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Welcome

Thanks for finding my new site, focusing on FIRE (Financial Independence/Retire Early) for Americans who live in the UK, or want to.

This site grew out of an idea that I had after helping a number of people on both Facebook and Reddit. There is lots of information out there about how to invest for FIRE, and tons of information on both US and UK taxes, although somewhat less on how the two systems interact. It’s really hard to find something that ties it all together, and that’s really important for US citizens in the UK. Investing in a way that isn’t tax efficient can be hugely punitive (55%+ tax rates, massive fines for non-compliance with unexpectedly complicated tax filings, etc.).

I started putting a document together to summarize the basics of what you need to know. Once that document reached 40 pages (!), I realized I needed to either write a book or create a better site for it. That’s this site.

Next Steps

For starters, I’ll be moving the content from that initial document here, organizing and expanding. Those topics include:

  • Summary of each account option for investing (pensions, ISAs, IRAs, SIPPs, etc.)
  • High level review of real estate, inheritance tax, things to consider before you move, and the US/UK tax treaty

From there, I’ve got some ideas about other topics I’d like to explore, and will also post on more timely topics as they come up. I’ve started a list on this page – definitely welcome your comments on other topics you’d like to see!

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FYI: 2022 FBAR Exchange Rates are Out

https://fiscaldata.treasury.gov/datasets/treasury-reporting-rates-exchange/treasury-reporting-rates-of-exchange

Just a quick PSA, for those of us who were “eagerly” awaiting them so we can wrap up that particular bit of annual US silliness. First time I’ll have to do FBARs for the kids, will write something up if that turns out to be any more challenging than mine (hoping not, it’s only one account each).

Wise Stocks & Interest Assets – Beware of PFICs!

Many Americans in the UK use Wise (formerly known as TransferWise) to transfer money between GBP and USD and take advantage of their “Borderless” accounts to facilitate a multi-currency lifestyle. I used Wise myself when I first moved to the UK, and generally think it’s a great product – it was a vital lifeline for the first few weeks until I got a “real” UK bank account. It’s also a very quick, convenient, and low cost way of sending money in either direction. Not quite as cheap as Interactive Brokers for any larger amounts, but certainly an easier customer experience!

Recently, they’ve started offering to hold your balance in different “Assets” – basically, instead of a 0% interest account, they will either put the money in “Stocks” or “Interest”. Stocks has been around for a few months, Interest is the new part that initially interested me, but led to this article when I dug in a bit.

Stocks is an all-world equity index fund, Interest is a GBP, EUR, or USD bond index fund. Critically, these are non-US funds, a mix of Irish and Luxembourgish domiciles – PFICs!

So while Wise is great for holding 0% interest cash and moving it between currencies, US taxpayers should definitely not use it for investing. Scroll down to the bottom of their “Who can use Assets” page and they call out that US citizens/taxpayers are not eligible, but how well they automatically enforce that is not something I’d want to test.

I’m glad Wise is trying to serve the international personal finance community better, but just wanted to put out a quick warning that this is one feature that US taxpayers should absolutely avoid. Fortunately, the default holding remains cash, which is perfectly fine (just report non-US accounts on your FBAR). At 0% interest and slightly convoluted deposit protection, I wouldn’t hold large balances there, but as an easy way of moving money across currencies, it’s great. Just don’t invest through Wise – maybe someday that feature will come in a way that is US taxpayer-friendly, but that’s not today.

News Alert: Chancellor to allow UK residents to purchase US ETFs!

For those UK residents who haven’t seen the news today, the Chancellor has announced a package of reforms. Reading into them, one is of particular interest to many UK Bogleheads (especially US citizens in the UK) – an intention to repeal the requirements for a KID/KIID, and quite explicitly to enable access to US ETFs.

The consultation paper is here. Section 5.3 says very clearly that they want to improve retail investor choice, including US-based ETFs.

Now, this isn’t law/regulation yet, but assuming it does happen, this blows a nice hole in the catch-22 between PFIC and KID/KIID rules. If it happens as written, it should be quite straightforward to buy a US ETF inside a UK ISA, thus benefitting from the UK tax advantages without the punishing effects of US PFIC rules. The dividends & capital gains would still be US taxable, but that’s a million times easier than managing a portfolio of individual stocks!

I’ll definitely keep an eye on this over the coming months, as the consultation closes on 03 March. But assuming it does, this moves ISAs from a borderline case to a clear-cut win for US citizens in the UK. Possibly also avoids some SIPP grey area around PFIC rules, if the SIPP is just in US ETFs anyway.

Some good news to come out of HM Treasury 🙂

The Autumn Statement & Americans in the UK

I never even had a chance to write about the Truss/Kwarteng mini-budget, it was gone so fast! (and honestly, didn’t have much in the way of any special impact on Americans in the UK, beyond what everybody else would experience). The Sunak/Hunt Autumn Statement has some more intriguing effects, though, particularly on the “is an ISA worth the hassle” question.

