Depression and working in finance

Depression. It’s been something I wanted to write about for some time. Particularly given the recent series of tragic high-profile suicides in the media. In a way, I’m glad I waited. For a week or two, there was a public outpouring. Then most people moved on. I don’t mean that in a bad way. But if you suffer from depression you can’t really ‘move on’. If you don’t suffer from depression, I hold no absolutely grudge in you being able to.

The thing that really spurred me to write this, however, was because of what other people had written. Unfortunately, in my view, there is still a big misperception in how depression (and other mental health disorders) manifest and affect people. Things have certainly improved, particularly over the past 5 years. But I was disappointed by how many writers I really respect, just don’t ‘get it’. So today I’m sharing my story about depression and working in finance.

A history of me

I’ve suffered from depression (and anxiety to a lesser extent) since I was a child. I wasn’t formally diagnosed until my late teens. But with the benefit of hindsight, I’ve suffered pretty much my entire life.

I’ve had two major ‘depressive episodes’ in my life. The first was when I was at uni. I couldn’t tell you what started it. But it was gradual then sudden. To some extent, I’m a ‘high-functioning depressive’. On the outside, I look like I’m holding it together. On the inside is utter chaos. That chaos is finely held in balance – I often describe it as ‘being held together with sticky tape’. But a bump, sometimes minuscule, can set things off.

I was holding things together. Day-drinking helped take the edge off of things. I was seeing a uni counsellor and going to group therapy. Then suddenly I wasn’t keeping it together. I then caught flu and ‘the bottom fell out’. I went home for over a month to recover and lost about 3 stone (20kg) in weight. My GP prescribed anti-depressants to me as well as sleeping tablets as I was regularly going whole nights without sleep.

I went back to uni, but effectively missed most of the second half of my final year. Somehow, despite being drugged up to my eyeballs I managed to get through the rest of my year and pass all my exams.

It’s an unquestionable beauty of the human spirit that we can pull ourselves through the mightiest of ordeals. Mine were trivial to what many people go through each day. I think for those who suffer from mental health illnesses it’s just that the margin of error is much finer. A bump that is minor for a non-suffer can be an insurmountable setback for someone with depression.

Starting in the City

About a year into my first job I suffered my second major depressive episode. Again, I don’t know what the trigger was. I just found myself uncontrollably sobbing in the toilet. However, this episode was much worse. Whilst I had stopped the drinking, I was not coping at all with the stress and pressures of a job in the City. I started developing shakes, rashes and rapidly lost weight. However, none of my line-managers noticed. It was only when one of my colleagues saw how bad I was that it came flooding out.

This is a cruel element of depression. For me at least, it actively stops you from reaching out. You think that if you to express your inner turmoil the fine-balance that keeps you operating would be thrown out. Your world comes crashing down around you. And in my first workplace, it was true. The unrelenting focus on being ‘confident’ ‘sure’ and ‘bolshy’ meant bottling up that chaos. Until it can no longer be contained.

Is it right to ‘bottle up’? Probably not, but for me this steps onto one of the biggest misconceptions about depression.

Failure

This is a generalisation, but many non-suffers think that depression is about failure. And for many, but importantly not all, failure is a major component in our suffering. But it’s a subtly different type of failure. Most people are afraid of failing because it will either make them look bad or negatively impact them in an unpleasant way. For someone suffering from depression (or at least for me), I’m not afraid of failure. That’s because my brain tells me I am a failure every single day. Being perceived as a failure is moot. I am a failure. Being a failure means I am a bad person. [p.s. it’s this last leap, failure = bad, that is the thing I have to work on the most]

This is the thing, I find, that those who don’t suffer struggle to comprehend the most. I’m massively generalising here, but they think that if you don’t take risks, if things don’t go wrong, you’ll be OK. That failure is something you can step away from. But it is inescapable. My brain will find a way to find failure – even in the most tenuous of circumstances.

Getting back up

After my second episode, I took some time off work (only 4 days – the masochistic nature of depression). Thanks to the help of some colleagues for whom I am eternally grateful for, I ‘got help’. I saw a psychiatrist who helped me to understand and classify my suffering (unfortunately/fortunately, I’m one of those people who is self-aware which can exacerbate depression and anxiety). I also saw a therapist and went through a series of Mindfulness Cognitive Behavioural Therapy (MCBT) sessions. My psychiatrist changed my medication to something that has worked much better for me since. Unfortunately, all this treatment is a salve rather than a cure. I know that I will live with my illness for the rest of my life.

When it goes right

I’ve focused so far on much of the negative in my journey. But there is a positive. I left my first job after qualifying as a Chartered Accountant. My first workplace wasn’t right for me. I was much more careful in deciding on my second workplace. And whilst I quit the day job not that long into my career; I think I could only have made that call because I reached the right frame of mind to do so (you can read more about it in my post: I’ve got a confession to make). A lot of that is down to the positive aspects of my second job.

The turning point was when I could have had another episode but didn’t.

I was sitting in a foreign courtroom and I suddenly felt myself shaking (I primarily worked in corporate finance disputes). I had been so engrossed in proceedings that I hadn’t noticed that I had drenched my writing pad with sweat. Apparently, my eyes were bloodshot and I had gone deathly pale. In my rush to get to the airport the previous day, I had forgotten to take my medication. Having then been on a plane for 12 hours, in the rush to get ready for court I again forgot to take my meds. I had never done this before, but in effect had now gone over 2 and a half days without medication. I was getting withdrawal symptoms. Now I’ve never taken heroin, but those who’ve tried to come off both heroin and anti-depressants say it’s pretty comparable. I felt like I was dying.

But I was in the middle of a courtroom session. You can’t say anything. Do anything. I was paralysed. At that point, however, my boss turned to me and saw my suffering. And he whispered: “it’s OK”. He knew. Immediately, the tension in my body released. During the adjournment, he took me to one side. And we talked. Rather than the flood coming out and leaving me a wreck; the flood was a release.

How you can help

It was all by circumstance, but it showed me what I help I needed. My boss took the ‘weight off my shoulders’. He didn’t make out things would be easy. But he promised – and a commitment he always kept – that he would make sure it will be OK.

That’s what worked for me. And without trying to be Captain Obvious, it varies person to person. A big part of my depression is always feeling the need to take on everything – to not let people down. What I needed was patience and my boss/colleagues to step-up when I couldn’t. There are just times when I can’t do it.  Unfortunately, there are lots of people in finance (and all professions) who think that that is not acceptable. You’ve got to be 100% at all times, every single hour of the day. It doesn’t matter for them that I can work 150% most of the time but only 50% in the remainder.

I was fortunate that my bosses at my old firm ‘got it’. We worked great as a team. In writing this it did make me slightly miss working with them. But for now, the (semi) retired lifestyle is too enjoyable (they continually try to tempt me back to work). Reflecting on it, we found a way that meant my depression worked (as much as it could) in a positive way. That doesn’t mean there were no negatives. As I mentioned in my confession post, those negatives contributed to me quitting my job.

The reality of life in financial services

Part of the reason I decided to join my second employer was their commitment towards tackling mental health issues in work. Whilst the firm was good, I did get quite lucky with my bosses. It worked out for me. Whilst it worked for me, I know it didn’t for other people in my old team (and for that matter, people in my first workplace as well). This is the reality of the world. Until things get a bit better for those who suffer with mental health illnesses, there will be workplaces and bosses that just won’t work for sufferers. The odds are more challenging in the City where many employers impose a culture and environment that it is counter-productive for suffers (and I think to all young employees).

