Portfolio politics gone mad: Managing your investments through another (!) UK vote

Financial markets HATE uncertainty. It can generate enormous tidal waves of volatility in stock markets and have investors, professional and novice alike, running for the hills with their fistfuls of hurriedly bailed-out cash – or at least towards the so-called safe-haven of gold reserves. And when it comes to uncertainty – political, economic or otherwise – it doesn’t come much bigger than the snap General Election on June 8th, as has been instigated by UK Prime Minister Theresa May.

While horror stories of a tumbling FTSE dominate the headlines, you might be worried about the impacts on your pension pot or equity portfolio. Well, don’t flap just yet. These are actually quite familiar waters we’re about to traverse and we will do so safely and serenely, I assure you. Let me explain why.

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Treading carefully

As soon as Mrs May announced her decision to hold a Parliamentary vote on a snap General Election, stock markets in the UK plunged, with the FTSE 100 finishing the day 2.5% down. The heavy dose of uncertainty she had syringed into the financial landscape had got investors on edge, which in turn causes them to re-evaluate their investment strategies and ultimately adopt a more cautious approach. For now!

They sell their investments, especially the more risky equity-based ones, and hold it all as cash or filter it into secure, low-rate long-term bonds – or, as I say, gold. This causes demand to collapse and, therefore, company stock valuations to slide. But it’s only because of this new wave of uncertainty, nothing more. And it’s just temporary. When it comes to stock markets, no news is bad news, and any news is good news (almost).

Sterling and stocks

Meanwhile, that same day May shocked us with her announcement outside No.10, the value of the Great British Pound bounced upwards 2.2%. The two major financial factors at play here – Sterling and big company stocks – are very tightly linked. A falling Pound often spells good news for large multi-national firms based in the UK, such as those on the FTSE 100, because so much of their revenue and profit actually comes from sales made abroad. This profit is then converted back into Pounds in the UK at better rates than before, so they’re effectively getting more pounds for their dollars, their euros, their rand, rupees, renminbi and so on.

Since the Brexit vote last summer, Sterling has struggled badly. Investors suddenly didn’t like the look of the UK as an economic region to pile their money into, which tugged on the value of the Pound compared to other major currencies. But it was a huge boost to the stock prices of the biggest global firms in the UK because of the higher value they found when changing those international profits back into British money.

If you invest in a diverse portfolio, and on a global scale, these potential ‘issues’ become merely nuances. But if you have all your money invested in a selection of company stocks you could get badly burned. Make sure your investments are diversified

Polling day – again!

You could argue that this isn’t actually a General Election at all. You might rather call it a ‘Brexit Election’. Many pundits see it as a bizarre precursor to the impending Brexit negotiations – or even a second Brexit vote, which will either give the government great confidence to go into battle with the EU member states on their terms and with great gusto – or, erm, not!

History tells us that the markets swing in time to the pre-Election opinion polls. We can expect to see more volatility in the lead up to the June 8th UK General Election and, if the pendulum suggests a hefty Tory majority, it will likely strengthen the value of Sterling and down-weight stock prices on the FTSE 100. Or vice versa. 

Bring the noise

However, all this doesn’t necessarily predict the post-Election scenario. We have two good recent examples. Firstly, the Referendum last summer. Many commentators expected a significant crash in markets in the event of a win for the ‘Leave’ vote. So far, we’ve seen anything but. Secondly, the US Election. The surprise Trump victory initially dented investor confidence and spooked the struggling US stock markets but they very quickly rallied and have been steadily rising ever since.

So in the run up to polling day, don’t be hoodwinked by the alarmist press or confused by mass storm of punditry noise. Ignore them. Put the ear-mufflers on. And when it comes to your investments, DOING NOTHING might well be your best approach. Hold a long-term passive investment strategy and you won’t go far wrong in my view.

These are typical times, when the nervous get nervous and can lose money badly, while the informed stay rock solid and breeze over the speed-bumps in relative carefree comfort. 

6 ways to cut your household bills

I’ve always had a love-hate relationship with the old adage “look after the pennies and the pounds will look after themselves”. For one, I prefer to advocate big savings over little ones. Major changes like down-sizing your home, relocating to a cheaper part of the country, or swapping your car for a pushbike, will make much more difference to your bank balance and your overall wellbeing than a string of minor life tweaks. The way I see it, choosing NOT to go on a £3,000 luxury holiday is like getting 3 years worth of FREE energy, or 10 years car insurance!

But – and it’s a big but – the sheer practice of habitually making successive small enhancements to your routine and to your budget, like changing your energy supplier or turning down your thermostat by one degree, is an amazing discipline to have. It helps you adopt an ‘always-on’ 100% frugal consciousness and keeps you at arm’s length from life’s constant stream of rampant consumerism.

I’ve shortlisted my 6 favourite bill-trimmers, none of which are as dramatic as moving home or selling the gas-guzzler! They’re all super-easy to implement and can collectively save you a nice little chunk of cash, every day.

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1. Buy tube heaters

The cheapest way I’ve found to heat a room. Leave one of these on as long as you like and it’ll keep a room warm for as little as 4p an hour. Much cheaper than electric convector heaters or halogens. One tube heater alone is not going to heat the whole house, or give you a roaring glow in the depths of winter, but they are perfect for those chilly spring and autumn months, or when you just need to keep one room nice and cosy. Hide them under the sofa if you don’t like the aesthetic appearance – I know some people find them visually offensive.

2. Get a wood-burner – and pick your fuel carefully

Ahhh, our new energy bill saviour. We’ve forked out £1200 to have a Firefox 8.1 woodburner installed but it’s paying back handsomely. We have a small-ish 2-bed cottage and it warms the whole house in no time. We have it going all day in the winter months when we’re both at home and light a small fire of an evening when outside temperatures are more in the region of 5-10C. I find coal is the cheaper fuel to run overall while wood is useful for getting the heat going quickly or for shorter periods. Having both options – ie, a multi-fuel stove – is important. Based on initial estimates I’d say our gas bill will be around 30% lower. And as we both work from home self-employed we can claim a portion of it back on our tax return forms.

3. Buy in bulk, make in bulk

Discovering Muscle Food was a watershed moment for me. We get 3 months’ worth of high-quality meat for around £60. Package it up and stick it in the freezer on the day of delivery and you’ll notice your weekly shop from then on is a damn sight cheaper. It also helps you plan meals better, which means less waste and gets you seeking out interesting new recipes. (“Hmm… What could I do with those chicken breasts tonight?”)