Quick recap on the main points of the Autumn Statement – deeper information on the always-great MoneySavingExpert:

  • Stuff that has no special impact on Americans, but could certainly have an impact on any individual:
    • Benefits & State Pension rise by the 10.1% inflation figure, from April 2023
    • Minimum wage rises to £10.42/hour from April 2023
    • Reduction in the support to energy bills, with help focused on those less well off, as well as other cost-of-living and mortgage support for the needy.
    • Council tax likely to rise more (can now do 5% without a referendum, instead of 3%)
    • Electric vehicle owners will pay road tax from April 2025
    • The 45% additional rate threshold falls from £150k to £125,140 (the point where the Personal Allowance phase-out stops), starting in April 2023. So the new thresholds are (income tax only, no NI):
  • And a few with a bit of American-specific impact:
    • Income tax thresholds frozen until April 2028: assuming US thresholds continue to increase with inflation, this will result in UK tax rates continuing to climb further above US ones. If you take the Foreign Tax Credit, this will result in increasingly more credit to carry over. No change to the basic fact that very few Americans in the UK will owe tax to the US, except in some fringe cases.
    • The 45% additional rate threshold falls from £150k to £125,140 (the point where the Personal Allowance phase-out stops), starting in April 2023. So the new thresholds are as follows, supposedly for the next 6 years:
Income BandTax Rate
£0 to £12,5700% (Personal Allowance)
£12,570 to £50,27020% income tax + 12% National Insurance
£50,270 to £100,00040% marginal income tax + 2% National Insurance
£100,000 to £125,14060% marginal income tax (40% plus loss of Personal Allowance at £1 for every £2 earned over £100k) + 2% National Insurance
Above £125,14045% marginal income tax + 2% National Insurance
These are generally true, but plenty of niche exceptions

This one means that people in that £125,140 to £150k band might pay up to £1,243 extra tax – all of that is likely extra Foreign Tax Credit to the US.

The other implication is that the Personal Savings Allowance now drops from £500 to £0 at £125,140, pushing some people towards using a Cash ISA or Premium Bonds instead of getting interest taxed at 45%

Dividend Allowance falls from £2,000 to £1,000 from April 2023, and again to £500 from April 2024. The rates stay the same: 8.75% for basic rate, 33.75% for higher rate, and 39.35% for additional rate taxpayers.

Capital Gains Allowance also falls, from £12,300 to £6,000 from April 2023, and again to £3,000 from April 2024. With the old allowance, it was fairly trivial to avoid paying UK capital gains tax unless you have some seriously big gains – at £3,000, that’s a lot harder. The rate stays the same, at typically 20% for higher and additional rate taxpayers.

Does this make an ISA more attractive?

Back in December 2021 I gave my thoughts on whether an ISA is worth it. Quick recap of the major pros and cons of a Stocks & Shares ISA:

Advantages

  • UK tax-free dividends & capital gains
  • Deeper awareness/understanding of investing (debatable, up to you if this is a pro or con!)

Disadvantages

  • US taxable dividends and capital gains (same as a taxable brokerage account, but worse than an IRA or pension)
  • No indexing: unless the UK chooses to diverge from the EU’s MiFiD rules, which could happen – definitely something I’m keeping an ear out for, and would dramatically change the evaluation. Or unless PFIC rules change (not expecting that to happen!).
  • Likely a skewed, or at least less diversified, asset allocation, since you’re stuck with individual stocks and can only realistically manage so many
  • Possibly higher fees, at least if you’re comparing an ISA to a US brokerage account (which is just about free)
  • Bookkeeping: significantly more recordkeeping in order to be able to file US taxes accurately, compared to an IRA/pension or a US brokerage account
  • Deeper awareness/understanding of investing (flip side of the coin!)

Impact of the Autumn Statement on ISAs

With the reduced thresholds for UK dividends and capital gains taxes, this changes the arithmetic around the key advantages of an ISA. I’d previously said that you start saving money on dividends tax at about £50,000 in an ISA, compared to a taxable account, assuming a 4% dividend yield resulting in £2,000 of annual dividends. That takes at least 3 years of maxed out ISA contributions (barring some exceptional gains!), with the willingness to accept the additional pain and lack of diversification in an ISA. Remember that you’re still going to have to pay US tax on dividends, even under the UK allowance.

From April 2024 with only a £500 dividend allowance, you’d now pay UK dividend tax at taxable balances of £12,500, with that same 4% dividend yield. That’s a much lower threshold, that many more people could reach in fairly short order or may already have in taxable accounts. If you got to that same £50,000 balance, you’d have £1,500 of UK-taxable dividends a year, paying probably £506.25 or £590.25 in UK tax, plus maybe some US tax on the £500 of dividend under the UK allowance. That’s roughly 25% of your dividends lost to tax – a 1% drag on your investment performance. When a lot of us are trying to keep expenses on our funds low, under maybe 0.2%, that’s a very significant drag.

