Brexit and Game Theory

I have recently discovered Epsilon Theory with Dr Ben Hunt and his use of game theory to analyse life and markets. I have to read the notes at least three times and the same with listening to the podcasts, but I definitely feel smarter after I’ve done so! The Epsilon Theory manifesto is really interesting I would urge you to read into it further.

http://www.epsilontheory.com/

One game theory game which features frequently is the common knowledge one. Read his note on this, it’s a million times better than what I could do, but in summary the game works by having a truth or a notion, which is known internally by the population but it’s not shared amongst the people in the game until someone comes along and starts articulating this fact openly, and it is only when this common knowledge becomes publicly shared and accepted that behaviour changes. The information is articulated by a “missionary”, someone who has enough clout, influence and respect to be taken seriously enough to facilitate the behaviour change.

So, Brexit. The negotiations aren’t going well because of… well, lots reasons really, but don’t worry because… German-car-makers-will-make-the-EU-give-us-a-good-deal, so that’s okay…

The current state of play is that growth forecasts are down, inflation is up, earnings growth is negative when adjusted for inflation, the UK savings rate is about 2% and the economy plods on because of consumer spending. A chunk of significant tax payers will start leaving soon and a chunk of low paid people who staff the NHS will not move here which will cause a fairly nasty build-up of bad headlines in the next year or so.

Cabinet Brexiteers are therefore capitulating on their red lines to try and get over to the trade deal, or show any sign of ‘making a success of Brexit’. David Davis stood up and said that there would be a meaningful parliamentary vote on the final deal but a ‘no’ would mean no trade deal and calamity… or, as it could otherwise be put; a bad deal is better than no deal… which is a bit of a change of tack. Add onto that the border issue in Northern Ireland and you have to be a serious glass half full person to think it’s all going well.

I think Brits know it and feel this slow down more because they also see the rest of Europe, if not the more developed countries in the rest of the world all outpacing the UK economy. Naturally enough when Europe does well, we want to be part of it. The reverse of which was seen in the period after the Great Recession and the Leave vote when Europe was struggling under comparatively large levels of unemployment and the UK economy was rocking along – did Brexit cause this reversal of fortunes? Not by itself, but it would have contributed.

The OBR downgraded the growth forecasts in the budget last week, potentially because they had been over optimistic in the past, so maybe this time they’ve under-cooked it and the economy will do better… history is no guide, but its interesting to take a look at the Monetary Policy Committee’s forecasts for GPD growth in the run up to the Great Recession – recency bias, maybe? Forecasting is a mugs game but there’s previous when it comes to being behind the curve on the way down.

http://www.bankofengland.co.uk/publications/Pages/inflationreport/irprobab.aspx

Along with the general gloomy economic backdrop there’s how an average person might be feeling:

-       I’m feeling poorer and I’m struggling to pay for the car I bought a year ago on credit.
-       That £350m a week for the NHS and promise of an easy and quick trade deal are ringing very hollow / complete BS.
-       That Boris Johnson, David Davis and Liam Fox team aren’t really smashing it out the park and all their positive predictions are failing to materialise.

Yes there’s austerity, maybe some antipathy directed at the EU for not immediately caving in, but I think a lot of people are seeing the proof that the UK’s utopia will not be created quickly and easily by leaving the EU and it would only take a small percentage to switch their way of thinking to turn the tables.

But how do you go about turning those tables. If this change of view is happening why isn’t there a clamour to reverse course? Going back to the Common Knowledge game who can shout loud enough that the Emperor has no clothes? There was a half-hearted shout in the snap election in June when May lost her majority seeking a mandate for a ‘hard’ Brexit but equally the electorate couldn’t vote in Comrade Jezza and the issue was confused. There is no missionary able to communicate with enough authority to support such a change of behaviour.

Politically, Labour are led by a Brexiteer pretending to be a Remainer, the Tories are led by a Remainer pretending to be a Brexiteer whilst also being split down the middle and the Lib Dems are AWOL. The SNP, another pro-EU party, suffered at the last election and aren’t the force they were a few years ago. Parliamentary remainers across the board won’t and can’t oppose it because of their political diversity and because the Brexiteers have a good line in not trashing the Largest Mandate Ever Received.

Who else is trusted enough? The Bank of England was part of Project Fear so is discredited, newspapers are tribal and increasingly shrill, foreign heads of state would be painted as biased and interfering, the Queen can’t and won’t get involved in politics. Celebrities and business leaders might have the clout but would probably be seen as biased as many stated their preferences before the first referendum. Even if Boris, Gove and Davis said it shouldn’t be done the needle might move, but they would just be consigned as failures and traitors by those who hold true to The Way.

It seems the only group powerful enough is the British public and another referendum.

Look at Greece a few summers ago. The party in power were voted in to stick it to the EU and stop the large payments being made which they argued were holding the country back, the EU held firm (sound familiar?) and the resulting deal on offer was too difficult / politically toxic to be taken by Tsipras alone so he went for a snap referendum advocating a rejection of those terms, effectively falling out of the EU... yes, there many differences, but it is not too much of a stretch to see this happening in the UK in the next 12months or so if the economy does go downhill.

