Friday, November 20, 2020

Pandemic raid

I read the other day a puff piece sponsored by Swiss finance industry. It was about them attracting ultra-rich clients.  Its understood, that Swiss are desperate to restore some appearance of credibility after they rat out their clients under so-called “The swiss bank program”. In short, the program allowed for Swiss banks to avoid criminal prosecution in exchange for the disclosure of all of its U.S.-related accounts that were open at each bank between August 1, 2008, and December 31, 2014.
The piece presented the ugly truth, that this time the rich lobbied quick and hard the western governments. The markets were flooded with liquidity at the first sign of the pandemic, with very little places to go but the stock market. As the result, asset prices across financial markets have held up very well.
While the global economy is going to contract by 4.4. percent (8% in the USA, 10% in the UK, 6% in Russia and China will grow by 2.7%).
The billionaires grew richer, as they could afford to hold to their investments and even poured in more money during the crisis.  Any pre-pandemic worries about wild evaluations of the technology stocks were washed away.  The main growth in stocks was in Technology and Health Industries. Equities price to earnings ratio is now 33 for Facebook, 34 for Google, 36 for Apple, 92 for Amazon, 800 for Tesla. This is much higher the historical average, which was mostly between 10 and 20.
Amazon chief executive Jeff Bezos net worth grew by $73bn between mid-March and mid-September. The EU is unable to adequately respond to the pandemic and going into second lockdown. Jeff's net worth expected to grow further. Tesla and Facebook chief executives (Elon Musk and Mark Zuckerberg) each have $45bn more. 
There has been an enormous wealth transfer from the poor to the rich via injection and direct contracts to selected companies by the governments in West.
 On much small scale I benefited a little bit too.  I invested in the each of kids' college accounts $17K in April 2020 it has grown by 20% now.  The fact is that the poor and middle class will pay higher taxes once they are back to their jobs.   
 Emotions cost the investors’ money.

Wednesday, November 11, 2020

Family budget 2020 – Family budget over last 12 years.

 This is 12th year we are keeping our family budget formally, recording every expense and trying to make sense of it all at the end of the year. 

Family Independence Budget - last twelve years

The expenses this year exclude a one-off house redecoration - $60K. This is fence around the house, internal doors, wardrobes and hallway parquet replacement, repainting the walls and ceilings.  The house is a typical one for the UK of approximately 1,700 square feet.  Previous once were 60 years old, I think.  These are not registered on the expenses but something to take into account.  I think its reasonable to assume that you need to put aside at least $3K a year on the house long term maintenance. This day will come sooner or later.

Friday, November 6, 2020

Four percent rule

 This rule was advertised by the finance industry since mid-90s, when a paper had been circulated stating that withdrawing 4 per cent from your portfolio a year will make it last for at least thirty years.

Before we look into the background and underlying assumptions lets have look at the 30 years of retirement. This is particularly important to note that healthy working life expectancy at the age of 50 years is on average 9.5 years for men and 8.5 years for women. This means that the healthy working life expectancy at age 50 years in the USA and the UK is below the remaining years to State Pension age.  So out of the average life expectancy of 80 years old, last twenty are in poor health, where people are unable to enjoy the life.

Interesting that the four percent a year withdrawal underlying assumptions are largely omitted by the finance bloggers and the mainstream media.  There are three main ones:
#1 Firstly, after you spent four percent in the first year, you need to increase that amount by inflation each year. 
#2 Secondly, your withdrawal rate is four percent of the initial portfolio. Whatever happens you need to keep it that way, for the calculations remain true.  Imagine, even if your portfolio would increase substantially due to the stock market growth, you should keep your initial withdrawal rate constant.
#3 Thirdly, you need to keep your nest egg invested in a 50/50 mix of equities and fixed income, re-balancing it back to 50/50 each year as the market moves.  The imaginary portfolio that was used for calculations, was also consisting of intermediate term Treasure notes. The long-term average for them was 4.41%, while current rate is 0.81%. In the most recent years, it is 1.8%. The government policy in the USA is to keep them that way for the next five years or more. The UK is even worse, where the long-term gilt yields are at their lowest level in 300 years, depressing prospective investment returns.