I can’t promise to young sufferers who may be reading that things are perfect. There are going to be setbacks. There are gonna be struggles. My advice is finding an employer and team that has a commitment to combating mental health issues in the workplace. I’m more wary of giving personal advice, because I know that what works for one person, doesn’t necessarily work for others. What worked best for me was finding ‘rabbis’ – senior people (bosses or not) who can offer their guidance, wisdom and counselling for succeeding in the workplace. They can help you develop a way of working that fits in with your mental health situation. I was fortunate that my rabbis were my bosses, we created methods of working that brought out the best in me (and I hope, in them).

If you’re an employer, I’ll copy some advice from Mind, who say it better than I could:

Sometimes people can worry about how to approach a conversation about a person’s mental health but there are no special skills needed – just the ones you use every day as a people manager like common sense, empathy, being approachable and listening. If you do nothing, problems can spiral, with a negative impact for individuals and organisations.

Thank you

If you’ve made it this far, thanks for reading. I can tell you, it was bloody hard work writing this. But I hope it was worth it. If you are willing to share your story in the comments, please do. Don’t be put off if you don’t suffer from a mental health illness – personally, I would really like to hear your viewpoint as well.

Mrs YFG and I are going on holiday tomorrow, but I’ll be reading every single comment – even if I’m not responding.

It’s somewhat a shame I feel like I have to say this, but here it goes: I see my blog as a living room. Feel free to come in and share your thoughts – even (especially) if you don’t agree with me. But there’s no need to be negative or rude. Don’t be a dick.

 

All the best,

Young FI Guy

[p.s. If you feel like things are getting too much, try to find somebody to talk to – even if you don’t know them that well. You can also go on the Mind website: https://www.mind.org.uk/ which has been helpful for me.]

How I invest my money

One of the most common questions I’m asked is: How do you invest your money? It’s a difficult question to answer because it can be interpreted so broadly. Are we talking about how do I physically go about investing? Or, what asset allocations do I use? What strategic allocations do I use (UK equities vs US equities etc.)? Or what funds do I actually invest in?

Today, I’m going for the narrowest definition. I’m going to write about every fund I invest in. Along the way, I’ll show my asset allocations and such forth. But the focus, at least for today, will be on the specific funds I invest in and why.

Let’s start with my asset allocations

Asset allocation

invest UK asset allocation

Overall, my target asset allocation is 90% invested in Equities and 10% in Bonds. I aim to hold 10% cash outside my investment portfolio.

Let’s start with what’s missing – commodities and property. There are strong arguments for holding these assets in an investment portfolio. I’ll avoid rehashing the arguments for and against. I don’t invest in commodities for three principal reasons:

  1. the thematic aim of my portfolio is towards investment growth – the evidence on commodities is mixed over the long-term for growth-based investment strategies
  2. the strongest argument for commodities is protection against inflation – again the evidence is mixed
  3. UK equities, particularly the FTSE100, are heavily tilted towards commodities-sensitive companies (think BP, Shell, Rio Tinto, Anglo American), investing in commodities as well could cause over-sensitivity to commodity prices

That said, there are diversification and crisis-protection benefits for having commodities in your investment portfolio.

Similar arguments can be levied against property allocations. In addition to the investment portfolio, I own a home with Mrs YFG which means we already have a significant amount of money invested in property outside my investment portfolio.

The 90/10 equity/bond split reflects my very long investment time-horizon and my relatively high-risk tolerance. Currently, I have no intention of encashing any of my investments. As such my holding period is relatively long. There is good evidence that on a risk-adjusted basis a more even split between bonds and equities is superior (in risk-adjusted returns). But, for now, I can comfortably stomach the volatility in my portfolio.

Strategic allocation

uk investment allocations

Overall, I’m almost 50% invested in Global Equities (more on what that specifically entails in a bit). I’m a firm believer in the global passive investment strategy that Lars Kroijer (and others) advocates. That said, you can see a strong tilt towards UK Equities. That’s because, whilst I think a global passive strategy is suitable for most people, we must not forget why we invest: to protect our future selves against inflation. To that end, I consider a tilt towards home markets advisable as they offer greater levels of specific protection against your personal inflation than a global portfolio can.

However, finding the right ’tilt’ is difficult. Whilst I could try and pretend that I’ve come up with some really smart mathematical model, I’ve gone for a rough rule-of-thumb of allocating 15-20% extra to UK equities than a Global Equities tracker. This means I’m roughly 30% invested in UK Equities. I’m very much open to any suggestions or tips if you have them!

Funds

uk investment funds

[Note: I’ve set out the funds by their ‘ticker’, ‘SL Global’ is an amalgamation of various Standard Life pension funds invested in global equities]

Now before I go any further, a disclaimer: none of this post should be construed as a recommendation to invest in a particular investment or fund. This post is for information purposes only. Please do your own research, and speak to an FCA authorised investment adviser if necessary. I won’t take any liability for any decisions you make off the back of this post.

ETFs vs Mutual Funds

With that out of the way, let’s dive in. Overall, I’m heavily invested in ETFs over mutual funds. It’s my opinion that ETFs are a superior investment product to mutual funds for three main reasons:

  1. They are marked-to-market – there’s no discount or premium on trading, unlike closed-ended funds.
  2. They can be traded throughout the day – open-ended funds can only be settled at close.
  3. They generally have lower costs to hold, the ETF structure makes it cheaper to operate than an open-ended fund and platforms generally charge no holding fee for ETFs compared to mutual funds.

There are some downsides, however:

  1. There are bid-offer spreads – which can be substantial for smaller ETFs (i.e. smaller Assets Under Management, AUM).
  2. Some ETFs are “synthetic”, they don’t hold the specific securities they are tracking – opening the ETF up to counterparty risk.
  3. There is an active discussion on the liquidity of ETFs, with some prominent individuals arguing there is a major liquidity risk with ETFs (I think this argument is somewhat overblown, perhaps I can write about it another day).

Passive vs Active

You’ll also notice that I’m pretty much 100% invested in passive funds (I do hold a small active holding, more on that in a bit). The evidence is pretty overwhelming that active fund managers underperform their passive counterparts. Over the years, I have personally conducted analysis on the UK and South American investment markets. The evidence was that few investment managers outperform the market. Finding those managers is difficult, takes a lot of time and isn’t something I find interesting – so I stick to passive funds.

A long time ago, I used to invest in individual stocks. And with reasonable success to boot. I think it is entirely possible ‘to beat the market’. But it involves a significant amount of time to do the research required. I think it is also hard to beat the market unless you focus on a specialism – UK small cap, Euro special situations, UK dividend stocks. That means the ‘active component’ would only represent a small part of my diversified portfolio. With those two things in mind, it’s very much in my ‘too hard’ bucket.

Fund managers

For the eagle-eyed, you may also notice is that I’m heavily invested with Vanguard. Here are the breakdowns by manager:

  • Vanguard – 69%
  • Standard Life – 16%
  • HSBC – 8%
  • iShares – 6%
  • Aberforth – 1%

I won’t hide it: I’m a big fan of Vanguard. I like their ethos: that fees are the most important determinant of investment performance and low fees mean superior performance. I also like their corporate structure (it’s set up as a mutual). There are also few alternatives to my largest single investment: VWRL, Vanguard FTSE-All World. I’m trying to reduce my dependence and diversify across more managers, but for now, it’s a slow process.

On to the specific investments. Details of each investment are (hopefully!) accurate at the time of writing: 20th June 2018, portfolio weights are in brackets.