As before, capital gains is harder to model, but with the capital gains allowance dropping from £12,300 to £3,000, what used to be a pretty easy tax to avoid becomes a real challenge, especially on long-term growth. Invest that £12,500 with 4% nominal capital growth (on top of the 4% dividend yield, reinvested), and 20 years later you’ve got about £23k of capital gains. At only £3k a year tax-free (and assuming that level stays frozen forever), it’d take you almost 8 years to withdraw your gains without paying UK tax, and that’s assuming only a single £12,500 investment. Invest more over the years and you could easily run out of retirement years before running out of capital gains – or you pay the tax.

So should I get an ISA?

Broadly speaking, the Autumn Statement makes ISAs more attractive from a tax perspective, but it’s still not a clear-cut choice for everybody. I reviewed my thinking from almost a year ago and I think it’s still the same general criteria. In summary:

An ISA is not worth it in any of these situations:

  1. Investments for after pension/SIPP access age, if you still have pension annual and lifetime allowances available
  2. You can access a Roth IRA and haven’t maxed it out
  3. You aren’t comfortable with individual stocks
  4. You plan on moving back to the US (unless that’s far in the future)
  5. NEW: You have/need enough cash savings or other interest-generating assets that you are better off using your ISA allowance for a cash ISA instead of stocks & shares

An ISA might be worth it, if you’re an American citizen in the UK and meet some or all of the following criteria:

  1. Expect to get above £12,500-ish fairly quickly (down from the original £50,000) – this is where you start saving some money on dividend taxes. Probably also a reasonable cutoff for where capital gains tax starts to become a challenge at only £3k allowance per year, for long-term investing.
  2. You can’t get non-PFIC index funds in a taxable account – if you’re forced into individual stocks anyway, may as well use an ISA
  3. You’re a tax-optimising investment nerd like me
  4. AND you don’t mind the extra recordkeeping, the reduced diversification, and possibly an impact on your asset allocation.

Personally, I’m not anticipating having spare money to invest in an ISA for at least a few years, and will prioritize my Roth IRA for any money that does become available. But if/when the cash becomes available, I expect I’ll restart my ISA experiment, probably using Interactive Brokers this time.

As for the other challenges from the Autumn Statement, there’s not much to be done to avoid them. Increase your pension contributions to stay under the frozen and dropped thresholds if you can, and you don’t need the money until pension age. Aside from that, I’m just going to build up more US Foreign Tax Credits I’ll probably never use.

Hope everybody is doing alright out there – the news can make some grim reading heading into the holiday season, but with Thanksgiving around the corner, I hope we all find a moment to pause and give thanks for what you do have.

Life Changes & Winding Down the ISA Experiment

Sometimes plans change, especially when we aren’t expecting it! Over the past few months, a few things have come together to cause us to make a decision to move next year.

In short, we’ve always wanted to live further west (within England), further away from London. We only moved to our current area because I used to commute 4 days a week – now, and for the foreseeable future, I’m 100% working from home, with some international travel thrown in.

What was tying us to this location are the kids and school. However, we’ve slowly realized that their current school isn’t a good fit, and likely won’t get any better. Not that it’s a “bad” school – it’s OFSTED “good”, and I think it is a very good school for mainstream kids. But both our girls are, if not actually special needs, on the verge of it (no official labels yet, but possibly some elements of autism, certainly very introverted and socially anxious, etc.). The other big concern for us is the way Buckinghamshire schools work at age 11 – basically, if you don’t do well on the 11+ test, you’re not able to access the best education. Given their personalities, we both worry that a single test won’t be a good representation of our daughters’ abilities, and would be an extremely stressful experience for everybody.

Decisions

Putting those two considerations together, my wife and I made a decision to move west next year (roughly Hampshire, Wiltshire, Dorset area), and enroll our daughters in the same private school my sister-in-law attended. Now, with all the financial (and political…) instability today, this isn’t exactly an ideal time. Interest rates soaring, lots of uncertainty about house prices, inflation rampant, and so on. But I think we’ll be ok – between our current equity and mortgage, plus cash, we should be able to port our mortgage without needing to borrow more, and still buy a house for the next 15+ years (if not forever). Our current house is “fine”, but we want a little more space, both inside and outside. Even further from London, that means more money.

That need for cash means I took a hard look at our investments to see where it can come from, and then moved funds to accounts that are appropriate for a purchase in less than a year, rather than 5+ years in the future. That included our ISA experiment, plus taxable accounts and Roth IRA contributions in the US. Over the past few months, that’s all been liquidated, and is in the process of being transferred into safe UK cash accounts (Premium Bonds and the best FSCS protected savings accounts I can find). That’s the best place for them to use next year, even with inflation. Who knows, might win big on the Premium Bonds, too!