Similarly, you can buy big bags of rice, pasta, oil, flour, potatoes, frozen veg – the staples we all need – at exceptionally low prices. Sign up for supermarket alerts and voucher codes and you’ll soon see that you can also get great deals when bulk-buying luxury items like sauces, cheese, or even wine.

4. Create your own cleaning products

Big-brand cleaning products can cost a fortune. I shudder to think we live in an age where there’s a fashion for lemon-tinged bleach and rose-thorned purifiers. Insane. You don’t need any of this stuff. You can make all your own liquids, lotions and potions for pennies.

Vinegar and a few drops of essential oils in a spray bottle is all you need for your everyday household cleaner. Hydrogen peroxide can be a good, cheap alternative to carpet stain remover. For a powerful non-toxic oven cleaner you could try mixing up some borax, vinegar, baking soda and boiling water. (Note – before creating your own, please research the portions and mixture methods carefully.)

5. Re-sell your energy

If you generate your own energy through solar panels you can cut your bills by around 25-50% and sell any surplus energy back to the grid. The initial outlay is still quite high, which is why I’ve not yet done this one myself but the the costs are coming down all the time and the resale prices are going up so a 15-year break-even point, as it is now, should tumble to 5-10 years reasonably soon.

6. Live by day, sleep by night

Rise with the larks! Enjoy the world in daylight when its warmer, more colourful and altogether more beautiful. And when night comes, bunker in under a blanket and go to bed early during those long dark winter months. Get your house working to the same routine too. Turn off all your power-points when you turn in for the night.

Peas in a pod: The DNA of a financially independent frugal warrior

On my journey towards financial independence (FI) I’ve soaked a lot of great content – books, blogs, podcasts and the like. They’ve helped me along the path. The best of them have become dear friends, or sharp tools to my armoury, or new ingredients for my melting pot of ambition. And the more I have read and absorbed, the more commonality I have noticed in the authors and creators of this content.

I’ve concluded that FI-seekers are a rare breed that share some striking similarities in the way they value life and approach a challenge. Here, I’m going to deconstruct that DNA, the make-up of your typical FI-seeker, as best I can. I’d love to hear your thoughts! Do you agree with these common traits, or not? And do they reflect your own life values?

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Time not money

I believe the classic FI persona upholds one core principle over all others – life is NOT about money. It is about time.

Perversely, while eagerly sniffing out ways to cut our spending and accrue wealth, FI-seekers are actually not that interested in money at all. Far from it. The focus on our finances is a necessity we must go through in order to achieve our true desire, which is to have more time, and more importantly, more quality time – the time to do what we want, to devote to things other than work and chores and simply ‘getting by’ in life.

Investment style

The vast majority of FI-ers / early retirees / call-it-what-you-will, discover one single truth about sensible investing and that is to adopt a passive, diverse approach to portfolio management.

Passive, diverse investing is where you establish a strategic long-term mix of investments – eg, 60% global stocks, 40% corporate bonds and gilts – invest your money across indexes, such as the FTSE100, and then stick to this portfolio mix as the financial markets ebb and flow, knowing it is likely to give you decent, reliable long-term returns. You’re simply tracking the markets. The flip side to this is active investing, where you research individual industries and companies and trade stocks frequently in an attempt to beat the market.

Active investing is dying on its arse. Over the last 10 years, 83% of actively managed investment funds in the US have failed to beat their target benchmarks. Nearly half of them have folded within that 10-year period. With the advent of technology and low-cost index-tracking investment tools, things are getting even worse for the active investors.

Active investors are greedy. Passive investors are smart. FI-ers tend to learn this quite quickly and keep a large proportion of their investments in a passive style.

Liberty

We want control, we want choice, we want freedom. As I said, it’s high-quality time that gives you that freedom and money is simply an enabler. But we stand for more than just that. We believe in equality for all, creative expression, clean air and long walks, learning, loving and free-living. We think a lot. You could say we’re a little bit hippy!

But that’s not to say we’re wild or flagrantly spontaneous. As a companion to this desire for ‘liberty’, FI-seekers also have a strong river of analysis and science coursing through their veins. We’re measured, considered open-book libertarians, not afraid to ask questions or push the boundaries, but often do so after much research and within our quiet realms of self-knowing.

Morality

I have found that many FI-seekers have very specific moral standards. They may not jump up and down and scream about it, demanding others live by these same measures – quite the contrary, in fact; FI-seekers are generally more concerned with how they and their immediate circle behave – but they believe vehemently in respect. It is morally important to FI-seekers that they show respect to others and trust others to display the same level of respect in return.

On a macro level, we hope and dream that the world can one day embrace greater levels of moral decency and do away with the greed, hate and anger that’s chewing it up.

Family

While those lofty global aspirations are held dear in our heart, they are not as dear to us as our immediate family and network of close friends. Because we appreciate the importance of high-quality time, we want to spend that time with those closest to us, the ones we love the most. We cherish and protect our family at all costs. We create an environment of warmth, sharing and support.

Bravery

FI-seekers don’t tow the line. We don’t simply take what we’re given in life, say thanks and move on. We want more. And to look for more, to swim against the tide, you need bravery. We never say never, we experiment and try new things, we ask searching questions, we call time on bluff talk, we don’t take ‘no’ for an answer, and we will take (considered) risks as we strive for a new, better way of being.

Individuality

The most important trait of all.

A few years ago, when I first became intrigued by the concept of early retirement, I found a very emotional attachment to some writers in the field. They inspired me. The book Your Money Or Your Life blew me away. I was hooked and excited about potentially making a significant life change, stepping off the traditional conveyor belt of work and taxes. At the start of that journey I was desperately looking for allies – a champion, a success story, a teacher. I was looking for more and more clues as to how I could unlock my own little life conundrum. I would latch on to any glimmer or comfort that I was doing the right thing. And I ended up feeling a real sense of fandom towards certain academics and bloggers.

But over time, this has waned. I’ve come to realise that, while I think we share many similar characteristics, the biggest and most important commonality among FI-seekers is, strangely enough, the fact we are all different. It’s our individuality and our spirit and determination for being unique that truly defines us. We have the verve to take the plunge and stick to our guns.