VWRL (26%)

a/k/a FTSE All-World UCITS ETF. With an ongoing charge factor (OCF) of 0.25%, it is the cheapest “true” all-world ETF tracker. It tracks the FTSE-All World index, which includes emerging markets. It’s invested in over 3,000 securities, offering instant equity diversification. It’s also got a long track record, going back to 2012. With a global passive strategy, this ETF is the bedrock of my portfolio. I’ve been looking for some alternatives, with limited success. Until one of Vanguard’s competitors gets their finger out, it’s the one to beat. Unfortunately, it’s 15 basis points more expensive than the US ETF equivalent which is quite disappointing!

Standard Life Global trackers (15%)

These are a mix of a number of funds across our mine and Mrs YFG’s occupational pensions. The OCFs are between 0.1% and 0.25% which make them, fee-wise, competitive with VWRL. To that end, they are staying put for as long as the fees stay reasonable.

VGOV (9%)

a/k/a U.K. Gilt UCITS ETF. This is the ETF I use for investing in bonds and my sole bond fund. It’s a mixed-duration UK Gilt ETF. There’s a valid argument I should invest in corporate bonds, but the evidence on their efficacy is mixed at best – so I personally steer clear.

The argument is less borne out about investing in global government bonds. I’m principally concerned about UK inflation: so UK Gilts are much preferred over international bonds.

There are lots of UK Gilts in issue – currently 44 straight bonds (not including strips, there are also 28 index-linked Gilts in issue). The UK gilt market is also deep and liquid with strong market-processes in place to ensure orderly trading. For those reasons, I think the liquidity and suitability of a UK Government Bond ETF are fine. VGOV holds 43 securities and has an OCF of 0.12%. It used to be the cheapest UK Gilt ETF although it’s recently lost that title to Lxyor.

The index-linked market is more challenging, there are few ‘shorter’ issues (VGOV’s average duration is c.12 years vs INXG’s (iShares index-linked tracker) c.22 years), which means index-linked gilts are particularly volatile (the longer the time to maturity, the more volatile a bond’s return is to interest rates). For now, it’s straight UK Gilts only for me.

VMID (8%) and VUKE (3%)

VMID a/k/a FTSE 250 UCITS ETF. This my largest UK Equity holding. VMID holds the ‘mid-cap’ stocks of the FTSE 250. At an OCF of 0.10% it is the cheapest FTSE 250 tracker out there (by some distance).

VUKE a/k/a FTSE 100 UCITS ETF. VUKE holds the stocks of the FTSE 100. It has an OCF of 0.09%, a bit more than the cheapest ETFs at 0.07%.

The reason I invest in the FTSE 250 over the FTSE 100 or All-Share is that the UK Equity market is heavily dominated by global companies which have global earnings – not necessarily great for protecting against UK inflation. As an aside, this is why the FTSE 100 surged post-brexit: sterling depreciated in value, so those foreign currency earnings became much more valuable in pounds, what the shares are priced in. The FTSE 100 is also heavily concentrated in a few sectors: (oil and gas: 17%, banks: 13%; tech makes up less than 1%) – (for more on this, have a look at a recent guest post on the subject over at The FIRE Starter).

Another reason is to capture some of the ‘size premium’ – the idea that smaller stocks outperform larger ones over the long-term. However, I’ll confess that, over time, I’ve seen more evidence to suggest the size premium is much weaker (if it exists at all) than first thought. As such, I’m no longer ‘actively’ investing for a size premium.

All-share tracker ETFs are, generally speaking, more expensive (0.2% OCF). Apparently, there’s a new Lxyor ETF on the block (with an OCF of 0.04%!) but has no track record – so we will have to see how it goes.

HMWO (8%)

a/k/a HSBC MSCI World UCITS ETF. This is the cheapest MSCI World tracker at 0.15% (except for, you’ve guessed it, a new Lxyor ETF). This fund has been going for quite a while, since 2010.

It’s a recent addition to my portfolio as I’ve tried to wean myself away from VWRL. As it tracks the MSCI World index, it doesn’t include an allocation to emerging markets – this is a Developed World tracker. The allocations between Developed World and Emerging market are also different between MSCI and FTSE. The most notable difference between the two being MSCI thinks South Korea is developing, FTSE thinks it’s developed.

Unfortunately, the only MSCI ACWI (All Country World Index) ETFs are quite expensive (0.4%+ OCF) which, for me, means they are prohibitively expensive. For now, I’ll be using VWRL and HMWO + EMIM (see below).

VUSA (8%)

a/k/a S&P 500 UCITS ETF. With an OCF of 0.07% this is one of the cheapest S&P500 trackers out there. This is in some ways, a legacy fund from the days before I started putting my investments into VWRL. Back then, I was replicating a global portfolio with a number of different funds in relevant proportions. I’ve now sold away most of my VUSA holdings, but this represents some of the holdings that still sit outside of my ISA with a big capital gain attached (see my post about what I do each new tax year) as well as the residual (“non-VWRL” allocation).

VFEM (6%)

a/k/a FTSE Emerging Markets UCITS ETF. This is the ‘cheapest’ FTSE Emerging markets tracker at 0.25%. It’s more expensive than the MSCI equivalents (see EMIM below), but it follows the FTSE methodology on Emerging Markets.

I tilt towards Emerging Markets. Firstly, because they offer higher growth opportunities than Developed Markets (along with the associated higher risk). Secondly, as a proxy for the inability to invest in ‘Frontier Markets’. Those are the countries with small stock exchanges which are, for now, not really accessible to retail investors. By adding a tilt to Emerging Markets, I’m trying to slightly undo the underweighting those markets get from their exclusion in global indices.

As with my UK tilt above, there isn’t much maths to this, the aim is to hold an extra 5% to my portfolio.

Vanguard All-Share (5%)

a/k/a FTSE U.K. All Share Index Unit Trust. This is the only mutual fund in our portfolio (outside of our occupational pensions). It’s one of the cheapest All-share funds with an OCF of 0.08%. It’s held by Mrs YFG with iweb, which doesn’t charge holding fees for funds. So, for now, we are leaving it rather than swapping it out for ETF equivalents.

DJSC (5%)

a/k/a iShares EURO STOXX Small UCITS ETF. This is an unusual fund, probably the most exotic in the portfolio. It tracks the EURO STOXX Small index, which is the smallest subset of stocks in the EURO STOXX index. Now by “small”, we are really talking about mid-cap type stocks such as Dassault Aviation, Christian Dior, Post Italiane, Pirelli. The idea behind this fund is to pair it with the Developed Europe Vanguard ETF (VEUR) to capture some ‘size premium’.

This ETF is also unusual because it differs from most of my other holdings: it’s expensive (OCF of 0.4%); it’s not particularly well diversified (it holds only 96 stocks); and it uses an ‘optimised’ physical replication strategy (i.e. it doesn’t hold every stock in the index at their market weights). So why do I continue to hold it? Well, as with VUSA, it sits outside my ISA with a nice big capital gain. Over time I’ll defuse the gains and slowly replace this fund in my ISA.

On a tangential note, because of the types of companies in the index, the sector weighting is quite well placed towards consumer inflation (industrials, consumer goods, tech) which does make it interesting from that perspective.

VEUR (4%)

a/k/a FTSE Developed Europe UCITS ETF. One of the cheapest broad Euro trackers with an OCF of 0.12%. Another Vanguard ETF, this also includes an allocation towards UK stocks (as it’s not an xUK fund).

SL UK trackers (1%)

These are Standard Life index funds that track UK markets. Again the OCFs are between 0.1% and 0.25%. As they make up such a small part of my portfolio I can’t be bothered to play around with them. So, for now, they sit there chalking up returns.