We’re also planning ahead for the school fees. Certainly a big unexpected expense, and pushes back our FIRE timeline by a few years, but something we can accommodate with a corresponding reduction in investments. Effectively, we’ll be nearly CoastFIRE, with my pension contributions reduced to the minimum that gets a full employer match, and no other long-term new investments. But instead of downshifting or going part-time, I’ll use my existing job to pay school fees, as an investment in the girls’ future.

ISA Winding Down

I’m still waiting on the last of the dividends to come in, then I’ll do a writeup on the overall outcome of the ISA experiment. But at this point, I can say that it would have been better to stay in cash, but that’s only because the money wound up being needed on a much shorter time horizon than I was investing for. On balance, I don’t think it did too badly – the FTSE 100 has done comparatively ok, helped by the dramatic weakening of sterling. And I got lucky and sold in one of the dead cat bounces over the summer, so it wasn’t all that bad.

I’ll also take a look at the tax implications – probably minimal, due to taking some taxable losses vs some gains in other accounts. Likely some ordinary dividends, but nothing too worrying.

I don’t see the ISA experiment picking up again soon, if ever. If unexpected income becomes available, I’d increase pension contributions and resume Roth IRA contributions first. But never say never, we’ll see what the future holds.

All that said, I think the experiment showed me that individual stocks in an ISA is a valid way for US citizens in the UK to invest, and to get some tax advantage. I think you have to be a bit of a “financial enthusiast” to be willing to deal with the extra complications, so it’s not for everybody, but it also shouldn’t be dismissed entirely without some thought.

Next Steps

With the end of the ISA experiment, that ends one of my major recurring topics on this blog. I know I haven’t been great at working through the long list of other topics I’d like to research, but maybe I’ll find some time to work on those. My job has been unexpectedly busy this year, and there hasn’t been as much available time as there used to be, but I see some light on the horizon for it easing up a bit.

If there’s interest, I’m also happy to write about the house selling/buying process. I bought our current house before this blog, and have never sold a house in the UK before. It promises to be interesting, stressful, but hopefully ultimately rewarding, and I’m optimistic we find a new home that is our base for many years to come!

S&S ISA Experiment – Mid-2022 Update

OK, a bit later that mid year, sorry! Let’s start with some pictures:

Really, the explanation for my underperformance hasn’t changed from my January deep dive – my wife’s ISA, in smaller UK companies, has significantly underperformed the FTSE 100. Mine, in bigger companies more representative of the index, has actually slightly outperformed, but combined, we’re still underperforming a bit. We’re talking less than 4% since I started the experiment in March 2021, and through some pretty volatile times, so nothing alarming, but certainly something I’m keeping an eye on.

Diving into the holdings, the divergence is even more clear. I only have 4 (of 20) stocks down over the course of the experiment, while my wife’s only has 5 that are up. Still not at the point that I’m making any changes – don’t want to sell low and buy high, of course, and there’s nothing fundamentally concerning about any of the companies. Really just a reflection that smaller companies have done worse over the past 10ish months, which could easily change again next month.

I did my “normal” ISA investment in April – invested roughly equal amounts into all 40 holdings, using HL’s regular investment feature to minimize fees. No changes at that time, just adding more to what I already owned.

I have had some action forced on me, through some corporate changes. Navigating the mechanics was a bit of a learning experience – nothing crazy, just figuring out how HL would handle the actions:

  • GSK spun off its consumer healthcare business as Haleon. This now gives me 21 holdings in my ISA. At this point, I don’t really want to pay the £11.95 dealing fee to dispose of £380 worth of Haleon and another £11.95 to buy something else, so I’ll just let it ride. At this point, I don’t anticipate investing any more in it, but there’s effectively no cost to just letting it stick around as a small investment except marginally more admin to track dividends, cost basis, etc.
  • Ideagen was acquired by a private equity firm, resulting in a fairly nice profit – which will get taxed as a mix of long and short term capital gains by the US. That dropped my wife’s ISA to only 19 holdings, so I bought into a 20th, Admiral. A very different business from Ideagen, but big enough that it pulls up the average market cap of her ISA a little bit. That resulted in a lucky bit of market timing when Admiral shot up a few day after I bought it – wasn’t the goal, but I’ll take it!

Aside from that, just a matter of staying the course. I don’t anticipate doing anything at all with my ISA until next April, when it’s time to add the 2023 contributions.

Quick Reviews – TurboTax, TaxAct, & OLT

I had intended to do a more comprehensive review of these three options, but as I tried to use them, I realized the choice, at least for this year and for me, was pretty clear.

OLT

Honestly, I just couldn’t get past the interface. Yes, lots of people recommend OLT. Huge advantage is that Federal filing is free, for everybody, whatever forms you need.