At the end of the day, we don’t need to follow others, or have heroes. We’re writing our own story, each and every one of us. Every day.

Are you ready to invest in Bitcoin?

I recently bought my first Bitcoin and Ethereum. Digital currencies – or crypto-currencies as they’re also known – had not really been on my radar previously, but having read up on them as part of a freelance project I was working on, I felt it was worth investing a small amount of my portfolio in them. I must admit to also feeling a curious and special pull to the crypto landscape and I could see why some people plunge money into this market without fully understanding it.

To anyone on the crest of investing in Bitcoin or Ethereum for the first time, make sure you understand the market and the technology as best you can before you commit. And to anyone yet to encounter this mystical modern world, I’ll do my best to give you a quick and honest overview of the technology and its potential as an investment asset.

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Bit-what?

Bitcoin is effectively a new way of paying for things online. It is still very early days so you can’t buy your online groceries using Bitcoin just yet, but one day, who knows? Plenty of places do now accept Bitcoin as payment – 10,000 outlets on takeaway.com, for example, careers and education site The Makers Academy, and even a handful of UK pubs, such as The White Lion in Norwich – and it’s steadily growing all the time.

Bitcoin uses blockchain technology. In very basic terms, think of blockchain as a bit like a google document, which can be shared and seen or edited by many people all at the same time, albeit on a massive scale. Using this approach, you don’t have the traditional one-to-one relationship when sending money to pay for something. This brings a lot of benefits and transactional features we’ve never experienced before, particularly around security, democracy and shared ownership.

Internet 3.0

Ethereum uses the same blockchain technology as Bitcoin but takes it to a whole other level. With Ethereum, it’s not just about currency, and paying for things online, you can build apps and software on the platform under the same philosophical approach. While Bitcoin could become a new mainstream online currency and payment method, Ethereum could create a whole new internet!

When you think of it in such grandiose terms, it’s easy to see why some brave souls are now rushing to invest in it. You could make a fortune if you can buy up Ethereum now and sell it on for a far higher price in years to come. After all, Bitcoin has already made some people very rich. Only 8 years ago you could buy Bitcoin for just a few cents – it’s now trading at around $1000. Ethereum has rocketed from around $10 to $50 in the first few months of 2017. It could reach the heights of Bitcoin and even surpass it over the next couple of years. Equally, it could all come crashing down – there has already been one major disruption to Ethereum development which has seen it split into two opposing factions.

A leap of faith

The real difficulty is that we have no precedents for a situation like this. When you look back in time it’s hard to find anything like it that has emerged as both a technology and an investment asset. It’s a great unknown. A giant leap of faith.

The potential for Ethereum is clearly enormous and personally I do believe it could very quickly revolutionise businesses and commerce in a way never seen before, but not without its many catastrophes en route. There are new money management innovations popping up all over the place – peer-to-peer lending, property crowdfunding, high-yield bonds that cut out the middle men, banking apps – the list goes on and on. That’s all very interesting, but blockchain is potentially the ultimate accelerator of all these. And also its death knell!

Share-Gen

Consider this… We all see Airbnb as a very modern business, a new and future way of arranging accommodation and a shining example of the sharing community where we market and share things we own to reduce the cost of ownership. There are many similar examples – car sharing (BlaBlaCar), renting out your parking space or garage (JustPark), loaning out a spare room as temporary storage (StoreMates). Collectively, I call it Share-Gen – the sharing generation.

But blockchain could actually overtake and kill off many of these innovative new businesses, before they’re barely up and running. They are, after all, just another middle-man, albeit one that facilitates a marketplace in a new way, making buying and selling quick, easy and accessible to everyone.

In an advanced Ethereum world, if I want to rent my car out when I’m not using it, I won’t, in theory, need a website or service provider to manage it all for me. I can log its availability myself. Someone in my local area looking to hire a car for a day can find it online, pay digitally for the booking and receive a unique crypto key that they use to unlock the car, which then activates its use for the period of time it has been booked for. They then return it and trigger another unique crypto key to unlock the insurance deposit on their booking. Ta-dah. The middle-man is reduced even further.

Love and war

Let’s get back to investing… As I say, it’s nigh on impossible to find historic parallels to this. But personally, it reminds me a little of the gold rush era. I can foresee millions of people getting over-excited and funnelling silly money into Bitcoin and Ethereum over the next 5-10 years, not to mention various other cryptos, some of which may not even have been imagined yet. There will be digital riots galore as greed takes hold and everyone fights for a piece of it. Some will bask in their new-found wealth, many more will get badly burnt by hoaxers, fake sites, corruption and theft. And eventually we’ll settle down into a more sedate responsible online existence were crypto is the new norm.

I believe investing in digital currencies is a great opportunity but it’s also very risky. It’s an exciting and sometimes scary future to behold. As an investment it will be a crazy, volatile marketplace – again, of the like we’ve never previously witnessed. My strategy will be to invest small portions of my portfolio, holding no more than 5% at any one time, and take a predominantly long-term view with a few short-term tactical trades when the markets experience huge swings.

One thing’s for sure. Digital currencies are not going to disappear any time soon. So even if you’re not interested in them as an investment opportunity, it’s worthwhile understanding how they work and how they can enhance and improve your lifestyle as they evolve.

A 5-point strategy for helping people manage their money better

We have a huge problem. As a nation, we have an extremely low level of education when it comes to money, below the global average according to some reports, and it’s screwing up our health, life and wellbeing. Did you know that only 38% of UK adults know what inflation is? And that one in four students do not consider a loan or bank overdraft as debt? It’s time to take drastic action. I present to you my five-point plan.

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1. Don’t focus on anyone aged over 65

Sorry, controversial I know, but by the time you’re 65 you’ve pretty much made all your money mistakes. You can’t exactly switch career or accelerate your retirement plan. The best you can hope for is to be smarter with what you’ve got, improve your budgeting skills and maybe down-size to free up some money from your home, but you’ll know all this already. Whatever we come up with by way of an education plan will help all age groups, but to prioritise, let’s zone in on the core of the problem and save future generations from committing the same catalogue of errors…

2. Go back to school

It’s never too early to start teaching our bright young things the importance of managing money and living well for less. In fact, the sooner the better. Toddlers should be counting pennies not chickens, early teens must have a good grasp of income, bills, mortgages and tax returns, and by the time they’re 16 everyone should have a decent understanding of macro-economics – inflation, GDP, interest rates, foreign exchange and investments.