EMIM (1%)

a/k/a iShares Core MSCI EM IMI UCITS ETF. As mentioned this a relatively new ETF for me, which I pair with HMWO. This ETF tracks the MSCI Emerging Markets Investable Market Index. What this means is that it is basically is a vehicle for investing in China, South Korea and Taiwan which dominate that index (29%, 15% and 12% respectively). It’s the cheapest emerging market ETF with an OCF of 0.18%. Very much a “let’s see how this plays out” investment.

ASL (1%)

The final and smallest holding is arguably the most interesting. It’s the Aberforth Smaller Companies Investment Trust. This is an actively managed(!) UK IT which invests in UK small caps. Every single other investment I have is passive, so why this sole active fund? Basically, because there are pretty much no UK passive small-cap trackers in the UK. I had looked around quite a bit, and good ol’ Mr Investor at Monevator had a feature on the fund. I liked what I read and I had a deeper look.

There are a few other small-cap funds. Of note is the Dimensional smaller companies fund. Unfortunately, you can only invest through an adviser and it’s really a pseudo-mid-cap fund, like quite a few others. Aberforth, invests in genuinely small-caps, with a value (rather than growth) tilt. Another distinguishing feature is that it has a relatively low OCF at 0.76% compared to its competitors (for example, Liontrust UK Smaller Companies has an OCF of 1.61%).

There are two final features which also set it apart from the other options. Firstly, the management house is focussed on small UK companies. From my experience, the more successful actively managed funds tend to be where the manager has a niche or specific investment philosophy compared to generalists. Secondly, the management team have been in place for almost 30 years, giving it a long track record. Now whilst there is an element of survivorship bias, the best funds tend to stick with their managers over the long-haul even when there is a period of underperformance (as with Aberforth).

As I’ve become more sceptical of the size-factor, I don’t think I’ll be adding to this holding. Although it’s nice to keep it as an experiment to see how it does. And with that, I’ve written about the most words about my smallest, most dormant holding…

Overall

Lots of words on picking funds and asset allocation, let’s get down to business – has it worked?

I’d argue that the answer is yes:

[Note: After posting, I’ve noticed there’s an issue with mutual fund data coming from google finance that was messing up my google sheet document. It means the chart and the return figures were slightly off. I ‘fixed it’ for now with hardcoded data.  I think I’ve also been able to reproduce the benchmark returns using data from Vanguard. Please do let me know if you’ve come across this issue before!]

Since I started systematically recording my investment returns (August 2013), £10,000 in my portfolio has turned into c.£19,000 c.18,000. With a 14% 13% money-weighted (IRR) return and a 12% 11% time-weighted return. For comparison, I benchmark against the Vanguard 80/20 LifeStrategy fund which has a 9.8% return (or the 100% fund with a return of 11.3%). Reassuringly, my portfolio and the LifeStrategy fund has a Rsqr of 0.98 (so I’m going well off base). On the other hand, I could just invest in the LifeStrategy fund and have a much quieter life…

All the best,

Young FI Guy

Great resources/hat-tips

I’m incredibly thankful for the following websites/individual’s who have helped me out a great deal on my investment journey. They are, if you aren’t familiar with them already, excellent resources for the UK investor:

Mrs YFG: on counting gold stars ⭐

Mrs YFG here. I recently watched a Ted Talk by Mandy Saligari (Feelings: handle them before they handle you).

It strongly reminded me of how I grew up. I have spent most of my life trying to be “the good girl”.

At home with my mother, I avoided conflict and eagerly bent to please. I was the good one who didn’t argue back. And I would comply with the rules without arguing.

I was a “good girl”. I did my homework on time (plus the second homework) and got my validation in the form of gold star stickers (in playschool) and then grades, certificates and awards onwards. Always doing what I was supposed to do – went to university, got a degree, got a good (by society’s standards) job, got married, bought a house. Ticking the boxes.

Mr YFG jokes about me needing “gold stars” as an incentive to function, and it isn’t even a joke – it’s my programming. I need validation to function. My life is about collecting gold stars, and how I can work towards my next achievement.

Surely the next step is to have a wonderful career, make partner and be a female power house?

Erm, nah. As a woman, it’s assumed by many that I want to prove myself and ‘overcome’ my femaleness. Don’t get me wrong, I’m a feminist (and an intersectional one at that, thank you very much).

This doesn’t mean I have anything to prove: I have no desire to be a millionaire partner. I do not think that this would make me feel I’ve “made it” and I’ve finally got to the pinnacle of my career. For some people it is the end goal, of course.

I started my career in 2011 assuming I would go all the way. That’s what you do of course. But after wearing myself down and seeing my senior colleagues over the last few years I don’t want their life. I don’t want to do what I do for the next decade.

So that left me in an awkward position a couple of years in – I had nothing left to “achieve”, to validate. What is the point in working at my job if I don’t know what I’m working towards? How will I know if I’m a good person if there are no more gold stars?

Look at these gold stars – where the f**k is my eternal happiness

When I realised in 2015/16 that I didn’t have partnership / career ideals to work towards I got frustrated, down and depressed by the fact that I didn’t feel happy. Even though I had worked hard (by society’s standards) and got all these gold stars no magic trapdoor opened and bestowed me with eternal gratitude and comfort. I worked hard and just wore my body and mind down.

After speaking to Mr YFG and researching online, I realised that I crucially had no concept of “happiness”. Yes, that sounds weird and unusual, but until a year or so ago I had no concept of what me being happy looked like. I knew that, on a cold calculation, on balance I should be happy. I have acquired enough achievements and I can afford to spend a certain amount of money, which equates to a certain level of purchased happiness.

So I began to explore my notion of what happiness is.

FI and happiness

The pursuit of FI for some is the pursuit of happiness – the ability to do what they want, when they want to, being free to pursue what makes them happy.

How do we know what makes them happy? Since I was a child I’ve never had the inclination to make decisions based on happiness. The majority of my life decisions have been made for ease, efficiency, for some future benefit. Happiness or convenience may be a side-effect of the choice I’ve made, but it is rarely the primary reason I did something.

Until a couple of years ago it did not occur to me that I was permitted to make decisions purely based on happiness – pure enjoyment, with no other motive. How selfish, to act with only your own happiness in mind!

Don’t get me wrong I wasn’t, and am not, unhappy, more that I just never explored doing something that makes me happy rather than something with a gold star attached. What if what makes me happy is not an achievement- what if it’s just something simple- is that allowed? Like petting (read:stalking) local dogs and wearing pyjamas all day.

I realised that I could spend my life doing something that makes me happy rather than just looking for my next source of social validation. But money isn’t what makes me happy.

Once I realised this, I spent some time understanding FI and getting into Mr YFG’s world. Slowly I realised a wonderful thing: I didn’t need to spend money to feel happiness. Buying things did not make me happy – it was the thought of treating myself that gave me a tiny buzz of dopamine (which then fell away so I need another hit, or another item).

Long story short, I’m embedded in the FI lifestyle and working hard to work out what makes me happy whilst continuing on the path to FI.

The Annual Allowance

A few weeks ago I wrote about the Lifetime Allowance (LTA). The LTA was brought in on A-day (6 April 2006) when there was an overhaul of UK pensions. (It’s worth having a read of that piece for some of the background history).

At the same time, the Annual Allowance (AA) was also introduced. The AA is very much the Ashley to the LTA’s Mary-Kate (or if you prefer, the Ronnie to the Reggie).

So in this post, I’m going to look into the Annual Allowance and ‘square the circle’.

What the Annual Allowance is and why it exists

The Annual Allowance for 2018/19 is £40,000. What happens is this: if your total contributions into your pensions are greater than £40,000 you will have to pay a tax charge. This tax charge is the top marginal income tax rate on the excess above the AA.

