Hi everybody – sorry it’s been a while, life gets in the way! Nothing bad, just been busy with family and work and nothing has really drawn me in for a full post. So I thought I’d post a few thoughts on two topics today, and some thoughts on upcoming posts.
Inflation & Investing
Most of the talk on the various finance communities I frequent seems to be some variation on “what to do with such high inflation?!?” Lots of variations on a theme: how to protect my investment from inflation, should I buy bonds with such high inflation and low yields, what should I do about an emergency fund so I don’t lose money to inflation, and so on. My thoughts:
- First, calm down, inflation isn’t that high, when you compare to history or to other economies. 4.2% in the UK, 6.2% in the US – yes, these are big numbers when we’re used to 2% or so, but it’s a long, long way from hyperinflation. Nobody is trucking around dollars or sterling in wheelbarrows!
- But, interest rates are also extremely low, when usually you can get a risk-free return that matches or beats inflation. The last time inflation was above 5%, in 1990, 10 year treasuries were above 8% yield – today, they’re at 1.375%. Quick graph of 10 year treasuries vs annual US inflation – the UK data I have isn’t as clean, but it’s a similar trend:
- So, what to do about it? Realistically, is there anything you can and should do, now that inflation is actually here? A few of the more commonly recommend approaches include:
- Inflation-indexed bonds/gilts are designed for to mitigate against inflation, but their yields, aside from the inflation adjustment, are practically (sometimes literally) 0%. And any bonds traded openly are subject to interest rate risk if rates rise from their current very low levels. I don’t have a crystal ball to say when or how much rates will rise, but rising inflation feels like it increases the risk of rises in the near future, and we’re seeing the market price that in with mortgage rates coming off their record lows. Plus, inflation is already here, so the higher inflation linked adjustments are priced in – I don’t see these as especially attractive, except maybe as a portion of your overall bond allocation.
- US I bonds take away the interest rate risk, since they aren’t openly traded, only bought and sold to the US government. And the current rates of 7%+ (all of that being inflation adjustment) are clearly attractive, although that’s only guaranteed for 6 months before the inflation adjustment changes, and you’re stuck with the 0% coupon rate. The 1 year lockup, 5 year penalty on interest, and $10k annual limit don’t help, either, and as UK spenders we take on currency risk with USD investments. I think there’s a place for these, but given the limits they’re hardly a panacea for an inflationary environment.
- Some people are recommending crypto as a store of value in an inflationary environment. Not sure I buy that crypto won’t be impacted by inflation (no historical data), but I do know the day to day fluctuations in crypto prices make me hesitant to use crypto as a safe store of value even if those fluctuations aren’t linked to inflation. I don’t want my “safe” money bouncing around that much! Crypto as a long-term investment is a topic for a different day…
- For me, this is the time to stay the course. If you trust your overall asset allocation and investment policy statement, it’s designed to handle anything life can throw at it, within the foreseeable possibilities. I’m still at my 79% equities, 21% bonds+cash allocation with no intention of changing, except bumping to 78/22 next year as planned. Changing your plans just because people and the media are making a lot of noise is a good way to chase performance and lose out overall.
- Within the bonds+cash allocation, it always makes sense to move money to the best combination of yield, access, and risk – leaving all your cash in a 0.01% high street bank account isn’t a good idea in any environment! Same if you have a dedicated emergency fund, at least get the best rate you can (probably the 1% prize rate on Premium Bonds, as of today, unless you can lock some of it up for a fix). If you wanted some of your emergency fund in I bonds, that seems reasonable, too.
S&S ISA Experiment Update
I haven’t done a proper update in a few months, mostly because the experiment is going well. I’m within a percent or so of the FTSE 100 – sometimes ahead, sometimes behind, but close. Individual investments are all over the place, with the best (M&S) up 61% and the worst (IAG, owner of British Airways) down 23%. Not through any investing acumen on my part, just my almost-random approach to a DIY index.
I’ll do a bigger update, probably at the end of the year, but so far I call the experiment a success and plan to continue my ISA contributions next UK tax year.
Upcoming Topics – Suggestions?
I keep a running list of topics I’d like to explore – some of the ones that I expect to come up in the next few months are listed below. But I’m eager to hear from you – what would you like to read? More diving into the details of IRS and HMRC publications, tax treaties, and the like? Modeling and projection? My own financial story and approach?
Some topics I might tackle in the next few months include:
- Expanded US Child Tax Credit and what it means for Americans in the UK – they’ve made it a bit complicated this year…
- Comparison of US tax filing tools – I’ve used TurboTax previously, just started playing around with TaxAct and I’m impressed so far. Any others you think I should try?
- Breakdown of my 2021 taxes – I expect 2021 to be a reasonably typical year, might be a good example of what a US tax return looks like for an American in the UK
- 2021 year in review – it’s been a good year from a personal finance perspective, at least!
- Tools for tracking investments and FIRE in two countries, two currencies – at least the approach that works for me
- Impact of Biden’s Build Back Better Bill on Americans in the UK, once/if it’s actually passed…
What else should I take a look at? Thanks for reading!