3. Create pioneers

It’s hard to spread the word alone, or for a government department to enforce change like a frowning school teacher. We need to work from the inside out. So, first of all, let’s create pioneers and champions who will advocate and educate on the ground in their immediate environment.

All local communities – schools, churches, sports clubs, charities, companies, political committees, hobby groups – they all have some kind of financial representation, someone who does the accounts or sets up the taxable status and manages the inflows and outgoings.

These people are gold dust and should double up as living-breathing finance gurus to whom we can all put our everyday money questions and conundrums. They’ll be rewarded handsomely by the government for their efforts and others in these groups will aspire to become a financial guru themselves and earn an extra income.

4. Keep it simple, keep it real

There’s so much crazy jargon around when it comes to money, it’s no wonder our knowledge is so low. The whole thing is a bore, a turn-off at best; a cumbersome, patronising beast at worst. So let’s not talk about ‘financial literacy’ as the industry so loves to do, let’s talk about ‘money knowledge’.

From there we need to create nudges and money rules for people that are a true reflection of their lives. There’s no point telling someone to save now for their pension in 30 years time when they have a 3-year-old to feed and energy bills to pay and it’s still 2 weeks until payday when they can hopefully pay off a slither of their mounting debt. Give them tips and tricks to help make the weekly shop go that little bit further. A brilliant recipe for sausage casserole that serves 10 portions at 30p each, for instance, is far more likely to get them engaged and kick-start some conscious thinking to help plan their spending in a smart, meaningful way.

5. Go on tour

Now is not the time for a government-led TV and poster campaign. It’s no good projecting these messages from an ivory tour and hoping they’ll land. That is so 1960s and simply not relevant to the modern day. We need the right messages to be out there, on the streets, all day every day.

All employers should be encouraged and incentivised to have lunchtime drop-in sessions in the workplace and post useful money tips in emails or on screen-savers and exciting desktop visuals. Shop receipts are the perfect time and place to remind people how much they just spent (or saved) as a proportion of their income and life budget. All this data can be seamlessly absorbed into an app that displays a constant reminder of how well you’re doing on a scale of 1 to 100, by the day, the week, the year and even over your entire life.

One final point… Knowing ‘how well’ you’re doing with money should never be related to how much you’re earning. That would simply exclude the lower earners altogether and give the high earners an undeserved pat on the back for their ego but very little else. It’s a fallacy anyway. Most millionaires are actually plain awful with money. Low-income groups and the self-employed are far better with their finances and plan long term for an easier life, without seeking out short-term windfalls.

It’s all about increasing your money skills, not your income. That way, it’s a badge of honour that anyone and everyone can wear.

 

The Lifetime ISA is NOT a savers’ salvation – be warned!

It’s been heralded as an innovative new way to help first-time homebuyers on to the property ladder and plug the pensions gap. Two of the biggest problems UK adults under 40 face today. Amazing. But tread carefully. The Lifetime ISA, which is available from April 6, 2017, is not all it’s cracked up to be.

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Another brick in the wall

The government loves a gimmick. It particularly loves a gimmick in the shape and form of an ISA – the Individual Savings Account that gives you tax breaks.

At the turn of the century we had the Mini ISA and the Maxi ISA, later renamed to the Cash ISA and the Stocks & Shares ISA. You can save (in to a Cash ISA) or invest (in to a Stocks & Shares ISA) a certain amount each year (up to £20,000 for the tax year 2017-18) and, for the whole time you keep the money in your ISA, it’s free of capital gains tax.

Then we had the Help To Buy ISA, where you can get a 25% top-up on your savings to help you build up a deposit for your first home. We’ve also had the Junior ISA – effectively a mini Cash ISA you can open for your kids – and last year came the Innovative Finance ISA, which covers investments in peer-to-peer lending platforms, and the Flexible ISA, which is really just a set of optional add-on features surrounding transfers and withdrawals.

Got all that? Good. So let’s tell you a little more about the latest ISA off the government’s conveyor belt. The Lifetime ISA.

An ISA is for life. Or is it?

If you’re under 40 you can open a Lifetime ISA and pay in up to £4,000 a year up until your 50th birthday. The government will add an annual bonus of 25% to any amount you put in. So, for every £4,000 you save, the government will add £1,000.

You can then use these savings to buy your first home , up to the value of £450,000, or keep it in savings until you turn 60. For both options, you can withdraw your money, including the 25% government bonus, tax-free.

Sounds simple. Sounds great. And for some people it is. But don’t run to open your Lifetime ISA just yet. The terms and conditions, when examined closely, show that it is not great – or simple – for everyone.

If you need to access your money before you are 60 for any reason other than to buy your first home (costing less than £450,000) or because of terminal illness, you will pay a hefty penalty. Not only will the government reclaim the 25% bonus and any savings or investment growth on that bonus amount, it will also charge an additional 5% of the total value. So you could ed up with less than you put in.

Compared to a pension, the Lifetime ISA is treated differently for tax purposes. Some taxpayers may be better off contributing to a pension. If you choose to opt out of your workplace pension to pay into a Lifetime ISA, you will lose the benefits of the employer-matched contributions.

Oh, and you can’t buy a property and then rent it out – you must live in it. And it must be in the UK. If you already have a Help To Buy ISA you can transfer it to the Lifetime ISA or save into both, but you will only be able to use the bonus from one of them to buy your first property.

Two words. Devil and Detail.

Capital-C Conservative marketing

The Lifetime ISA is good for some but it is not the golden bullet. It is actually another headline-grabbing savings initiative, sneakily and strategically linked to two hot topics for millennials – housing and pensions – that has a lot less substance than the Chancellor would have you believe, once you’ve kicked the tyres and absorbed all the small print.

For one, the name ‘Lifetime ISA’ is curious. Why choose to label it ‘Lifetime’? It doesn’t last your entire lifetime. Is this to make us feel like it’s even bigger and better than the previous ISAs? A magic cure to all our long sufferings? Perhaps I’m being overly cynical here, but it does have a strong whiff of clumsy marketing about it, like it hasn’t been given its full consideration and due diligence.