As I mentioned in my Lifetime Allowance post, when you put money into a pension the Government provides tax-relief. The underlying principle under the pension tax-relief system is that you defer taxes.

With the Annual Allowance, the Government is basically capping the amount of tax relief they will give you in a year. In effect, the Government is saying: “you’ve got enough from us, you’re on your own now”.

This seems quite reasonable in principle – should the Government be subsidising the pension savings of the very rich? In general, I agree with this principle. But there are some issues.

Firstly, people don’t earn a consistent salary over their career. They are likely to earn much more in later years – and therefore, contribute much more to their pensions.

Secondly, as we saw with the Lifetime Allowance, lots of Government tinkering has (in my view) resulted in some unintended consequences which feel like they defy the spirit of what is trying to be achieved (more on that later).

Before we jump in, it’s very important to note that the Annual Allowance operates separately and differently to tax relief rules. Let’s quickly touch on the tax relief rules.

Tax Relief

Currently, tax-relief on gross individual pension contributions is limited to £3,600 or 100% of relevant UK earnings per tax year. Importantly, there is no carry forward of unused tax-relief.

Annual Allowance

The Annual Allowance works differently. It’s based on ‘Pension Input Amounts’ – the total of all pension contributions. These are tested over ‘Pension Input Periods’ which (historically) are not necessarily the same as tax years. The AA can also be carried forward. The AA also varies depending on how much you earn and whether or not you have taken some pension benefits.

History of the Annual Allowance

The Annual Allowance came into existence on 6 April 2006, known to those in the pensions industry as A Day. A Day is the Pension expert’s equivalent to the birth of Christ – things are either pre-A Day or post-A Day.

Prior to A Day there were a number of rules and limits to how much could be contributed to an individual’s pension.

The starting Annual Allowance was £215,000, increasing up to £255,000 in 2010/11. It was then dramatically slashed down to £50,000 in 2011/12 before being cut further to £40,000 in 2014/15.

Annual Allowance over time
Annual Allowance over time

Source: Royal London

You’ll notice some asterisks by some of the figures.

Due to the dramatic change in the Annual Allowance in 2011/12, a one-off pension ‘straddling’ adjustment was available. I won’t delve into the detail, but if 2011/12 is relevant for your AA, remember that there are some special rules that applied (your financial planner or accountant will help with the calculations).

In 2015/16 the Government aligned pension input periods to tax years. Before then, pension input periods and tax years were not necessarily aligned. The Government adjusted the Annual Allowances so that for the period 6 April 2015 to 8 July 2015 the AA was £80,000, for the period 8 July 2015 to 5 April 2016 the AA was zero. But you could carry forward the lower of £40,000 and £80,000 less what you input between pre 8 July; minus what you input post 8 July. In effect, you could get up to £80,000 in AA.

With the introduction of pension freedoms in 2015, the Money Purchase Annual Allowance (MPAA) was introduced to further limit the amount of tax-relief available for those who have accessed some of their pensions. In 2015/16 and 2016/17 the MPAA was £10,000 before being reduced to £4,000 in 2017/18.

Finally, In 2016/17 the Government introduced the Tapered Annual Allowance (TAA), potentially reducing an individual’s allowance to a minimum of £10,000 (more on that later).

How it works

The Annual Allowance is assessed each tax year.

Inputs

The first step is to calculate the total pension contributions in the relevant Pension Input Period.

For defined contribution pensions this is calculated as:

DC Annual Allowance Input Calculation
DC Annual Allowance Input Calculation

For defined benefit, it’s a little bit more complicated:

DB Annual Allowance Input Calculation
DB Annual Allowance Input Calculation

Here’s an example DB input calculation from the HMRC tax manual:

Tina is a member of a final salary scheme giving her a pension of 1/60th pensionable pay for each year of service. At the start of the pension input period Tina’s pensionable pay is £80,000 and she has 31 years pensionable service. At the end of the pension input period Tina’s pensionable pay has risen by 5 per cent to £84,000 with 32 years pensionable service.

Tina does not have any other pension arrangement.

Step 1: Calculate opening value

Annual Pension: 31/60 x £80,000 = £41,333.33

Multiply by factor of 16: £41,333.33 x 16 = £661,333.28

Increase by CPI (say 3%): £661,333.28 x 1.03 = £681,173.27

Step 2: Calculate closing value

Annual pension: 32/60 x £84,000 = £44,800

Multiply by factor of 16: £44,800 x 16 = £716,800

Step 3: calculate pension input amount

Closing value – opening value = £716,800 – £681,173.27 = £35,626.73.

Therefore, Tina is within the Annual Allowance and there is no charge.

Carry Forward

Carry forward is available which allows unused Annual Allowance from pension input periods ending in the previous three tax years to be carried forward. It is then added to the annual allowance for the current pension input period.

It’s important to bear in mind the transitional changes in 2011/12 and 2015/16 (you can read more about the specific steps to take here at Pru Adviser: https://www.pruadviser.co.uk/knowledge-literature/knowledge-library/annual-allowance-carry-forward/#section-3)

You can find a number of worked examples of carry forward in the HMRC tax manual (link).

Also note that you don’t need to make a claim to HMRC to use carry forward.

The charge

The charge is levied on the excess of pension contributions above the Annual Allowance. So if there an individual has contributed £50,000, the excess if £10,000 (£50,000 – £40,000).

This excess is charged at the individual’s marginal rate. In effect, it sits on top of an individual’s taxable income.

Bear in mind, you must self-assess. If you’ve exceeded the Annual Allowance you’ll need to record this in your tax return.

It’s possible to get your pension scheme to pay the charge for you, under the ‘Scheme Pays’ system. This is available if:

  • The total annual allowance charge is over £2,000, and
  • The inputs are in excess of the standard annual allowance in the scheme.

Pension schemes must provide the information you need for calculating your pension inputs automatically each year. But don’t rely on your various schemes, it’s up to you. If necessary, get in contact to get the information you need.

Tapered Annual Allowance

In 2016/17 the Government introduced the Tapered Annual Allowance (TAA). Aimed at ‘high earners’, the Annual Allowance is reduced for people who have ‘adjusted income’ over £150,000 and ‘threshold income’ over £110,000 a year. The AA reduces by £1 for every £2 over £150,000 down to a minimum of £10,000.

As noted above, both adjusted income and threshold income need to be above the limits. If you are over only one of the limits, the taper doesn’t apply.

Calculating adjusted and threshold income

Both include all taxable income. The difference between the two can be summarised as: adjusted income includes all pension contributions (including employer and salary sacrifice), threshold excludes pension contributions.

Annual allowance Adjusted and Threshold Income calculation
Annual allowance Adjusted and Threshold Income calculation

Unintended consequences

Unfortunately, there have been a number of unintended consequences with the Tapered Annual Allowance.

Firstly, it’s thought that thousands of people were unintentionally snared by the change and hit with unexpected tax-bills (Professional Adviser).

Secondly, lots of individuals accruing DB pensions above the Annual Allowance have now found that they aren’t eligible for Scheme Pays (FT Adviser). Leaving some with big cash holes to fill.

Finally, I’m aware of several employers who have capped their pension contributions for high earning employers at £10,000 to avoid leaving their employees worse-off from a cash perspective. The difficulty (impossibility?) in employers knowing what other sources of income their employees have means that many have opted to just avoid the whole problem and reduce pension contributions and to pay other types of benefits in lieu. (see FT)

Money Purchase Annual Allowance

In 2015 the Government brought in the fabled Pension Freedoms. This necessitated the need to introduce a new allowance to prevent individuals crystalising a pension and ploughing the money back into a pension.

