “If nuclear armageddon might strike tomorrow then I might as well spend the money rather than invest or pay off the mortgage”. If unpredictable, calamitous events are the only rationale behind spending your money then you might never save! That’s not to say, however, that spending money instead of investing or paying off your mortgage is a bad option.

Example – the outcome of the thought process:
“I know that if future investment returns mirror historic returns I would make more money investing instead of paying off my mortgage. However I prefer to have no debt at all and even having a mortgage grates on me. I’m also near an LTV bracket so could remortgage for a better rate if I reached it. My job security is low and I may end up changing careers, so I don’t want all my money tied up in an inaccessible way. I think that the chance of future economic downturn is guaranteed, although I don’t know when, but want to keep some money liquid. As such I’ll split my spare money into 50% mortgage overpayment, 30% investments and the rest as cash.”

Strike the Balance

Ultimately, the answer to your own personal ‘mortgage vs other’ question needn’t be binary, nor absolute. You might decide that the net outcome of the ‘mortgage matrix’ is a split of your spare money between your mortgage and other vehicles. Similarly, you could rehash the problem on a recurring basis to check the balance of factors, assess how they’ve changed and modify your approach as needed. In any case, we hope you find the matrix useful – let us know how you get on with it.


Mr. MedFI