But I just found the interface very cumbersome. For example, entering UK bank interest required simulating a 1099 for each account, with lots of required questions that have no actual bearing on the final tax return.

If you find OLT easy to use, great for you – I’d love to hear about it in the comments, maybe there was an easy solution I was just missing. But I found the interface clunky and frustrating, and gave up.

TaxAct

TaxAct was much more user friendly, with one critical fault: it didn’t really support the new Form 1116 Schedule B (the foreign tax credit carryover). It popped up the form, asking you to fill it in, but scrolling left and right was broken. Given that the form is built in landscape format, this meant I couldn’t actually see all of the form, making it impossible to use. Minor technical bug, but made it completely unusable for me.

I liked the interface, and it’s a little cheaper than TurboTax. I will definitely consider TaxAct again next year, hoping they get the bugs worked out with the Schedule B.

I did complete my return on TaxAct except for Schedule B, and got the exact same refund result as TurboTax. Everything looked good, and I would have been happy to use it, except for that one critical bug.

TurboTax

I actually don’t like TurboTax – Intuit lobbies to keep the tax code complex so they can make more money and I don’t particularly find the TurboTax interface very user-friendly in situations common for US citizens abroad. But at this point I feel like I have Stockholm Syndrome – I know how to make TurboTax do what I need it to do. They’ve got all my information saved from the last few years, which saves time, and I can just get it done.

I did find a coupon code online (just google “TurboTax coupon”, they change all the time), which got the price down to only $10 more than TaxAct. So I paid that extra $10 just to get my taxes done.

Note that this was using the online version. I have heard good things about the downloadable version, I may explore that next year, if it can import all my existing data.

Other Options

I filed my extension using Free Fillable Forms this year. It worked perfectly well for that – definitely no reason to pay for an extension, it’s a one-page form. My taxes are complex enough (44 pages this year) that I’m not comfortable doing my full return with Free Fillable Forms. If you have a simple situation, it could definitely work (it’s the AMT FTC and Schedule C parts that make mine kind of complicated, plus a bit of complexity from my pretty boring dividends and interest in two countries). “Simple” might mean earned income with the FEIE, or just one category of FTC, that sort of thing.

Same logic applies to just doing taxes on paper. I actually do print mine out on paper to trace all the numbers through the forms, I find that much easier to review than on screen (and I did catch one number where TurboTax’s guidance didn’t do what I would have expected – easy fix, and made no difference to the final number). But I’m not enough of a glutton for punishment to do it all by hand.

What method are you using for your US taxes this year? Have you finished them, trying to finish in the next 10 days before the extended non-US resident deadline, or already filed an extension to later this year?

Nearing the bottom? Or just getting started?

Work has been crazy the past few months (seeing people in person again has it’s pros and cons!), which has limited my writing, but also the attention I pay to the markets. That’s typically a good thing anyway – hence Bogle’s timeless advice to “don’t just do something, stand there!” Just been doing my monthly portfolio updates, checking on rebalancing a little more frequently, skimming through Monevator’s always-excellent Weekly Reading, etc.

But a chart posted on, of all places, Reddit’s WallStreetBets, caught my eye. Not sure of the original source (happy to add sourcing if anybody knows – I haven’t 100% confirmed the information either, but a few spot checks look right):

Smoothing out all the volatility shows why this pullback is very different from 2020 (sharp, severe, but blink and you missed it), and not nearly as painful as 2007-08. At least, not yet, although we’re on roughly the same trajectory.

What’s been remarkable to me is how badly bonds have done, along with equities. Intermediate term gilts and total US bond market are both down about 10%, S&P 500 is flirting with 20%, FTSE 100 is basically flat (although the rapidly weakening sterling hides reduced real purchasing power in a flat nominal value). Plenty of individual stocks, especially tech ones, are down way more than that – 50% plus:

https://theirrelevantinvestor.com/2022/05/17/where-are-we-in-the-cycle/

But, like every pullback, this one is unique. A combination of factors I’ve certainly not seen in my investing life:

  1. Inflation, now approaching double digits in the US and UK
  2. Rising interest rates, after falling fairly consistently for 40ish years
  3. A tech bubble, driven by easy money and a COVID-inspired optimism about tech that seems to now be deflating
  4. Very tight labor markets, which may drive inflation up more, and certainly are challenging many low-wage employers to find workers at all. Even higher wage employers (including mine) are struggling to hire for prices they think are “reasonable”, and to retain good people.
  5. Supply chain issues, from COVID and the cheap labor shortage.
  6. Russian aggression in Ukraine and the threat of great power conflict

All that combines to make for a volatile investing environment, and an uncertain future. Despite the title, I don’t have any more of a clue if we’re at the bottom than anybody else. Look back to the first chart – there are plenty of pullbacks of similar severity that end soon. But there are also some examples where we’re less than a third of the way through, in both duration and severity.