Thus the Money Purchase Annual Allowance (MPAA) was born. From 6 April 2015, an individual taking income from Flexi-Access Drawdown (FAD) or taking an Uncrystallised Funds Pension Lump sum (UFPLS) triggers the MPAA. Initially, the MPAA was at £10,000 before being dramatically slashed to £4,000 on 6 April 2017.

The MPAA triggers if an individual:

  • Takes a PCLS and income (FAD)
  • Takes an UFPLS
  • Exceeds the GAD rate in a capped drawdown (i.e. turns a capped drawdown into a FAD).
  • Takes a Flexible Annuity (depending on specifics)

It does not trigger when an individual only:

  • Takes a PCLS only
  • Remains in capped drawdown
  • Takes an annuity (non-flexible)
  • Takes a small pot (via commutation)

The Money Purchase Annual Allowance applies to DC only, but not to DB accrual. However, DB contributions are still tested against Annual Allowance. There is no carry forward of the MPAA. Note, the MPAA doesn’t replace the current AA, if applicable, the MPAA and AA will be calculated alongside each other.

Annual Allowance Planning

As I highlighted in the LTA post, paying a tax charge isn’t necessarily a bad thing. As Pru Adviser note:

Opting out to save a tax charge, even if the net benefit is better, would be a bit like a client asking their employer to stop paying their salary because there is a tax charge.

Here are some helpful steps to think about when thinking about the Annual Allowance:

  1. What benefits will you get if you keep contributing – thinking about levels of contribution, future salary increases, interaction with Tapered Allowance
  2. What will it cost (net of tax relief) to get those benefits
  3. Calculate the overall benefit receivable net of tax charges. In addition, will the scheme pay, if you’re in a DB scheme what is the commutation factor?
  4. What will the benefit be if you stopped contributing today?
  5. In addition to (4), what is the value of alternatives benefits (employer paying different benefits)
  6. What will you do instead of contributing to the pension? Will you receive more salary? Invest in ISAs or other investment vehicles? Are there differences in access and risk factors compared to the pension?

Below is an example:

Say we have two individuals, both 45% taxpayers each with a salary of £210,000 (so they have a TPAA of £10,000) with no carry forward available.

One is a member of a DB 1/60th scheme, employee contribution is 6% with scheme pays at commutation factor of 20:1.

The other is a member of a DC scheme where the employer pays 6% of salary, and employee contributions are matched 1:1 up to 6%. The scheme pays the AA charge.

Annual Allowance Planning Example

Having done the number crunching it leaves us with a few questions. For the DB member, is it worth paying £6,930 today for an extra £2,465 each year after retirement? For the same cost, the DC member gets an additional pension amount of £25,290. Is it worth the cost? Or are there alternatives which are better value? The judgment will, of course, depend on the circumstances for each individual and their financial goals and plan.

Closing – key points

  • The AA regime is a cap on the amount of tax relief the Government will give you in a year
  • It’s assessed each year on total pension contributions (yours plus employer plus third parties). The calculation varies between DC and DB.
  • It’s possible to carry forward unused annual allowance from the previous three tax years.
  • If both your ‘adjusted income’ is over £150,000 and ‘threshold income’ is over £110,000 your AA is tapered by £1 for £2 down to a minimum of £10,000.
  • If you flexibly access your pensions you will be hit by the MPAA at £4,000.
  • Paying an AA tax charge is only bad if the net benefit isn’t “worth it”

Please let me know your thoughts. Have you done any Annual Allowance Planning? Has the dramatic fall in the Annual Allowance changed what you (or your employer) have done with your pensions? Do you think the Money Purchase Annual Allowance will affect you?

Disclaimer: Please note, I’m not an FCA authorised financial adviser. This site provides information, comment and opinion for information purposes only and should not be considered financial advice. The site may contain incorrect information or mistakes. You should do your own research or speak to an authorised financial advisor or financial planner before making any and every investment decision. If you make an investment or decision on the basis of any information you do it at your own risk.

All the best,

Young FI Guy

Why having your hopes and dreams crushed can be a good thing

Over the years I’ve had a fair few setbacks. But being honest, I’ve led a charmed life. I’m incredibly grateful for the opportunities I have in life because of the time and place I was born as well as my gender and ethnicity. For me, part of the deal with being blessed in living in the greatest ever time to be alive is that, when things go wrong, you don’t get too down about it. The reality is, when your hopes and dreams get crushed, it’s not the end of the world. In the past, it wasn’t always like that.

So today I want to tell you about a time when my hopes and dreams were crushed. Why it wasn’t the end of the world. And what I learned from the experience and how it has helped me reach the point I’m at today.

A prelude

Just over a week ago I wrote a post asking whether a private school education was worth it (link). There were some great comments both for and against private schooling. I don’t have any children, and Mrs YFG and I aren’t planning on having any. So I don’t have much “skin in the game” so to speak. But I generally land on the side that private school isn’t worth it. However, there are some exceptions. I think one comes out in this story, which is about my terrible experience applying for entry to Cambridge University.

The background

I grew up on a council estate (where my mum still lives to this day). It was, and still is, a rough part of the UK. The town I lived in is one of the most deprived in the country. Perhaps tellingly, it had one of the highest proportion of voters voting for Brexit. A sign that the town has been very much left behind and has really suffered from the neglect of central government.

I went to pretty terrible First and Middle Schools (where I lived used an unusual schooling syste:m, First School was ages 3-8, Reception to Year 3; Middle School ages 8-12, Years 4 through 7; High School ages 12-16, Years 8 through 11). Things were a bit better at High School. I went to the best school in the town. That isn’t saying much, GCSE pass rates at the school are just above the national average, rather than just creeping into double digits (the worst school in the area at the time, now an academy like all the others, only had a 4 day week due to a shortage of teachers and barely scrapped double-digit pass marks in GCSEs when I was a kid). I got good, but not great, GCSEs – mainly because I hated school and really couldn’t be bothered.

College (Sixth Form) was better for me. The local Sixth Form is a good school, one of the best large colleges in the country despite being non-selective. Mid-way through my first year I had pretty much guaranteed an A in A-Level Maths (there weren’t A*s back then) and had A’s in all my other subjects. Just before the Summer AS Level exams my father passed away suddenly. Somehow, I managed to do excellently in my exams getting A’s in every exam (apart from one, which I’ll talk about soon) and finishing my A-Level maths a year early with a high A grade.

Applying for university

My first two choices were Cambridge for Economics and Warwick. In the end, I was rejected from both. In fact, I ended up with only 2 offers out of 5 (more on that later). It was the Cambridge application that my true first choice. It was the closest to home, the most prestigious university, with excellent facilities, and in a lovely city. I knew, of course, that competition for places was fierce. I was more likely than not to be rejected.

Going to university was a big thing for me. My mother had never gone to uni. In fact, she was the only one of her siblings to finish school. Her mother, my grandmother, is illiterate. I would be only the second person in the family to go to uni. My father had gone to uni, being the second in his family to go. He was from a family of immigrants, and so access to education had been much more limited (ironically my grandfather and great-grandfather were both teachers, though I don’t think they went to university, I’m not sure there even was a university back then in their home country).

Anyway, much to my joy, I managed to get an interview at one of the colleges. That was when things went downhill. The day of the interview ranks up there as one of the most unpleasant experiences in my life.

Interview day

It didn’t start well. First off, there was a breakfast introductory meet for all the applicants. I quickly found I was one of only a handful of state school applicants. A good half were foreign students (mostly Chinese) who didn’t really want to talk to any of the British students, and when they did talk to me, couldn’t understand a word I said in my rough, thick, council estate accent. The “public schoolboys” were even less interested, keeping very much into their circle. When the state school kids were periodically introduced to the public school groups you could almost taste the disdain.