And herein lies the source to a long and growing history of ISA problems. ISAs have always been rushed out, part of the annual Budget statement by the Chancellor each March, when they’re invariably looking for a piece of good news to announce and project into the media, to detract from the negative news – usually tax hikes, or spending cuts. The ISA has become something of a saving grace for the government in this sense. It’s a cheap trick and an easy yet flimsy get-out-of-jail card.

Tax con

The government is quick to hone in on the fact that ISAs give you generous tax breaks and ISAs are often advertised as ‘tax free’. Don’t be fooled. They’re not. You avoid capital gains tax on funds you hold in an ISA, yes, that’s true, but they’re not strictly speaking ‘tax free’. You may still have to pay tax on dividends, for example.

More importantly, we all have a separate tax allowance on capital gains from investments anyway – and from dividends! For the tax year 2017/18 those annual personal allowances – the amount you can earn before you have to pay any tax – are £11,500 on capital gains, £5,000 for share dividends and up to £1,000 on savings accounts. The vast majority of people won’t be making anywhere near £11,500 in capital gains on their ISAs in a single year. They’d need in the region of £100,000 or more in ISAs to have to worry about that. And if you’ve got that much, you’re unlikely to worry.

Shifting goalposts

There are countless other ISA rules and regulations to baffle you too and they change every year. The annual ISA allowance itself has changed most years over the past 16. At one time you could only have a Cash ISA or a Stocks & Shares ISA but now you can have both. You can now transfer your ISAs but you can’t take a Stocks & Shares ISA into a Cash ISA. If you have a Help To Buy ISA that counts as your Cash ISA for that year. ISA allowances generally run for one year, except the Help To Buy ISA which runs over multiple years.

The list of technical details and restrictions designed to confuse goes on and on and on. And all the while, the most common Google search term related to ISAs is, by a long way, ‘What is an ISA?’

The learning zone

The government has a lot of work to do on financial education. They should be less focused on repackaging gimmicks and devote more continued effort to communicating good financial habits to the public in a real, meaningful and engaging way – while cleaning up the foggy rocky landscape of financial apparatus too, of course.

To be fair, there are a number of excellent industry working groups beavering away at this right now, looking at ways to simplify common money issues for UK adults and create rules and nudges that resonate to promote better financial planning. I know because I’ve been involved in some of these projects, albeit in a small way. But these projects are so stealthy and drawn out that they’re unlikely to ever see the light of day. By the time they’re done, the ISA will have skipped ahead several more steps, or we may even have a new government in place that wants to take an entirely different direction.

One world, one vision

So how do we sort out the ISA mess we have? I’m not saying it’s easy but there are obvious changes that could be made, all in the name of simplicity. For starters, we should have just one ISA. There’s no need to have all these different flavours. The ISA and the pension can also be moulded into one. It’s just an account, a savings account, and you should get your tax relief on whatever amount you put in up to an annual limit of £50,000. You should then be allowed to use it on whatever you like, whenever you like. It’s your money after all!

Next, scrap inheritance tax. Completely. The savvy savers use these products and criteria to squirrel away their wealth and protect it as best they can while the less literate (financially speaking) are left to the dogs.

There would be budgetary details that make all this complicated behind the scenes, I’m sure, and there’s no denying it would need careful thought, but that’s what the government is there for. Guys, don’t push such complications front of house and expect us, ‘the customer’, to understand your difficulties and deal with them on your behalf. That’s your job, mate!

But I fear we’ll never have that level of common sense or support. Certainly not in my ISA lifetime! So I leave you with a final word of warning on ISAs…

Do your homework. Sadly no one is going do it for you and, despite the government’s overtones, they’re not giving you a shiny new savings present on a plate with the Lifetime ISA. In fact, it could do you damage and you might not even know it until it’s too late. BUT, if it ticks all the boxes for you and you’re sure it’s not likely to ruin your pension pot elsewhere or tug at your tax liabilities later on, then go for it – take all the help you can get.

Bitcoin: Past, present and future

When it comes to modern-day currency investing, there’s nothing quite as mysterious and alluring as Bitcoin. The crypto-currency has attracted millions of investors worldwide and has shown faster gains than any other asset in history. In its first 4 years it went from being worth less than $0.01 to a whopping $1,000. As of today, it is hovering around $1300. So how did it become the fast-tracked investment monster it is today, and what does the future hold for this most enticing of technical innovations and digital investment assets?  

bitcoin

Growing up fast

Bitcoin is still considered the proverbial new kid on the block by many – a niche crypto-currency for speculative traders. But that reputation could be about to change. The new kid is suddenly growing up very fast, with the first ever Bitcoin ETF (exchange-traded fund) due to be approved by the SEC (Securities & Exchange Commission in the US) any time soon. This will mean it gets listed on the New York Stock Exchange, making it a genuine mainstream investment.

As well as shifting it significantly towards the mass market, a Bitcoin ETF means that investors can then invest in a fund that tracks an index of Bitcoin exchanges. The ETF also allows ‘normal’ investors like you and me to invest in Bitcoin without actually having to buy or hold the digital currency themselves.

Race for the prize

A Bitcoin ETF called Winklevoss Bitcoin Trust (COIN) was recently denied its application but it’s widely believed a new application, or one from a different supplier, will pass the regulations this year. COIN was primarily the work of the Winklevoss twins, Tyler and Cameron. Priced at $100 million and more than three years in the making, the ETF would give investors exposure to Bitcoin via a mainstream instrument on the NYSE for the very first time. If not COIN, the first Bitcoin ETF to get SEC clearance will be a clear statement that Bitcoin is set to stay and become a part of investor portfolios of all shapes and sizes.

So what would this do to Bitcoin’s valuation in 2017 and beyond? Bitcoin prices have been on a steady incline for weeks in anticipation of a positive decision from the SEC, consistently reaching new record highs. Many think there’ll be a new wave of activity pushing it higher still once an ETF gets the green light.

Is it time to snap up Bitcoins?

I’m not in to crazy speculative investments but do find interest in very early-stage investment vehicles, even if they’re very volatile like Bitcoin. I’m prepared to risk and potential totally lose the amount I put in so I’d only go for small ‘bets’ on assets like Bitcoin, just the same as I treat the new P2P platforms where I have put a few £k into the likes of Property Partner, The House Crowd and Ratesetter. Bitcoin too is still one of those fascinating early-stage volatile markets.

