Jan 2020: borrowing to pay taxes

What happened in the world in January? A variety of things, which impact the Australian environment a lot more than my portfolio.

The month began with Australia on fire. The month ended with China’s Coronavirus making the world hyperventilate. The latter, 10,000 km away, seems more to blame for the AUD currency dropping 5% to its post Brexit low. Australia’s (worldwide commodities-centric) equities however have risen symmetrically to compensate. The environmental damage may be shocking, but you’ll need to look elsewhere than the markets to see the impact.

(C) Northern Star.com.au

Closer to home, as I write this the UK is no longer a member of the EU, and I have lost my rights to live, work (unlikely, to be fair), or retire to (that’s more like it, obvs) 26 countries (and retiring to Ireland is not very appealing). The last couple of weeks of Brexit newsflow have seen the Tories approach knock the FTSE-100 back a bit. This UK equities decline is bucking the wider positive trend.

Bonds, in the meantime, have had a good month. Flights to safety, I imagine, plus various central bank noise that I tune out of.

The markets I’m in, net of currency fluctuations, moved up just over half a percent in Jan. My portfolio dropped about half a percent, even though AMZN is one of its largest holdings and has just popped its $2000/share cherry. Off the top of my head, I’m not sure why my performance is lagging my benchmark – but the headline of ‘not much to see here’ is really what matters.

In the UK, January is the month when you won’t bump into accountants. 31 January is the annual tax deadline. My tax bill this year was the highest for years, thanks to a flurry of windfalls a couple of years ago. This presented me with a six figure cashflow crunch, as in a few days’ time I am due to receive a seven figure sum for selling my old house.

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I solved my cashflow challenge with my portfolio loan facilities; I have, without a murmur or delay, withdrawn the six figure sum I need to settle with Her Majesty’s tax collectors, knowing that within two weeks I should have more than enough to repay the portfolio loan in its entirety if I so wanted.

Using this loan has tilted my exposures vs my target allocation slightly, but I have ended up very close to target on all fronts:

Deltas from target allocation, as at 31/1/2020.

As it happens, another way I think about this portfolio loan is that it has allowed me to ‘borrow money’ from the taxman over the last year or two, after I crystallised my windfalls. Rather than pay the tax in advance (which, in Switzerland where rates are negative, they charge you a penalty for), or set the tax due aside in a ‘no risk’ (i.e. no return) account until due, instead I’ve had it invested. In effect, I’ve borrowed money from the tax man. This tax due, as it happens, has earnt about 20% return. Now’s the time to ‘pay back’ the taxman, but in the meantime he hasn’t charged me a penny of interest and I get to keep the five figure sum I’ve made out of his money.

I know it isn’t customary to go into debt to pay your taxes, but it feels like it’s working for me.

Annual FI audit

It’s that time of the year when we take stock. Here at FIREvLondon, that means it’s time to do an ‘audit’ of our Finances, and our financial Independence.

Let’s take a look at some of the key questions an audit should consider.

Q1: What state is the balance sheet in?

I review the portfolio performance monthly, and it’s progress against ‘budget’ (i.e. target allocation). As this post highlights, December saw a very strong performance with net assets up almost 23%. An exceptionally strong performance, by historical or future standards, reflecting the 30% gain in the US stockmarket in 2019.

Liabilities remain very much under control too. The margin loan that provides my account with leverage amounts to just over 10% of the value of the assets.

Off balance sheet, the recent move to sell a key residential property and reinvest the money will provide further strengthening of the balance sheet.

Q2: How does the income statement look?

A year ago I borrowed a framework by {indeedably} in which he breaks down his assets and income. He has an unusual way of looking at his state of financial dependence, as shown by his (updated) image below:

Using this framework, 2019 saw me, like 2018, make a clear ‘profit’, or surplus, between total inflows and total outflows. However, from a Financial Independence perspective, i.e. stripping out earned income (and taxes on them), I saw a slight deficit – with outflows exceeding inflows. The chief reason for this was a very high level of expenditure on ‘wants’.

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December returns and 2019 review

The UK election already seems some time ago. Really, it was just last month, and mid month too. And it provided welcome clarity – I will say that for it – after several years of frustration. For all the hyperventilating Brexit nonsense, citing ‘enemies of the people’, ‘a treasonous Speaker’, parliament undermining democracy etc, the root cause of much of the last few years’ nonsense was the lack of a majority in Parliament. Parliamentary sovereignty is supreme, and is delegated to the government/executive by a clear majority. All else is noise.

And much as I am no fan of the Tories and the Tory Brexit, the improvement in mood / confidence / sense of clouds lifting after the election result was palpable. The dimwit forex markets lifted the pound above $1.35, before dumping it back where it started once they came to their senses. By the end of the month though sterling had climbed 1-2% against the USD/EUR.

GBP/USD and GBP/EUR since 1 Nov 2019 to 3 Jan 2020

Elsewhere, we saw the new EU commission take over, the USA/China trade war rumble on, and some nasty early season bush fires take root in Australia.

And amidst all this noise, equity markets rose. The UK market grew the fastest, bouyed by the election result presumably; both European and USA markets also saw good gains, admittedly mostly cancelled out by their currencies falling against the pound. Only Australia was the outlier, with a drop in its ‘share market’ somewhat mitigated by the rise in the AUD.

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