The unpleasant experience was interrupted by an announcement that it was our turn to take the electronic entrance exam. Never in my life had I been so thrilled to hear it was time to sit a test! The exam was pretty unremarkable. I’ve got no idea whether I passed or failed it.

After lunch, it was time for the interview.

The interview

It didn’t start well. I turned up to the office of the professor who would be interviewing me (along with one other person). It was in a damp, dark corner of the building. Down a corridor with no light or anywhere to sit. I turned up 15 minutes early. The interviewers were late, so I ended up waiting 30 minutes, with nothing to drink, nowhere to go to the toilet and nowhere to sit.

After what felt like an eternity, I was ushered into the office, just as the previous applicant left. She looked pretty miserable coming out of the room. I was suitably intimidated. I was greeted half-heartedly by two upper-middle-class white guys. Both seemed very grumpy and aloof and not best pleased I was sitting in their office at that moment.

The interview started off reasonably well. I was asked two maths questions. I got the second one wrong, only to correct myself a few minutes later when I realised my error.

Things go downhill

Things then went downhill. The “economics” question was:

what are the problems with stamp duty tax?

Now I had prepared quite a bit for the interview, as best a state school kid with no dad could. The Principal had kindly done a mock interview. I’d had done some interviews for some weekend retail jobs. I read the Times every day (out of enjoyment). But I was stumped by that question. I was a council estate kid. I had no bloody idea what stamp duty was (they didn’t allude whether they meant SDRT or SDLT). Given houses in my town sold for fractions of the SDLT minimum-level, it just wasn’t a thing I had ever come across. My dad traded shares, so I had a vague idea that there was more than one stamp duty. All I knew is that they existed.

I admitted to my interviewers that I didn’t really know what stamp duty was, so I couldn’t answer their question. If they were grumpy before, they were definitely annoyed now. In fact, my response seemed to completely throw them. They didn’t seem to have another question, so they tried to explain what stamp duty was and asked me to answer their question anyway. After a long and confused pause, I tried waffling an answer. I can tell you it was a load of bollocks. I know that now because, after a decade of studying economics, finance, accounting and financial planning, there’s no clear-cut answer to that question.

It gets worse

So things were bad. But I was still hopeful as they were moving on to my grades. I already had an A in A Level maths, so I’d only need two As to get the required grades. I had pretty much guaranteed that as in my 3 other A Levels I’d have to get worse than Ds to not get those needed As. They skimmed my results with a mutter: “decent grades”. But then they spotted I’d got a D in one of my general studies exams.

why did you do so bad in general studies?

If you want to fail an interview this is how you answer: “I didn’t do very well in general studies because I don’t care about it“. Now that was the truth. If you asked any of the several hundred students forced to sit the exam (so the college could get more money) they would have felt the same. The only people (at least who I knew of) who liked general studies were weirdos (sociopaths). I didn’t give a shit about general studies, I don’t give a shit now.

That was the wrong answer.

Well, why don’t you care about how our country operates. Isn’t that important to you. Don’t you want to do well in your exams?

I replied that general studies didn’t really teach anything (it didn’t). I wasn’t focussed on it as I was just trying to keep my life together after burying my father a few weeks earlier. It was hard enough getting out of bed let alone caring about some poxy exam that almost every university didn’t count towards their required grades. My college had kindly written a note explaining my extenuating circumstances. The interviewers then asked (roughly): why did I need those extenuating circumstances, you did well enough in your exams, could you have done better? I can’t remember how I answered, but that question really hurt.

The interview petered out. And I left, knowing, even in my ignorant bliss, that things went bad.

No surprises

I wasn’t surprised I got the rejection letter. I confess I was a little disappointed I didn’t even go into pooling. My teachers were disappointed, they had hoped I might be successful. There were about 5 of us who applied to Oxbridge, I think one (or maybe two) of us got in. Amongst a year group of a few hundred students, it must have been disappointing for the college.

I was a bit more surprised when I got rejected from Warwick. It was a tough course to get on, but I was still hopeful. In a twist of irony, I was accepted to LSE (the London School of Economics), arguably (I’m biased of course) the best uni out of the lot for my course. In another bit of oddness, the grades I needed for LSE were lower than all the others (AB only).

Some things I learned

Despite my Cambridge dreams being mercilessly crushed, I learned a great deal. In no particular order:

  • Always have respect for people who have come from other backgrounds – the breakfast introduction was a horrific experience. I have vowed never to treat anybody poorly just because they come from a different background to you. I never ever want anybody to come away from talking to me like I did at the introduction. Everyone deserves respect. It’s important to treat everyone with respect.
  • I have huge respect for people who overcome the odds – having been pretty beaten up in applying to Cambridge, I have huge respect for the people who made it in. Even more so for those who have overcome difficulties in their life to make it. The two smartest (and arguably best) bosses I worked for both came from working-class backgrounds and made it into Oxbridge, both getting Firsts (or Double Firsts, can’t remember exactly). I have a lot of time for those that overcome the odds and succeed.
  • Schooling can only get you so far – being a state school kid from a council estate I was like a guy turning up to a gun fight with a butter-knife. The public school kids had prepared so much more than me. They also had the confidence. They weren’t intimidated by the tall buildings. When you have grown up in a town where a 3 story flat is ‘the tall building’, even small things are strange to you. The whole Oxbridge world was completely alien and new to me. Maybe you need to go to private school to ‘learn’ lots of this. That would seem at, first glimpse, the best way to do it. But I’m sure there are other ways.
  • Always be prepared – following on from the last point, great preparation is invaluable. I’m now always prepared for tough questions. When I go to an interview I know everything about my interviewer. I do the homework. In doing so, I have a better control of the interview. But it also applies to other aspects of life. In my job I had a reputation for ‘getting things done’. That’s because I was always prepared. Many of the best opportunities I got in my work-life was because I was ready and not a disorganised mess.
  • Keep to time – The huge wait for my interview was stressful and incredibly unpleasant. Not keeping time is disrespectful to the other person. You are in effect saying, my time is more valuable than yours. Unless you are the President of the United States, then I don’t think you have much of an excuse. I never want to leave a person feeling like I did in that damp dark corridor.
  • Tell the truth – I bombed the interview, in part because I was too blunt. But being honest is the #1 most important thing in life for me. Say I had fibbed in the interview and lucked a place. I’d have that place because I lied. That place might not have been right for me, because it was right based on a set of false information. The only way I would know is the potentially painful process of finding out later on. By telling the truth at the interview I found out that Cambridge wasn’t right for me and I wasn’t right for Cambridge (it works both ways). I’ve “passed” most of my face-to-face interviews since. One particular interview where I didn’t, I knew immediately it hadn’t gone well. Because I knew I wasn’t right for the guy interviewing and he wasn’t right for me (a close friend now works for that guy and confirms that it would have been a disaster if I had ended up working for him).

Perhaps the most valuable lesson for me is to always question authority. My interviewers held all the power. And I let that be. I didn’t question why they had that power. An interview should always be a meeting of equals (even where it’s a Partner interviewing a trainee). It’s an attempt to share information: both the interviewer and the interviewee have a common goal (albeit coming from different angles). You should always question anybody who tries to wield authority over you. I can’t put it better than Tony Benn:

“What power have you got?”

“Where did you get it from?”

“In whose interests do you use it?”

“To whom are you accountable?”

“How do we get rid of you?”

