I am about a week late writing this monthly update, and my what a week it’s been.
February was when the coronavirus (now called covid-19) began to impact the markets. My diary called it the ‘corona correction’. At the time of writing, on the 10th March, the February story already seems rather old, but here it goes in extreme brevity.
- Beginning of February. I sold my house, pocketing over £1m cash.
- Middle of February: I ‘slowly’ dripfed £1m cash into the market, matching my target allocation.
- End of February: the market fell almost 10%. Doh.
- (early March – my house money has all gone…. but that’s getting ahead of myself!)
More specifically, equities fell 6-9% on the month (and significantly more off the mid-month peaks). Bonds ticked upwards very slightly. And the pound fell slightly versus other major currencies.
The markets, weighted to my allocation, fell 5.8%. My (very slightly leveraged) portfolio fell 6.4%, even more than the market – reflecting me topping it up by >£1m mid month, at its peaks. That high plateau you see in the graph below almost exactly mirrors the time period over which I put my money to work. Sigh.
The other thing February was notable for was my efforts to reduce my (taxable) complexity. I sold a number of holdings, in unsheltered accounts, replacing them with fewer, larger, mostly ETF holdings. And in my sheltered accounts (pension & ISAs), I sold a bunch of ETFs and bought individual securities – concentrating my active holdings in the (undisclosable) tax sheltered accounts, and reducing my number of (disclosable) tax holdings significantly.
My efforts fighting complexity were more successful, more quickly, than I would have first thought. I have reduced my total holdings to <150. My unwrapped (disclosable) holdings are almost below 100 – a reduction of 37 since the start of the year. And my number of small (<£20k) holdings has dropped to 35 (though the market’s falls are making this target harder to hit!).
My portfolio is still complex (certainly too much so for @mathmo – see comment below), but progress is being made – and quickly.
I liked FireVLondon’s revelation on the road to Shipley Tax Office that complexity was a real cost like fees and taxes. I myself just a few weeks ago pinged my tax return off with just 10 lines of information to my accountant so his inventory of tax filing effort was eye-opening. I’d suggest the solution didn’t go nearly far enough in the face of active naughtiness — if the cost of complexity were properly measured, the knife would have cut much deeper.(@mathmo comment about my Fighting Complexity blog, in Monevator’s Weekend Reading 14 Feb 2020)
At the end of February, I was almost 4% underweight equities, around 1% overweight in bonds, and 2.5% overweight cash. With hindsight, not terrible positioning for the March roller corona-ster.
The title of this blog is that fundamental question: how much is enough? Much of the thinking around FIRE boils down to answering this question.
And as with so many good questions, the answer depends on perspective. And perspective itself depends, among other things, on height. And I think height is a useful metaphor for explaining how much is enough for me.
Ceilings vs floors
I remember my scorn about twenty years ago for my friend W, who was my most earnings-focused mate, when he told me that “I couldn’t live on a salary less than £100k”. At that point I earnt less than half that and very much saw £100k as a ceiling, not a floor.
In any case, these days I’m afraid I would now regard £100k p.a. as definitely a floor. And I mean £100k post tax, of actual money that I could spend. It would fund my ‘needs’: groceries, utilities, transport, medical bills, household cleaning and maintenance, and such like. It would also pay for my investment expenses, though obviously there is a ‘circular reference’ here (as the more that is ‘enough’, the higher the expenses that ‘enough’ needs to fund!).
My ‘needs’ are based on relatively low housing costs. I don’t have a mortgage on my home. I am also ignoring my house as an asset – so it is not part of the ‘enough’ calculation either.
Based on a 4% Safe Withdrawal Rate (a.k.a. the 25x rule), £100k p.a. needs a pot of £2.5m. Tax would complicate that somewhat, but assuming I remain married, and that the current allowances remain in place, I am prepared to ignore tax, for the moment. Certainly I know people earning almost £90k who have <10% tax, and I think as a couple we could make the tax at £100k p.a. relatively minimal.
Or perhaps one should think of the tax liability as roughly equivalent to the state pension/benefits which, in other respects, I am ignoring for the purposes of ‘enough’ calculations.
In actual fact, whether £2.5m turns out to be enough depends on two key questions:
- What return does the portfolio deliver in the long term, and
- In what order (or sequence) – i.e. if it alternates 15% and -5% every year, you do much better if you begin with a +15 and not a -5.
As I mentioned in my January 2020 report, January is the tax deadline month in the UK. And it is the annual tax filing process where the overcomplexity in my financial affairs becomes most visible, and any problems created by that complexity become urgent and pressing.
In previous posts here and here I’ve discussed the complexity that has arisen in my financial affairs. Partly this is a quality problem, reflecting my higher than average net worth, and the journey I’ve taken to build my wealth. Partly this is deliberate strategy on my part – to diversify across providers, to make use of tax sheltered accounts where possible, to spread funds between me and Mrs FvL. And partly this is just creep – the equivalent of middle aged spread: it happens without you really noticing, until one day in January somebody takes a snapshot of you and you realise how unappealing the image is to outsiders!
Reflecting on the consequences of my overcomplexity, I think three problems nag at me:
- The burden I shall impose on my executors. I struggle sometimes to manage my finances. My other half, or my family/friends, or a trained financial/legal professional, would be left with a genuine labyrinth to navigate.
- The time I spend managing my money. As it happens, I am sad/bored enough to quite enjoy this. But I suspect I would enjoy it just as much if it took half as long, and I would find more productive/enjoyable things to fill my time.
- The hassle/time/expense of the annual tax filing process. Let me dig into this a bit below.
I have used the same accountant for years. She knows my affairs pretty well and we have developed a reasonable system/way of working over the years. My limited company has a separate accountant and process, who/which I am largely ignoring in this blog post. Here are some stats from my personal tax filing process for the last tax year:
- 82 files that I’ve sent to my accountant. These are statements, EIS certificates (for the UK angel investing tax breaks), payslips, etc. These 82 files do NOT include some important material my accountant gets direct from my broker/private bank.
- 69 pages: the number of pages in my tax return.
- 110 emails, exchanged between me and my accountant, over the last 12 months. This is going to cost me….
- 570 rows in my investment tracking spreadsheet, covering both me and Mrs FvL. One row represents one holding in one account across all our publicly traded investment accounts. We have about 200 holdings in total, so each holding is coming up in almost 3 places (e.g. in my ISA, Mrs FvL’s ISA, and my General Investment account).
- 10-20 hours a year of my time is spent specifically working on my tax admin each year. Plus at least double this on tracking my activities.
- 1800+ investment-related transactions for just 12 months in my tracking system on Quicken. This covers me, Mrs FvL, and my personal limited company’s liquid portfolio. Every single one of these transactions has been typed in by me. Of these, about 500 are of a dividend payment of less than £50.
I reflected over the Christmas break on what I might do to curb this complexity.Read the rest of this entry »