There is a good chance we could see Bitcoin prices above $2000 by the end of the year as investment flows into the Bitcoin market and the many companies that operate within the Bitcoin eco-system. There will still be some growing pains, I’m sure, especially around scaling the technology as a payment network, and it still has work to do to shake off its negative associations with dirty money, drug rings and so on. But in the race to become the first globally accepted and endorsed crypto-currency, Bitcoin is lapping the competition, so it will continue to generate huge interest.

Despite its relatively young age, Bitcoin has already been on an amazing journey. Back in 2009, it was worth next to nothing. Today, it is priced around $1,300 (and climbing). And it has seen gains in seven out of those eight years. Bitcoin is now set for a colourful new chapter in its already-vibrant history. There will be challenges ahead and bumps in the road, no doubt, but the appeal of Bitcoin continues to grow at an incredible pace.

Investing in a Trump-dominated universe

Unless you’ve been living on Planet Zog for the past 12 months (and to that, some may say, “lucky you!”) then you’ll have noticed the election of Donald Trump has caused an emotive and dramatic response around the world – and in all walks of life.

The financial markets are no different. So if you’re an investor, what does that mean for you? How do we ponder our finances in a Trump-led western economy? And, given the mass-hatred Donald has infused in so many of us, should we feel guilty about making money off his pro-business capitalist ideals? Hmmm. Now there’s a conundrum.

Here are my views on how the stock markets have reacted to Trump policy so far and how they may evolve in the months and years ahead. And a few thoughts on the g-word. 

trump

 

Trump wins! Wall Street’s initial scare

Hillary Clinton was long perceived as the frontrunner throughout the presidential race. On Wall Street, she was widely seen as the preferred candidate, and whenever she pulled ahead in the polls, the market reacted positively. So it was no big surprise that when the official results were in and Trump was declared the winner, Wall Street panicked, and the top indices crashed.

However, it was short lived, and once the markets settled, the negative trend reversed pretty quickly – screens turned green, the US Dollar started climbing and the US markets in particular were soon hitting record new heights on a daily basis. A fresh period had begun. Business confidence and investor optimism was sky high.

Trumponomics

In hindsight, that’s not so much of a surprise. Let’s not forget that Trump was considered a very successful businessman for decades. The upward trend that has been sweeping Wall Street could be attributed to the traditional republican perception of keeping the government small, with little interference in the economy, which Trump will most-likely uphold. Trump has also made very strong promises that could boost the American economy – and his background in business might have given more validity to these claims once he got elected.

So far, the market is booming. Leading stock markets continue to show steady gains and the Dow is showboating above 20,000 points for the first time in its colourful history.

Where next? International relations

We are all looking for signs as to where the Trump effect will be felt the most and his outspoken views on US relations with other nations is a great starting point.

The economy in Mexico – America’s closest neighbour to the south – has already taken a big blow and could be set for further disruption in the future. Every time Trump strengthened in the polls before the elections, the peso would lose value against the dollar. It’s dropped even more since Trump won. In the last two months Trump has been consistently taking jabs at companies who have a presence in Mexico, further dampening investor appetite for the region, and there are no signs that Trump will let up any time soon in his unwavering, singular approach.

The relationship between the US and China is a bit more complex. It’s also arguably more important because, given their combined stature, any changes here will undoubtedly impact every financial market around the world. An announcement from Trump and Alibaba’s Jack Ma, which stated they will work to increase the Chinese eCommerce giant’s presence in the US, supposedly creating one million new jobs in the process, is a strong indication of Trump’s commercial desires above all else.

The tweet that moves markets

If you’re an investor or trader of any level of experience, it can help – I’m sorry to say – to follow Trump on Twitter. Generally, social media has been Trump’s weapon of choice in conveying his robust policy ambitions and he has often been able to influence the economy with 140 characters or less.

When Toyota said it would build a Corolla factory in Mexico, Trump took to Twitter saying he would impose specific taxes on the car makers if it tried to export cars to the US from Mexico. Whenever Trump tweeted his opinion, or intended actions, regarding a car maker’s intention to manufacture in Mexico, that company’s stock would go down.

Another example is Trump’s criticism of Lockheed Martin’s F-35 jet, calling it overpriced and saying he had asked Boeing to manufacture a rival plane. That tweet sent Lockheed’s stock price crashing, shedding 2%, and caused Boeing shares to rise 1%.

The Trump era has begun – but where will it end?

The effects of Trumponomics are already very present in the market and are here to stay – for at least four years. The American economy is already adjusting to the new reality and major financial bodies are already making adjustments. The Federal Reserve, for example, has raised rates in December, and will probably raise them at least once more this year.

Traders who want to benefit from Trump’s presidency should pay close attention to his announcements regarding the US market in particular, his reforms and planned courses of action. These are the areas that are likely to cause big waves in financial markets and create opportunities for investors.

With the Brexit vote putting a lot of pressure on the European and British economies, Wall Street and the US appear to have a more stable foundation in the coming years, which should also present some interesting opportunities for investors, both in the short and long term.

Spread it around

Personally, I always favour a very VERY diverse approach to investing, as anyone who reads my blog will know and understand. By that I mean that I’m not in the habit of picking out individual company stocks or singular opportunities as such. That’s a very risky way to invest your money in my view. It’s a fool’s game. But, with Trump’s influence on the world being as great as it is there will undoubtedly be many enormous changes – and therefore opportunities – in financial markets. US big company stocks, more broadly, look like a good investment for the next 5 years.

I’ll also be looking for ways in which US economic improvements may provide good news for emerging markets, where stocks are relatively cheap in some quarters and where US boosts could reverberate quite quickly, and how US trade relations with Japan and the UK could give a healthy kick to global businesses based in those countries – again, a positive sign for many large-cap stocks in western economies.

Investing with a conscience

I mentioned the G word at the start of this post too – GUILT.

I intensely dislike Trump and his approach to life. I don’t agree with it at all. I know some that do, but not many. The vast majority of people I converse with in life are vibrant opponents of the Trump philosophy. So a challenge has been put to me many times in recent months – how could I look for stock market opportunities that might give me financial gain and cause others pain, all as a result of Trump’s dramatic manoeuvres and often scandalous new policies?