It all worked out

In the end, even though I had wanted to go to Cambridge so much, things turned out great. I really enjoyed my course at LSE. The course was suitable for me. I got to live in London for 3 years which was great. On a more minor note, I also happened to meet Mrs YFG there (how unfortunate for her!)

So when people say: “when one door closes, another opens”, it is true. It might not feel like it, but there is an opportunity from every setback.

Some questions for you. What setbacks have you overcome? What did you learn from them? Did it help you on the road to FI?

I’d also like to hear from anybody who did go to Cambridge or Oxford (be nice to me!), and from those that didn’t get in.

 

All the best,

Young FI Guy

[p.s. I can’t remember the interview questions verbatim, it was over a decade ago – there’s every chance I’m remembering it worse than I did!]

[last edit: 6 June 2018]

Something a bit different – A Monday World Cup Maths Puzzle

If you didn’t know already there’s an obscure little sporting tournament in Russia which starts this month. It is, of course, the World Cup!

If you’re a bit footy-mad like me, past World Cups bring back glorious memories. Particularly those from your childhood. An abiding memory of mine is of the 2006 World Cup which coincided with my GCSEs. I’m sure I would have done much better in my exams if I had actually done any revision instead of watching all the games. Faced with the dilemma of watching Togo and South Korea duke it out or revise – the answer is obvious!

Which is why I enjoyed Alex Bellos’ Guardian Monday Puzzle so much this week. Every fortnight, Alex sets a maths puzzle on Monday morning, sharing the solution at 5pm. Alex’s puzzles are very good – being both challenging whilst, usually, not taking too long to solve. This week’s puzzle being football related is a bonus (Alex is footy-mad himself having written several books about football in Brazil alongside his mathematics books).

Here’s the puzzle:

If you know only that England beat Tunisia 3-0, can you deduce the score of every other match in the group?

Anyway. Alex also included a post of GCHQ puzzle from Euro 2016 which is a little more challenging:

Being semi-retired, finding the time to do puzzles is very difficult. But I managed to find time to solve the GCHQ one as well (it’s not too long of a puzzle, it took me about 10-15 minutes and I am by no means “fast”!) I couldn’t find a link to the solution so for those who don’t want spoilers skip the next few lines.
You can find the archive of Alex’s puzzles here: https://www.theguardian.com/science/series/alex-bellos-monday-puzzle
Hope you had a good monday!
All the best,
Young FI Guy

Mr YFG needs your advice and some other odds and ends

Hello loyal readers. I’ve got a favour to ask. I’m looking for a bit of advice on the content of the blog. In short, what types of posts do you enjoy reading the most? What content brings you to my blog? What contents keeps you reading?

Some background on why I’m asking. I usually aim to write two posts a week. One being on a ‘technical subject’ (like this week’s on the Lifetime Allowance) and one on FI or other related subjects. Recently, there’s been more of tilt towards the technical subjects. That’s because I generally find them easier to write. I find that I often stumble into writer’s block with FI posts. I think that’s for two reasons. Firstly, there’s already so much good content out there that I feel I’m just rehashing the same things others’ have already said. Secondly, when I write ‘my journey’ type-stories I can’t help but feel a bit self-indulgent.

I guess what I’m asking loyal readers is: Am I over thinking this? Do you still enjoy reading FI posts even if it covers familiar ground? Do you like hearing me talk about my journey (or conversely do you think I should keep it to myself?

Please do share your thoughts in a comment. I’d really like to know your collective thoughts.

Odds and ends

There are a few things over the past week or two I’d like to comment on. I don’t think, as yet, that I can write a ‘full length’ post on them. So I’ve bundled them together to share today.

Carillion

A few weeks back the Work and Pensions and BEIS parliamentary committees released their long await report on the Carillion mess. I was very much looking forward to it, both from a professional point of view and a personal one. I have to say that I was very disappointed in the quality of the report. My biggest disappointment was the lack of detailed research or analysis in the report.

There was no analysis of the accounts. No critical review of the advisors’ work. Nor any basic research into any industry practices. I had hoped to read a bit about invoice factoring as Carillion was a known abuser of credit terms in the industry. Instead, we were given broad statements sourced from Investopedia.

Likewise, the summary of the report was: everyone is to blame except us MPs who write the laws. Much criticism was given to the regulators (The Pensions Regulator and Financial Reporting Council) but from what I gather they have both been doing their job. The limit on their powers seems to be, at least to me, because MPs are reluctant to give non-government bodies strong powers. That doesn’t mean they are perfect, both could do with reacting quicker to ‘blow-ups’. But their ability to do real investigatory work requires much more money (and better staff) than both the government and the market are willing to pay for (read Serious Fraud Office).

That said, there are big issues with the quality of audits. Although I really don’t think conflicts of interest or the big 4 oligopoly is to blame. [For disclosure I have worked both for one of the big 4 and for a non-big 4 competitor]. In summary, the report really felt like a “we’ve made our minds up, now let’s find the evidence to fit that narrative”.

The Pensions Mountain

Royal London / Steve Webb released their latest policy paper: “Will we ever summit the pension mountain?” The headline was that you “need” a £260,000 pension to maintain current living standards,up from £150,000 16 years ago. That headline grabbed a lot of attention. But the underlying numbers less so. The £260,000 is based on a person aged 65 making up a shortfall between the state pension and the average UK income (£26,728). The analysis also assumed retirement would bring cost savings such as: no longer having to pay a mortgage, not contributing into a pension and the end of work-related costs. Therefore, the analysis suggested workers can retire on two-thirds of UK average earnings (£17,819). The shortfall being £9,273.

Putting aside the question marks on the assumptions, the report suggested a 65-year-old could buy an index-linked annuity for £9,273 at 3.56% (£260,000 = £9,273 / 3.56% rounded). I’ve got to be frank: I read this in a sanguine way. That 3.56% seems like a pretty good deal to me (most in the FI community use a 4% SWR). An inflation-protected, guaranteed 3.56% for life seems pretty darn good (I know that’s a bit of an apples to oranges comparison). Saving £260,000 over c.50 years of working seems pretty manageable. The elephant in the room is, of course, housing costs. Saving £260,000 and having a mortgage-free home is a bit more challenging. And that’s the key message from the report. We can fiddle with pensions and incentivising savers as much as we want, but housing is still the elephant in the room.

The Monetary Policy Committee and boardroom diversity

Yesterday, the MPC announced the appointment of the latest member of the committee (Jonathan Haskel). To very little surprise in some quarters it was, once again, a white middle-aged bloke. The timing could not have been much worse. The day before, the Department of Business, Energy and Industrial Strategy released the mid-way report on promoting greater gender diversity in the boardrooms of our listed companies. To accompany the release, they set out a top-10 worst reasons companies gave for not including more female members to their board. (Such as, “We have one woman already on the board, so we are done – it is someone else’s turn“).

Maybe Prof Haskel is the most qualified person for the job. But when you have 19 members, 18 of which are men; and you interview 5 candidates and select the only male interviewee, questions are going to be asked. The trouble is, time and time again, we see questionable appointments of people to public decision-making roles (remember the Toby Young fiasco?) Too often, the reason given for these appointments are: “they are the best candidate” or “they have the best fit” or “their objectives in the role are aligned to ours“. All these reasons really boil down to: “they look like us, talk like us and think like us“. Nazir Afzal hit the nail on the head for me:

Too often, it’s the cronies or the familiar faces who get the nod. Where we are appointing people to oversight and decision-making roles we should be setting out the precise reasons why. No hiding behind platitudes or weasel words. Until this intellectual honesty becomes part of the game, women (and other minorities in society) will continue to be short-changed.

All the best,

Young FI Guy