Chinese takeaway
by Doug Brodie
/1. How the US owes China money.
Imagine we are commercial traders, selling things to each other. If you deliver to me more goods than I do to you, I will owe you money – essentially that means you have a claim on either my assets or my future income. China swamps the US with the excess of goods delivered versus what the US exports to it, meaning that the US has to pay it lots and lots of dollars. This cash is deposited in US Treasuries – so the Chinese and Japanese holdings of around $2 trillion in US government bonds have been created by Americans sending money to them in payment for things. The US has swapped their cash for Chinese goods.
Clearly to stop sending so much of their currency overseas the US has to stop buying from overseas countries, which is what Trump is trying to do. The difficulty is he is trying to use a chainsaw to do so, instead of a fine scalpel.
/2. What is your severity of failure?
You can keep all your money in cash: you will always know how much is there, the capital value of each £1 will never fall (skip the inflation comments please) so from a ‘holding on to money’ perspective you can never really fail.
However, failing to account for inflation over a thirty-year span is likely to create a pretty severe problem; using the Rule of 72 and dividing that number by 2.5% inflation means that the price of everything doubles every 29 years. Think of your current income, how severe would it be if you had that cut in half? How problematic would that be if you were 90?
Keeping up with inflation is fairly well accepted as a must in income planning by most (prospective) retirees. What might not be so clear may what happens if your income strategy fails to provide an increase next year? If your income is £75,000 and you planned for a CPI-matching 2.5% increase to £76,875, then failing to get that extra £36 per week is likely to be serious, it’s not going to lead to penury.
So, do you need that increase to be guaranteed, or will ‘most probably’ do? The reality is that almost all people reading this have capacity to cope with annual disappointments in income, as long as the overall failure is not severe. We use our disposable spending to take up the slack, it’s unlikely that such a CPI-linked failure would prevent bills from being paid.
There is a technical study of this, it is known as FMEA – Failure Mode and Effects Analysis. We do a very watered down version of that when we plan and build client portfolios. It is a subconscious act that we consider the different elements of the portfolio in terms of the impact of failure. We do this from experience – we didn’t touch Woodford funds because of experience; we have lost no portfolio income whatsoever since 2007 because of experience. The experience was learned during the 1990’s and the dotcom crash.
“In 1989 we followed Antony Bolton after he produced a huge 84% in Fidelity European. To everyone’s cost, he promptly followed that with a -45% fall”. Ouch.
/3. Were you born at the right time to invest your pension?
MSCI World is a global index which seeks to replicate market capitalisation, so the largest allocation is to the US.
If you retired at the end of the 90’s and decided dirt cheap index investing was the only way to go, this was your investment return for the next ten years:
Your spouse is ten years younger so didn’t retire until 2010 – and this is the chart for that person’s first ten years following the same mantra:
Exactly the same investment for exactly the same number of years – you can get royally turned over simply because you turned 62 at a bum time; looking at the charts above, where do you think we are right now, closer to the start of the 2000 chart or the 2010 chart?
It’s the former – that was coming from a high, in 2010 it was starting from the dotcom crash.
Going back to the issue of severity of failure, this is why we only use income investing to design and deliver client income.
/4. People rarely do what they plan – the stats from the Society of Actuaries.
Retirement often doesn’t go to plan, unless your sole pension income is via a final salary scheme.
We do see many people talking about getting part time work, going down to 3 days per week, getting NED roles, but employers clearly don’t see things the same way. If you’re lucky, your work is fulfilling, a touch academic in some areas, suitably contained in an area where you are an expert, social, safe and satisfying.
Retirement is often a complete unknown, and from our experience we see many, many more people who say they retired too early than those who say they retired too late. Often the issue is people don’t like their employer, and the trouble is that when you’re over (say) 50 that can be interpreted as not liking the working life, when it’s not.
/5. M&S vs The Entire Cybercrime Ecosystem
The project lead on our software development previously worked for an offshore cyber-crime specialist, analysing hacks and takeovers and running ransom negotiations with the hackers.