Firstly, I can’t control it. I don’t even have a vote in the US. So his existence and role in the world is far, far beyond my powers, no matter how repulsive I find it. Secondly, I don’t believe in 98% of our current world leaders and their beliefs. Jeez, I wish I could pull the strings there, but it just ain’t going to happen. So regardless of who’s in charge and who’s saying what, I’ll always think they’re a tidal wave of dough-ball lunatics and I’m going to take them for as much as I can, quite frankly – as little as that may be in the grand scheme of things.

My hope of all hopes is that the Trump era is short-lived and relatively painless. But that doesn’t mean we shouldn’t continue to look after ourselves and our families and provide a good, healthy, responsible and ethical environment for them and those we love, as best we can, for as long we can.

Money Giraffe returns! My accelerated journey towards financial independence

I was horrified to realise it’s been an inexplicable 18 months since I last published a blog post. A lot has happened in that time on my journey towards financial independence (or early retirement, or call it what you will). So much so, I’m not quite sure where to start. But in short:

  • I re-focused and drafted an accelerated plan for financial independence (FI) numerous times over.
  • I decided to strive for a halfway house, a semi-FI. By that, I mean quit the full-on corporate job and move out of London so we could own a home outright in a cheaper area of the UK. Then find a way to bridge the wealth gap that remains to achieving full FI, hopefully working part-time from home on projects I can enjoy.
  • I endured an awful job for decent money while pursuing this plan in more detail and putting the building blocks in place to make it happen.
  • I eventually found us a lovely little house 250 miles north of London that fitted the plan really well.
  • We bought the house, I quit my job and we moved.

It sounds quite simple when laid out as five bullet points like that but it feels like it’s been anything but simple.

 

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A few weeks ago we packed up our belongings in Surrey to make the move up north. I travelled back down to see out the final days of my job in London from the discomfort of a cheap Croydon hotel. I did very little actual work but the company seemed pretty insistent I was there for the full duration. To the very last, the corporate blood-suckers of modern city living know no bounds. I finally made my permanent escape late on a Friday evening back to my wife and our two cats in our new home feeling giddy, exhausted and strangely on edge.

The new home has cost us £150k. It’s a very old, quirky 2-bed terraced cottage on a west Yorkshire hillside that’s brutally and beautifully exposed to the raw elements.We could just about buy it outright with the proceeds of our house sale down south after repaying the outstanding mortgage on that place. Having no mortgage is an unbelievable relief to me. There were so many mornings I’d trudge into work thinking there’s no other way to pay the £1600 per month mortgage-noose around my neck than do this – the 14-hour daily grind.

calder-valley-panorama

I also have some money invested in stock portfolios. See My Investments page for a latest summary. It won’t be enough to keep us going. I calculate that as a bare minimum I’ll need to earn around £50k over the next 10 years. (At that point I can start drawing on my pension which, given average expected investment growth, should be just about enough to cover our expenses from then on).

The estimated £50k extra needed over the next 10 years is based on a pretty slim budget. If there are big unforeseens in that 10 year period, like health problems or house problems or lord knows what, that we want to spend big money fixing, then that sum rises accordingly. Let’s face it, there are always unknowns and unforeseens in life, so I’ve calculated that the £50k should become more like £100k. That’s an average of £10k a year gross (there should be no need to pay income tax on that amount if it’s earned in a fairly regular and consistent way).

How and when I earn that I’m not yet sure but I’m confident I could sustainably earn around £200 per month from matched betting and £100 from buying and selling niche items. That’s £3,600 a year, so £6,400 a year more needed.

I’ll keep in good contact with certain old work colleagues anyway and see if I can pick up occasional freelance work through that network. Being located up north in a cheaper part of the UK and having no bills to pay means I can be very competitive on freelance rates and fortunately the nature of my work means I can do most jobs remotely.

I also believe that with my new-found freedom and, most importantly, time, I’ll start channeling my energies into new endeavours, which are likely to present opportunities to earn money that I’d never previously considered properly.

Over the last 18 months I’ve  been constantly re-evaluating these numbers, seeing how soon we could make the move, how big a hole I’d risk leaving in our finances without having a job or another form of concrete income plan to securely plug the gap. But after all this frenzied meticulous recalibrating, I settled on the figurative £100k shortfall for no great reason whatsoever, other than it just felt like an amount I could live with and take a chance on.

Giving up a well-paid job and moving to a very different part of the country without a job to go to was a little scary. But giving up that same horrendous, life-sapping, spirit-crushing job was pretty euphoric. And the closer it felt to becoming a reality the more eager I was to ‘just do it’.

Now it’s happened, now that we’ve moved, it seems ridiculously easy and straightforward. I feel I could and maybe should have done it sooner, taking more risk. Having an even bigger shortfall in the finances would have been a minor sacrifice, given the liberty, release and freshness I’ve felt since the big move.

Yes, it’s going to take some adjusting. And I may struggle to find a source of income at times, especially if I’ve chosen to do no work for a year or so within that 10 year period. But hey, we don’t have kids so the risk and responsibility is far less than if we did. Plus, I believe in my resourcefulness to earn a crust in an interesting and experimental way, one that keeps me away from the mundanity of office life and commuting routes.

Most FI-seekers I’ve obsessively read about are a lot more cautious than this. They tend to save up way more than the projected sum they need for a safe margin on their passive investments, working years after that passive income outweighs the household expenditure to be absolutely sure they have enough in the tank. I really didn’t want to wait that long. I don’t want to spend another 5 years labouring to build up a super-safety net. I’d rather get out early with some risks on my shoulders. I craved even half an escape so desperately I guess.

I’m glad we’ve taken the plunge. For now it feels very very right. Everyone is different and I would stress to anyone going through a similar journey towards FI that it is exactly that – a journey, a very personal journey. Like all long life journeys, they evolve and have surprises, some good and some bad. You need to navigate them, refuel and take a different route if there’s a roadblock. Don’t get overly fixed on one plan, one route to FI or one solution for getting there. Stay open-minded and be flexible with your options. Above all, be brave. Or you might live to regret it.

