Complexity costs

A recent piece in the FT by Jason Butler mentioned some advice the author received from Peter Hargreaves, one of the UK’s richest men, a few years ago:

I asked Peter if he could share some of his money wisdom. He thought for a moment and then replied: “As you know I’ve got a few quid and I can pretty much have anything I want in life. I’ve got one car, one house and one wife, and that’s the way it’s staying. No matter how much you own or earn, keep your life as simple as possible.”

Now, (both) long time readers of this blog will know that I am not a fan of the firm Hargreaves Lansdown (though I have professional respect for it as a very effective way to part wealthy fools folks from their money). Nor, for various reasons I won’t cover here, am I generally an admirer of its founder Peter Hargreaves, notwithstanding that he is clearly a very talented entrepreneur/businessman.

However, this blog believes in playing the ball not the man.

I can recognise wisdom when I see it.  And I think Mr Hargreaves’ advice to keep life as simple as possible is profoundly good advice.

How financial progress breeds complexity

For those of us who manage to grow our net worth, saving money, simplicity is an uphill battle.

That first thrill of making more money than you need to live will invariably result in some temptations.  Time to ‘treat yourself’ with a new holiday?  What about new clothes?  Or some art?  Or some furniture?  Maybe even a new car?   Carry on this way and pretty soon you’ll need more space, parking, garage, a yard, who knows.

But, once you’re making decent money regularly you will start wondering how/where to save it.  Now, don’t misunderstand me, there are definitely simple ways to save/invest.  But if you are tempted by property, EIS/angel investing, or extreme diversification, then care is certainly required.  All of this increases your financial complexity pretty quickly.  Carry on this way and pretty soon you’ll need an accountant to help with your tax return, and you will probably seriously consider talking to a financial adviser.

Once you start investing, time can be a surprising enemy.  Most of us investors learn about ‘buy and hold’ as a strategy pretty early on.  And twenty years in, I would say that ‘buy and hold’ works pretty well.  But buying and holding can nonetheless result in an increasingly sprawling portfolio – as my recent ‘overdiversification‘ blog highlighted.

Property is particularly beguiling.  As a reader of this blog, you probably don’t consider property to be the only way to invest. But is certainly one way to invest.  You might, like me, consider that property has a place in a diversified portfolio, either via REITs or via ‘buy to let’. But have you considered / aspired to owning a weekend place? A holiday home?  A ski chalet? Carry on that way and you’ll probably need a gardener, a handyman, maybe a builder.  That’s one thing if it’s local but it’s another prospect if it’s in another country. Carry on further and you’ll be tempted by a second car, you’ll want access to the business lounge every trip or, worse, you’ll start seeing private jet ads follow you round the web.

Or perhaps, like me, you have become an ‘accidental landlord’.  That ‘accident’ – your first place – is, in London, more likely to be leasehold than freehold, so maybe the maintenance/etc is not your responsibility.  But if it’s leasehold you will have some form of service charge/sinking charge to budget for, and it’s freehold you’ll know all about every roof repair, damp patch, and boiler problem.  Repairs and maintenance are all tax deductible, but make sure you keep those receipts.  Carry on this way and even your accountant will start complaining.

Have I got a complexity problem?

Questions you could ask yourself to diagnose whether you have a problem include:

1. How many direct debits/standing orders do you have on your current account?
2. What is the difference between your after tax investment income and the figure you get to if you take 3% of your net worth? Are you comfortable with that difference?
3. How readily could you go completely ‘off grid’, on holiday for a week?
4. If you won (from work, if applicable) a round-the-world-in-six-months all-expenses-paid trip, could you take it?
5. If you had to hand over your life to your better half / kid / adviser to make all decisions for you, how many pages would your instructions fit on?

Why complexity is the enemy

As the acclaimed books Rich Dad, Poor Dad and The Millionaire Next Door illustrate, you show me somebody who has two cars, a holiday house, the latest fashions, and a BA Gold card, and I’ll show you a lot of complexity.

Complexity results in cash costs.  Travel, debt, property maintenance, professional advice, consumables, all cost actual money.