If I had to guess, I’d say it’s not over yet. Probably the worst of the tech bubble blow-off is done, although I expect some isolated further examples. But it feels like the broader impacts on non-tech are still coming to light. None of the other factors I mentioned are done: inflation is still going up, not down. Interest rates are still very low, although rising. There’s not a clear path back to cheap labor – which might be a good thing for income equality and broader societal stability, but has ripple effects on prices. COVID remains an issue, especially in China but likely to pop up unexpectedly elsewhere. And it’s anybody’s guess how Ukraine plays out.

So what should we do about it?

Nothing. At least, that’s what I’m doing. My pension investments continue every month. I moved money into our ISAs in April, and rebalanced to bring my stocks vs fixed income split back to balance. And I’m checking my rebalancing bands, but I’m currently only 1.6% under on stocks/1.6% over on fixed income. There’s a part of me that wants to trigger a rebalance at that level, rather than waiting for 5% – doing some research there.

But aside from that, I’m doing nothing. Not trying to sell out into cash to time the bottom, of course. Not chucking more money in, because there isn’t any “spare” money – I wasn’t keeping spare cash laying around. Thought about some tax loss harvesting, may do a bit of that if we keep going down, but at this point very little of my investments are outside some kind of tax shelter.

There’s the naughty stockpicking part of my brain that wants to do a bit with my “fun money” allocation – Amazon and Moderna in particular look oversold to me. I may yet pull the trigger on small bets here, keeping my fun money well under 5% of my portfolio. Those are both companies I’m happy to buy and hold for a very long time, and if a little fiddling around the edges keeps me from anything bigger, that’s a good thing.

I’m feeling rather pleased about my approach to bonds and cash. Because only a tiny part (2%) of my portfolio was in marketable bonds (all UK gilts in my pension), the bloodbath in the bonds market hasn’t touched me. My true cash (savings accounts and Premium Bonds) are losing money to inflation rapidly, but haven’t lost anything nominally, and rates are creeping up.

The TSP G fund has been a relative star – rates rising with long-term treasuries, so now up to 3%, with no capital loss. Still not beating inflation, but a lot better than being down 10% in a “normal” bond fund. I bonds would be even better, but I haven’t taken the plunge there, not because they’re in any way bad, but just enough bits and pieces that I’m not sure they’re worth the faff, for me ($10k limit, TreasuryDirect is archaic, UK tax on the interest, time limits on withdrawals, etc.).

Back to the office?

One other big factor that I think will have major impacts on both work/life balance and company performance over the coming years is their approach to remote work. For context, pre-pandemic I was an in-office worker, but my company had started experimenting with one or two days a week from home, largely due to office and parking space constraints. Coming out of the pandemic, I’m in a 100% remote role (with some travel, but my work isn’t associated with any specific site). But much of my company is manufacturing or lab based, and thus is almost 100% on-site, and has been through the pandemic.

My conjecture is that white-collar, knowledge-based work is going to split companies into five buckets:

  1. Dinosaurs that insist everybody is back to the office 100%. They may get good collaboration with that brute force approach, but they will struggle to hire top talent. Every high performer I know wants some level of flexibility, and I think it will be a major disadvantage in hiring to insist on 100% in-office work.
  2. Rigid Flexibility: “2 days a week from home, 3 days in the office” and similar schemes. Pays no attention to what is going on those days, so you get people driving to the office just to sit on video calls, and then trying to collaborate remotely. Especially fun when you have a group meeting, but only half the group is in the office, so you wind up huddling around a little speaker trying to talk to the rest of the team, or just carrying on without them and the people on the call are lost. Not actually much better than the dinosaurs, although leadership may think they’re well ahead.
  3. Truly Flexible: make the office the place for collaboration, brainstorming, personal interactions. Make the most of the time people have in the office – trust people to do the right work in the right environment. Collaboration, training, mentoring, networking – all usually better in person. Day-to-day work – probably anywhere. Focused creative work – depends on the person and the environment, some will be better at home, some in a specific space in the office. And so on.
    • I’ve just spent a week in a face-to-face workshop. In two weeks, we achieved more mutual understanding and agreement on a path forward than we did in the last two years. Clear value for money/effort, even with a chunk of international travel involved.
  4. Broken Remote: broken might be a harsh word, but this is what a ton of companies have been forced into during COVID. The day-to-day work mostly happens alright, sometimes with more friction than in person. But the collaboration, training, coaching part is far less effective, or it just gets skipped because it’s hard to do remotely. Companies can sustain this model for a long time, but they will stagnate – becomes very hard to get new ideas to move forward, very hard to develop the next generation of leaders, general malaise. Some companies will try this, thinking they’re keeping up with competitors by being remote, but it will slowly emerge as a negative differentiator.
  5. Remote Nirvana: this is the one I’ve never seen (I’ve lived all the others), but I am assured it exists. These are companies that truly make remote work as well or better than in-person. Lots of asynchronous communication, not so much staring at video calls. Practices that encourage collaboration and personal relationships, even across geography and time zones. I can’t tell you how to get there, but for the few companies that really make this work, it will be a huge advantage.
    • This probably also only works for a small subset of potential employees. It may well be that some companies make this work, but the pool of people they can hire is so limited it can only ever remain a niche model. We’ll see…

