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.

Image result for mornington  peninsula holiday home
Off the agenda

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.

16 thoughts on “Complexity costs”

  1. Your list of questions scares me, well the answers to them anyway.

    1) I have way to many DD`s, and I have 3 current accounts, 1 for personal use, 1 for each of my BTL properties. I guess in a way this might be simplification of sorts, all expenses for each house separate, but of course its an extra account to manage and monitor.

    2) Nope, not at all comfortable….Because of property, I am asset rich and cash poor!

    3) I haven’t done “off grid” in more than 20 years. Self employment is an extra complexity.

    4) No I could not, as per question 3!

    5) I have been told to complete some instructions for this purpose exactly, and the complexity of writing the instructions, let alone the instructions themselves, has thus far “persuaded” me to just not die!!

    Liked by 2 people

  2. Interesting post as always. One dilemma it does present is that the complexity of this nature, brings the need for paid for assistance. I have often wondered about directly employing someone once/twice a week for admin, but have never quite pulled the trigger so admin is a feature of my existence, which does seem inefficient. I suspect Peter Hargreaves still has complex affairs, but just has the benefit of a number of assistants to ensure his time is best used not on admin.

    Answers to your questions:
    1, 3 current accounts and not an unmanageable amount of DDs but definitely more than 10 but i suspect less than 30.
    2, Yes as majority of holdings are listed investments. Only one BTL property through ‘accidental’ ownership.
    3, Will let you know after 8 days climbing Kilimanjaro next month!
    4, No, because of kids not work. If I could go, would work on the trip though.
    5, At least five, but one instruction as per Warren Buffett is to buy ETFs on indices.

    Liked by 1 person

  3. Interesting set of questions

    1. Between 10 and 15 I think. Manageable.
    2. Around 0.5%. Yes comfortable as an increasing proportion of the investments are in ISAs for spouse and self and have been on a good run in the last 8 years.
    3. Easily
    4. Not possible due to kids but also need for ongoing financial decision-making particularly at the start of a tax year.
    5. The mind boggles. This is the one that scares !

    Regarding 7 figure amounts and number of providers to house the assets, I am comfortable with using 2 ISA providers, a separate SIPP provider and another taxable brokerage account from where assets will be migrated to ISAs over the next 5 years.
    All accounts divided between spouse and I to maximise protection.


  4. 1. How many direct debits/standing orders do you have on your current account?

    I’m still chortling at the use of the singular.

    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?

    That’s the one that worries me. The other day I was planning a financial manoeuvre for a few years hence when the penny dropped that I shouldn’t bet on being around by then. It’s fairly easy to simplify my wife’s finances so that she should be able to cope with them. My finances, however, and our joint finances, and our family responsibilities, may be too much for her. What to do?

    Liked by 1 person

  5. Love it!

    Yes, I’m definitely getting too complex!

    Trying to ease it now, shame all these new investments (Crypto, P2P, EIS) seem so tempting!


  6. Great post! I definitely see small decisions compounding into complexity. Picking up hobbies is a clear example. You start by wanting to learn photography and end up with books, trips and a whole lot of equipment.

    Liked by 1 person

  7. This is a really interesting post, as usual!
    1. 9 on my current, mainly exercise/ hobby related or professional, 6 on our joint account covering bills.
    2. Just starting out, so a big gap here.
    3. We’re trying to go ‘off grid’ for at least a week every six months. Having just come back it’s exceptionally free-ing. It’s also something I couldn’t have done whilst an ‘accidental landlord’.
    4. No, but not due to finances. I actually had this option (self-paid rather than all-expenses) two years ago, and we chose not to so we could both focus on our careers. Mine is on a rather steeper trajectory than my investment worth, but requires significant plate-spinning and constant attention.
    5. Could and would, and that’s the purpose of my blog.

    I completely agree that adding complexity through BTLs, wine etc adds costs and a lack of flexibility. When we were accidental landlords our ‘property agents’ who dealt with our tenant were essentially an equivalent to a funds ongoing charge, and so a comparison becomes simpler. The curveball being solid assets are subject to entropy; your house falls down, your car rusts, your painting gets damp. For me alternative assets have to include other reasons for me to want to own them. I own cars because I enjoy tinkering with them. I own art because I like my house to be full of art. I own first-edition books because I like to read them. I guess that’s the key. A portfolio of BTLs doesn’t bring me joy, but a brisk mountain drive in my sports car does.

    Liked by 1 person

  8. Definitely too complex for my partner to pick up. 5 accounts 5 p2p accounts and two investment accounts.

    That said my main wealth is in my company pension who will obviously help and at 37 and there’s a list of investments on my computer.

    We’re doing a will next year (yes I know I know)


  9. As I’ve gotten more interested in investing, things have gotten less simple.

    I quite like tinkering about with spreadsheets but am aware that this won’t always be the case so do need to cut out some complexity and distraction. I’ve started simplifying (pulling out of P2P for instance) but there’s still a way to go.

    I can go completely off grid for a week (I do this already when I’m holiday) and would take up the 6-month world trip in an instant, although I’d probably have to tweak some direct debits before I go away…

    Liked by 1 person

  10. I have made plenty of decisions that have lead to unnecessary complexity since FIRE. Like body weight, complexity is easier to gain than it is to lose and the root cause of the complexity is often too tempting to resist. Furthermore, like calories, complexity is invisible when making the original decision.

    I confess to falling into the traps of; over diversification of investments and saying yes to too many so called ‘interesting projects’. The aggregated complexity was ridiculous and simplification took unnecessary effort.

    I now evaluate the impact of complexity as much as assessing risk in my decision making processes and regard the simplest solution as the most elegant solution to any problem.

    However, sometimes complexity can creep up on us. Case in point, residential property letting. This has slowly become so heavily regulated and the legislation stacked in the tenants favour and therefore increasingly complex. Without diligent management and good processes it is an area that has so many pitfalls and now makes low cost ETFs look like a very elegant investment solution.

    Liked by 1 person

  11. Great topic and something to work on. I have way too many bank accounts, spread over 4 countries. Due to many years working overseas/ overseas property.

    Could probably simplify this with one or two bank accounts and a borderless (multi-currency) debit card.

    Liked by 1 person

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