Complexity results in lack of flexibility.  You might have some lovely ski chalet in the Three Valleys, but are you going to continue to enjoy the variety of skiing in Switzerland, Austria, let alone the USA? You might have some fancy offshore bond, but how are you going to raise funds in a hurry if the bond can’t be liquidated unexpectedly without some nasty tax penalties? Carry on too far on a tax-optimising strategy and you’ll find yourself unable to spend more than 90 days per year in your home country.

Complexity sucks up time.  Each car needs to be insured, have its MoT renewed, and have its parking fines paid.  Each investment produces income that needs to be recorded somewhere.  Each property results in, at the least, emails and phone calls at a time which always feels inconvenient.

Crucially, at least for me, complexity results in stress.  That foreign home which had a suspected fire the night before my expensive long haul family trip.  The roof repair at my old home which has resulted in an argument with the tenants, the neighbour and the managing agent. And maybe you don’t get stressed by your numerous investment accounts and three properties, and Excel-based record keeping, but how would your widow feel if she was having to pick up those threads unexpectedly if the worst were to happen?

How simple can it get?

Peter Hargreaves cites having ‘one car, one house, one wife’. This isn’t an exhaustive list but it’s a good one.

Readers of my blog will know I’m definitely not from the FIRE community’s central casting.  My cost of living would make many spendthrifts blush.  And I definitely have more complexity than I should in my life.  But on some crucial aspects I have consciously avoided temptation, in favour of simplicity.

The complexity bullet I have successfully dodged is a second home.  Much as I love international property porn, my head (and Mrs FvL) always overrules the heart/gut and I have never been seriously tempted by a ski chalet, holiday villa, or Australian bolt hole.  I do ‘throw money down the drain’ every year in Australia by renting a holiday place, but if you compare the annual equity returns with the annual holiday property yields, I am pretty sure I am ahead.  And as soon as you imagine the phone call about the bush fire / leaking roof / intruder alarm from 20,000km away I am pleased to sleep soundly at night with my Australian assets nicely stashed in the liquid stock market, not tied up in some inaccessible bricks and mortar.

Even as it is, the most painful complexity is real estate.  I will let out a big sigh of relief when I eventually sell my old home.  And I may well then repeat the process and sell my ‘buy-to-let’ flat.  Certainly, if I swapped out my ownership of these two assets and replaced them with just a diversified collection of public real estate listings (e.g. British Land, IUKP, Workspace Group, SHB, possibly AEWU) then my net yield would increase and I think my long term rate of return would increase.

In the modern world of London, ownership of physical assets like cars is on the wane.  I don’t think that, if I was in my 20s now, I would buy a car.  Certainly I struggle to justify owning my car.  Even the annual Christmas break criss-crossing the country seeing family, when I do appreciate having my own wheels, could be done pretty easily with a rental car / Uber / Zipcar.

Where I am pretty unusually complicated is my investment portfolio. And this is bit of my life that does needs simplifying.  Assuming I have a reasonable amount of time to consolidate my finances before I part this earth, I fully intend to rationalise my ownership significantly.  I think my portfolio could be collapsed into fewer than 10 ETFs; if I was handing it over to a trust or Mrs FvL I would seriously consider Vanguard’s LifeStrategy series.

I do struggle with the conflict between diversifying across platforms and ETF/fund providers, and the desire for simplicity.  Given the relatively low FSCS limit of around €100k per account, there is a clear argument for embracing the complexity of having multiple accounts/providers.  But once you have over £1m invested, it is hard to remain fully FSCS protected and sane.

Probably a reasonable trade-off is having different providers for the current/savings account, ISAs, SIPPs and other investments – for the sake of argument four separate providers.  And aiming for fewer than 10 ETFs across the whole lot.  That would be a big challenge for me, but one I think I could achieve. Mrs FvL’s holdings are already much closer to this ideal than my own accounts are.

The hardest single bit of my life to simplify is my collection of holdings of private, unlisted ‘angel’ shares.  These holdings are hard to value, and almost impossible to trade.    Fortunately these holdings are exempt from inheritance tax. And these holdings do not cause me much hassle to own, aside from needing to sign documents from time to time.

Any readers recognise some of these dynamics, or are these just ‘first world problems’? Any good tips/strategies for reducing complexity?  Please share via comments.