It’s clear to me that there’s no one model that works best for every company and every employee, although Truly Flexible and Remote Nirvana are obviously better than Rigid Flexibility and Broken Remote. It will be really hard to tell, as an investor or a potential employee, which bucket a company falls into.

Dinosaurs are easy to tell, and that’s the only bucket without a good/bad version – it’s all bad. But maybe that’s my bias, and maybe there are environments and cultures where 100% in-person is the best way. I’m not convinced though – there may be situations where 100% in-person is required, even for knowledge workers (dealing with highly classified information, for example), but that doesn’t mean it’s the best way of working, only that it’s necessary based on other factors. For everybody else, the complete lack of flexibility will drive away top talent.

It will definitely be an interesting few years as businesses figure this out, balancing collaboration, productivity, retention, mentoring, and so on. I expect there may be some opportunities for active investors – or better yet, stay the course, own the market, and let the winners rise to the top.

March Update – Lots going on, but not much to say

It’s been almost two months since I last posted, so rather than leave it any longer, I wanted to say something. But I’ll keep it quick – my attention has been focused elsewhere, although I hope that to change again in the coming months.

First off, work has been busy. 80% in a good way, 20% in a frenetic way, as I’m about to move into a new position for someone who is retiring, while we’re also in the midst of going live with a project that I’ve been working on for two years (and it isn’t going quite as smoothly as I’d hoped). Nothing existential, just keeping me busy. And of course I still have my family, and two little kids can demand some attention!

The other big draw on my attention has been Ukraine. This isn’t a political, military, or international relations focused blog, so I won’t spend any time on my thoughts on the war. However, international relations and security studies are one of my long-term interests, as much as investing and personal finance, so I’ve been spending a lot of time thinking about Ukraine. Suffice to say, my thoughts go out to the people of Ukraine, some of my dollars/pounds have gone to the Red Cross to help them, and to the Ukrainians fighting, I wish them good hunting.

From an investing perspective, the last few months have been turbulent, but while things are more volatile than they have been for some time, nothing has changed my fundamental approach. Inflation is higher than I’ve really seen (I was a child the last time it was this high), but I’m very fortunate to be somewhat insulated – not driving much, 5 year fix on the mortgage, 2 year fix on the electricity and gas, groceries up a bit but not breaking the bank. The Government is messing around on the margins, but the Spring Statement isn’t even worth a post- tiny tweaks for those of us fortunate enough to be investing for the long term, not enough to make much difference for those less fortunate.

And the markets have been volatile but not that volatile, if you’re generally a total market investor. FTSE 100 almost flat for the year now, after the recent recovery. VT (Vanguard All-World/All-Cap) down 6%, just noise – still a little up from a year ago. Unless you’re in particularly growth-y stocks, or a Russian ETF, none of this is huge.

Bonds are a bit of a conundrum – BNDW (world bonds) down almost 6% for the year (excluding the piddling interest), looks almost like equities. UK gilts looks the same. I’m honestly not quite sure what to think of bonds right now. Rates are still very low, feeling like it’s an asymmetric risk profile (rates can’t fall that much more, but have plenty of room to rise), but I’m also not a proponent of 100% equities. In practice, that means almost all of my fixed income allocation remains in the TSP G fund, EE bonds, and cash (none of which has any risk to principal, although plenty of risk to loss of purchasing power through inflation), with only a small, slowly growing allocation to gilts in my UK pension. Searching out higher risk bonds for a higher yield feels like too much risk for the reward, so I don’t see much in the way of alternatives. Curious to hear how you are all managing your bonds/fixed income allocations these days.

Put that all together, and you get some very hard times for a lot of people, and a great deal of geopolitical uncertainty. But from an investing perspective, it’s the same lesson as usual: stay the course. Trying to respond to world events is a fools errand, and few of us have the foresight to anticipate them. Broad diversification at a low cost remains the best approach for almost all of us, with an eye on how to keep taxes to a minimum.

For me, January to April is the “active” season for investing. My Roth IRAs have been done since January (in Interactive Brokers for the first time). Interactive Brokers turned down my application to be a professional investor, so I’m keeping my ISAs with Hargreaves Lansdown for now – will fully contribute to those with the monthly savings option in early April, with a little cleanup to use up remaining cash after that. And my company pays bonuses in March. This year, I salary sacrificed the vast majority to my pension, rather than paying 62% to HMRC, so I’m waiting for that to show up in the next few days. There’ll be a rebalance in the midst of this, since none of those new investments goes into US equities and I want to keep the overall equities/fixed income allocation broadly stable.

