Reflections on a world turned upside down

Everything seems very uncertain right now (credit)

A mild fear seems to stalk the lands as of present. An undercurrent of uneasiness. If you haven’t been living under a rock for the past few months then you’re well aware the Coronavirus is upon us and is working it’s way through the world. I hope you are well prepared (and I don’t just mean the toilet paper stockpiling) and your friends and family are well and will remain that way.

I’m not going to comment on whether the UK is prepared enough, or the response so far or even on the idiots buying up all the toilet roll at your local supermarket. I’ll instead focus on the financial aspects and the time we will likely all have to pause and reflect while under self-imposed or forced quarantines.

Risk tolerance

It was only a few months ago I was 100% in equities following the general advice of The Savings Ninja and MMM that “I’m young and don’t need no damn bonds – I’ll easily have time to recover from any falls”. I can’t remember exactly when but I came across this very thoughtful post from Monevator and reassessed my thinking. Not long afterwards I made the decision to shift my separate pots of money into a more bond heavy portfolio, like below:

Bonds / Equities distribution around December 2019

To say this random article turned out to be very helpful is an understatement! Many thanks to the Monevator crew, but I can only attribute this shift to pure luck. I hope I am able to use it well in the future. However, I can also confirm that even with my portfolio down about 9% overall I’m not panicking and I’m sleeping pretty well, so I apparently found an okay level of risk tolerance for myself. I am of course aware it could go way further down too though!

If you’re wondering why the SIPP is so bond heavy, I was taking advantage of a transfer in offer to a provider and it was then sitting waiting for Vanguard to open their own SIPP, which was delayed… I’d half forgotten about it, oops. Luckily it’s only a small part of my portfolio.

When being irrational is rational

I think there gets a point where the irrational acting people reach such a critical mass that not joining in with them could, rationally, leave you worse off. While fortunately my wife and I have enough non-perishable food that we could last a few weeks by default (we buy rice and pasta by the 10kg bags as standard), it was eye opening to wander down the various aisles at our local supermarket and see all the bare shelves.

Pasta? Gone. Rice? Gone. Bottled water? Gone, except the Dasani brand stuff (nobody ever wants that!). Something at the back of your head does start to prickle and make you wonder if you’re not the rational one and should pick up an extra large box of Weetabix just in case…

Within the FIRE blogosphere, there has also been a wave of “my equities are higher than ever!” and “bonds are a drag on returns!” with only perhaps Ermine and Monevator sounding the gong of “steady on folks, this can’t last forever!”. But going against the grain is not easy and I felt much inner turmoil watching other bloggers post record 20% returns in the year when I took some risk off the table and settled for my meagre ~15%.

Exploring volatility

I picked up a copy of Antifragile by Nassim Taleb from my local library to read while work is likely to have some downtime and I’m only about a quarter through it. I want to do a full review on it in a later post but I have to say I’m gaining a new perspective on how I view the world. Though I do think he bashes lecturers a bit much. I may also read Black Swan at some point, one of his most famous books.

If I were a super active investor it would be intriguing to apply an estimate of volatility to the current Coronavirus crisis. Will the UK end up like Italy in two weeks? Is the FTSE 100 going down further, hitting the lows of the 2008 Financial Crisis? How does Brexit factor into all this? Should I invest in loo roll manufacturers? Will the drop in oil price have an effect on all the above and will it be positive or negative? That last one is probably negative for me, the electric car was sort of a hedge on higher petrol prices, heh.

Of course the correct passive answer is to carry on carrying on. I’ve upped my contributions a little to buy in while things are a little lower but I don’t have a large surplus of cash I can just throw into the market right now and I won’t be shifting my bonds into equities until there’s a 5% increase or decrease on one or the other which hasn’t happened yet (though we’re getting close).

GBP version of VWRL as of 13th March 2020

It is worth pointing out that even with the fairly big global drops in stock markets, we’re still nowhere near the prices available back when I first started investing in 2016. I had bugger all cash to spare then but those small amounts are still doing pretty well compared to now. Keep everything in perspective when it comes to your portfolio. If you’re under 50, then you’ll probably be fine – both in terms of time to recover and due to the virus. If you’re coming up on retirement age then you should be heavier in bonds to reduce your volatility before draw-down and take extra care out there in the world.

Nothing will happen and then everything will

The problem with diseases like the Coronavirus is that they spread exponentially and us humans are only really good at thinking linearly. Take this as an example:

A lily pond starts with a single lily leaf. Each day the number of leaves will double, so 2 leaves on the second day, 4 leaves on the third day, etc. If the pond is full on the 30th day, on which day is the pond half full?

http://www.artefacts.us/wordpress/works/exponential-growth-lily-pond/

Have a think before you click through to the answer. It’s obvious once you stop and think about it, but our brains are trained to do linear processes by default. Your retirement plan is somewhat based on this exponential growth as well as you go into the longer term with compound interest or returns. Each year extra you work and can build up your funds gains you far more than the previous year due to new money being added and also compounding. Even if you spent all your money in that extra year working, you would still (likely) have a higher retirement income, just from the extra returns!

Compound 5% return over 30 years, starting with a £100,000 portfolio

Here an extra year of waiting from 29 to 30 years would net you an additional £19,601 whereas waiting an extra year even at the half way mark of 15 to 16 years only nets you £9,900 more! For the same amount of time! Now let’s look what happens when we’re dealing with the Coronavirus which has seen infection rates of nearly 200% a day:

The rate of growth per day if 1 person infects 2 people every day

If humans are bad at dealing with small values of exponential growth, then we’re really really bad at understanding high numbers of exponential growth. And as such, nothing will happen for a while and then it will happen all at once. Thinking in this way is hard, but I’m glad that there are people much smarter than me who have the knowledge and experience to deal with this outbreak.

My own workplace has just informed us that we’re not to travel to client site anymore, which seems a wise move. It also make it feel just that little bit more real. Stay safe out there folks, and go wash your hands!

2 thoughts on “Reflections on a world turned upside down

  1. Good that you erred on the side of caution. I started shifting some of my equities into more bonds (from 10% to 30%) – still seen a >25% drop in my portfolio so far but guess it could have been more without the bonds.

    I’m probably more grateful however that I have an emergency fund – there’s the possibility of jobs losses for many and financially, I’ll be able to survive. I pity those who aren’t so prepared.

    Stay safe and yes, keep washing your hands!

    Like

    • Thank God for Monevator being the voice of reason 🙂 Indeed, it’s frightening to look at the U.S. and see how many people are being fired or let go as businesses scramble to stay alive. We’re lucky to have the NHS. And the FIRE community are lucky to have savings (on the whole) to help them through this.

      Hope you’re keeping safe yourself weenie!

      Liked by 1 person

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