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Snap! Trade the latest tech stock to IPO? You must be joking

Snap Inc, the makers of world-renowned photo app Snapchat, debuts on the stock market this week and it will be to a veritable frenzy of trader activity. Touted as the biggest social media IPO since Twitter, it has got investors in a lather as they look to turn a quick profit on the newly-listed stock. Me? No chance. It’s fraught with danger and idiocy. I’m not a stock picker – and here’s why…

snap-generation-a-guide-to-history-of-snapchat-garyvee

Many new companies hit the stock market every year but only a handful of them have the global media salivating and mainstream investors nervous with excitement. Snap is most definitely in that category. The column inches dedicated to Snap’s public offering have been steadily growing over the past six months and, now the stock is imminent, investor fever is past boiling point.

It’s getting hot in here

It’s no wonder financial markets get over-excited when a giant household name goes public. The brand name and the product is familiar, so it’s easy for the proverbial man on the street to take a view on which way the company will go, no matter how ill-informed that view might be. And believe me, it usually is ill-informed.

Why would the novice investor think they can understand the true market value of a complex corporate beast like Snapchat, let alone be able to confidently predict how its share price may fluctuate and evolve in the weeks, months and years ahead? But they do. They think they can. They ALL do.

The incredible volume of interest and speculation this creates – often wild, blind speculation – can be the breeding ground for quick and big trading profits and quick and big losses. The experienced heavy-hitters are out there to make top bucks and prey on the misguided masses. But even they get it wrong half the time! All in all, it’s a lottery on a ridiculous, lunatic scale. You may as well chuck it all on red over black, or odds over evens.

Just look at what happened with the Twitter IPO

Back in November 2013, popular opinion had it that day one trading on Twitter stock was going to be your golden chance to invest early, and at a great price, in this wondrous new breed of tech company. Twitter’s IPO was hailed a momentous success by the trade press. It raised $1.8 billion for the social media giant, with the share price of $26 valuing the business at an incredible $26 billion. The next day, the first day of trading, its opening share price was a far loftier $45.10. Within an hour that had rocketed to $50 before immediately slumping back down to $44 levels and finally ending the day at $44.90.

It was a crazy day of trading, with half a billion shares bought and sold in the first two hours alone, and there were no doubt some big winners and some big losers – not least those who got blinded by the stock tickers and mis-took Tweeter for Twitter. Shares in the little-known Tweeter Home Entertainment Group Inc, a bankruptcy consumer electronics firm, shot up from 5 cents to 13 in early trading as over-eager investors leapt before looking. Some even reported, in their maniacal bubble, and on Twitter ironically, that they’d bought Twitter stock for pennies and that it had since shot up 1800% just moments later!!! As if. (You should have to pass some form of test before you’re allowed to trade stocks, seriously).

It doesn’t always follow, but a big, high-profile IPO like Twitter or Snap can generate enormous price swings in the first hours, days, weeks and even months of trading, because there is such ludicrous media hype, greedy trading and an unrelenting sheep-herd mentality to the whole show. Twitter is a good example in point – it’s share price today is around the $20 mark, compared to its $45 starting point just three years ago – but there are plenty of others too. The five biggest IPOs of all time have endured some considerable swings of their own:

  1. Alibaba Holdings Group – went public in 2014 for an astonishing $21.8 billion raise. Four days later, underwriters exercised an option to sell more shares, bringing the total IPO to $25 billion.
  2. ABC Bank, one of China’s five largest banks, took a bow on July 7, 2010 at an initial offering raising $19.228 billion. The total was over $22 billion.
  3. ICBC Bank fetched a total of $19 billion in 2006.
  4. NTT DoCoMo hit the markets in 1998 raising $18 billion. Underwritten by Goldman Sachs Asia, this IPO launched NTT to the third largest market cap for a Japanese company.
  5. Visa Inc. The card processing company raised nearly $18 billion in 2008, despite being in the guts of the global financial crisis.

Back to the future                                               

Snapchat isn’t quite in the same ball park as these guys but 2016 was a dry year for IPOs so by recent standards it’s one of the biggest stock launches and, for other specific and fascinating reasons, it’s very high profile…

As we’ve discussed, the familiar household brand name alone generates much buzz across media outlets and among novice investors. But Snap is also of huge strategic importance for many industries. The success or failure of Snap will be a big signal for the future fortunes of other tech and social media giants who may be looking to go public over the next few years – mega-names like Uber, Pinterest, Dropbox, Spotify and Slack. Their company values and future reputations are very much linked to the public demand for Snap stock over the next few months and the company’s commercial performance over the next year.

All this introduces even more unknowns and risks into the mix. It makes the whole process of investing in stocks a melodrama of gigantic proportions. Or a tragedy, if you happen to be on the wrong end of a considerable loss.

If not Snap then what? 

Don’t get me wrong, I will gladly look at investment options that are high risk. I frequently bet on sports, after all. But only £2 at a time, or £5 as a rare maximum. I invest in a number of new, unproven peer-to-peer platforms. But I only have 2% of my money there and wouldn’t budge it upwards much beyond that until such firms have proven their worth over a longer period of time. My investment portfolios are all 95% or more in equities. But, and here’s the point, that money is spread across thousands of different stocks and bonds and other assets, in very small proportions.

This – having a globally diverse portfolio – is in my mind the ONLY way to invest smart in the financial markets these days. It means you can track the best companies out there in a particular sector and dilute the risk of losing big chunks of money by having your money invested in little pieces across a lot of ‘horses’.

Be more snail

The other major beef I have with the glamour show that presides around a stock launch like Snap is that it irresponsibly promotes short-term day-trading. It has been shown in countless studies now that high-frequency active trading in stock markets, no matter how experienced you are at it, will more often than not fail to deliver you long-term profits that beat the natural market rises. So, in other words, you’re better off just lumping your money on an index like the FTSE100, or a collection of such indices, and letting those markets just do what they do. Ignore it, go live your life and pick up the profits without lifting a finger or opening a page of the Financial Times.

Here’s one of my favourite proof points that staying the course long term and holding tight – and not constantly buying and selling individual company stocks – pays dividends (to pardon the pun)…

Looking at UK stock market data since 1969, you’d have had a 55.2% chance of making gains if you’d invested across the entire market for 1 day – similar odds to the toss of a coin. Investing for one month ups your probability to 63.9%. Investing for one year boosts your chances to 82.1%. And investing for 10 years or more pushes it to an amazingly attractive 99.4%.

Sorry to put a dampener on the Snap festival but it’s not a bandwagon I’ll be venturing near any time soon. If you’re still tempted, please don’t put in more than you can afford to lose – it might just happen.