But by the end of April, it’ll be all sorted, and, aside from monthly pension contributions and additional savings, the “busy” period of the year for investing will be done. US and UK taxes will be the next order of business – more to come on that.

Hope you’re all keeping well, and I promise not to keep it quite so long for the next post!

S&S ISA Experiment – January 2022

I don’t usually post about my ISA experiment every month (previous updates here), but January has been an interesting month. Obviously not just for my ISAs, but across the market.

Some headline figures, to set the scene for those who haven’t been watching closely (good for you!):

MarketRepresentative ETFJanuary Performance
All WorldVWCE-5.0%
US Large Cap (S&P 500)VUSA-6.4%
US Small Cap (MSCI US Small Cap)CUSS-10.2%
UK Large Cap (FTSE 100)CUKX-0.3%
UK Mid Cap (FTSE 250)VMIG-8.3%
Our ISAs (UK mixed cap)N/A-4.8%
All figures include dividends

This is the first time our ISAs have diverged from the FTSE 100 in a pretty big way – very visible on the charts:

Not great, but what’s going on under the hood, where is this divergence coming from? Looking at each of our ISAs, there’s a dramatic difference:

  • My ISA: up 0.06% for the month (not much, but positive!) – within squinting distance of the FTSE 100 at -0.3%
  • My Wife’s ISA: down 9.7% (!) – not too far off the smaller cap FTSE 250 at -8.3%

So what’s going on here? Two key themes emerged when I dug a bit deeper:

  • Size
  • Randomness/luck

Size makes a difference

Thinking back to when I put our ISAs together, I did mine first, and basically started at the top of the FTSE 100. Skipped some here and there, but 80% of my ISA is from the top third of the FTSE 100 by market cap, and the smallest one is still in the 70s. Average market cap of my ISA is £42 billion.

I assembled my wife’s ISA second, after already picking most of the biggest parts of the FTSE 100. Aside from National Grid up near the top, her ISA is clustered around the middle of the FTSE 100, with a long tail, and 25% of it too small to make the index. Her average market cap is £9 billion – dragged up by National Grid; without that, it’s not much over £7 billion.

All told, that means my ISA represents about 40% of the FTSE market cap – not at the same weights (I’m basically equally weighting stocks, based on cost, not market cap – way too much hassle – plus a rough market cap weighting of sectors), but still a good chunk of the index. However, my wife’s only represents about 8%.

So when smaller cap stocks performed significantly worse this month, it’s no surprise that her much smaller cap ISA performed worse than my much bigger cap one. Before this month, UK large and small caps were close enough that it all averaged out, but not in this pullback.

Now, I’m not saying that large will always outperform small, not at all, just that when they diverge, my pseudo-index doesn’t index that well. I could sell out of some of her smaller cap positions to fill in some of the big cap holes (we don’t have HSBC, Shell, British American Tobacco, etc.), but a) I don’t want to pay the fees and b) none of this volatility is all that scary, especially when each individual stock is only £1,000 or so invested.

Luck (or randomness!) matters, too

Remember that I’m not making high-conviction bets on these stocks – it’s not far off darts against the FTSE 100 with some rudimentary due diligence and my own idiosyncratic ethical screen. BP vs Shell, Vodafone vs BT – not much more than a coin toss. Should average out in the end, right?

And yes, I still believe it will, but this month, the fact that I only hold 40 stocks meant I got a bit unlucky. Of the top 20 performing stocks in the FTSE 100, we only hold 4 (all in my ISA), and even the best weren’t great this month (average just under 8% up for that top 20). But we hold 6 of the 20 worst performing (5 of those in my wife’s ISA), which are down an average of almost 17%.

So again, no surprise that with our winners in my ISA and our losers in my wife’s ISA, and having fewer winners than losers, we underperformed the FTSE 100.

So what?

I’m not changing our approach on the basis of a single month – far too small a data set. And there’s no reason to think that it couldn’t have gone the other way, with us beating the index by 5 percentage points.

But it is a useful reality check that a pseudo-indexing approach does have real limits. Hopefully things that average out over time, but we can’t expect to perfectly replicate the index by only holding part of it.

Bigger picture, I’m not saying much about the volatility and pullback this month, because it’s nothing to panic about. This is the stock market being normal, at least so far – if there was no volatility, there’d be no risk premium! My handful of US fun money stock picks show the hazard in stock picking, too – yes, I own a very small amount of Gamestop, down over 50% since I bought. The pullback in these, plus some of the trendy working from home stocks, is pretty impressive, although less trendy stocks aren’t doing too badly, in the US, UK, and elsewhere.

Stay the course!