Maybe there will be a resurgence of UK economic activity and Brexit looks more rosy, though I don’t hold out much hope of that. So when we get to the sharp end of Brexit the view may well be: is that we're about to pay a huge amount of money now, against a backdrop of hated austerity, to have a relationship that is similar to, but fundamentally not as good as, the one you are trying to leave with still spurious benefits of leaving. With those facts established, rather than the never never of the first referendum campaign, how many people would still stick to their original Leave vote?

Lunch time walks

I sometimes get a funny feeling when I leave the office at lunch time. Nothing to do with using cheese past it's use by date for my sandwiches, but its about the habit of leaving the office.

I try to take lunch in with me when I can, sometimes it's a few left-overs, sometimes something more substantial. When its a larger meal I then don't need any top-up from Tesco, but I don't just want to sit at my desk, so I go for a walk. It's then, when leaving the office and hitting fresh, un-conditioned, air that makes me want to buy something.

I think it's the process of leaving the office, so often it is to get something else to eat, or pick up something I need, but it follows the same routine; I leave the office, walk for a bit, buy something, return to office.

I left the other day, stomach full and no need of anything for the house or myself, I just wanted to get out of the office, but I felt the habit of buying something quite a pull. I started thinking of things I could buy; maybe just a chocolate bar, only 50p or so... but my inner Mustachian, or what have you came to the rescue, "you don't need chocolate and there's cereal in the kitchen if you get hungry, that would be better anyway, walk on."

I resisted in the end, I know, I'm a hero! I could try and overplay it, that by eating more I'll be getting fatter and needing to buy new clothes or endangering my health... or that I'll be pushing back when I can retire by spending all that extra money... it's not that dramatic, but I was surprised by the pull of this innocuous but very present habit.

Now I've noted it, I can avoid it by thinking of a specific route to walk, so I leave with a separate purpose.

P2P - month 4

Probably the last one now, but here it is!

Total in FC	Invested	Cash	Paid in (new capital)	Fees	Losses	Total no of loans
£     2,057	£      2,042	£     15	£                       -	£      2	£        -	85

The purest FIRE film

The Escape Artist has done a few posts on this and I haven't spotted this one listed, but having re-watched it the other day, I think the purest FI film goes to, the absolute classic in it's own right:

....

Forrest Gump.

Watch it again, it deserves it. No lifestyle inflation, has trusted friends and positive, after a while, influencing people in his life. Rich, but still takes the bus... he even cuts the grass for free because he enjoys the work!

Honourable mentions to A Good Year and The Family Man, but Forrest has it down for me!

Great post

https://ofdollarsanddata.com/when-there-is-blood-in-the-streets-dea11dc5dc59

The mentality is the hardest thing to get right, but the emergency fund definitely helps ease the worries. I remember walking up and down a high street around 2008 or 2009, looking for a retail bank to switch my current account to because the feeling was that any one of them could fail at any time. You forget how bad it was and I didn't fully know or understand what was going on.

Mirco finance

I like the idea of micro-finance. I would sign up to a clever little app which rounds up purchases to the nearest pound and then either invests or adds the difference to a savings account. It appeals to me as I like to think I'm hitting a lot of the targets of being financially conservative but if there's something else which can help me along the road, then I'm open to it.

From top tier priorities such as overpaying the mortgage, maxing out the company pension contribution or ISA's. Mid-table staples like reviewing all household costs to keep regular spending to a minimum to the small fry of making a note of what I spend day to day. 

I round up to the nearest pound on my spreadsheet. So when I saw an advert for the Moneybox app I looked into it as it seemed that it did everything I wanted. The good news is that it does, it rounds purchases up to the nearest pound and invests that into an ISA for you. The bad news is that the fees to do so aren't great at the fractional level I was thinking about.

To give them their due the website provides a sliding scale showing the total fee percentage you would pay depending on how much you invest, but all it does for me is completely turn me off the idea. You need to have £1,000 or more in there to get the fees less than 2% and the amount that I would be interested in, a couple of hundred, the fees are c6%. No thank you.

As I'm already watching fees levels on a lot larger sums than £1,000 there is no way I would use this app. I would go further to say I hope those its targeted at, mid twenties 'Millenials', ignore it too. If they are struggling to save as much as the media portrays then something like would be actively harmful. Equally, if you had £20k to invest you should sign up to an online dealing platform, go direct to Vanguard, do not pass Go and do not pay any more fees than you have to.

I appreciate that they have to earn some money somehow, but I feel this is a missing market - no point at the low end, vaguely worth it between £1.5k - £3k, but above that you should be moving on to a platform which provides more transparency and offers a wider more involved service.

As you may have guessed I won't be signing up, so I haven't gone through the whole process. On the main page of the website you only get the choice of adventurous, balanced or cautious. I can't see if there's any discretion within these choices once you sign up.

As I write this I realise the similarity to the Funding Circle where shortly, only two options will be available. Good point. However, the differences here are the fees and the fact that it's a different investment vehicle. The fees on FC are lower and you are gaining access to a market, lending money to smaller businesses, which isn't readily available elsewhere. This app invests in Vanguard, Henderson and Blackrock - all of which are available from a free / no fees based investing platform.

I don't think I'm being unfair, if I've missed anything, let me know!

P2P - month 3

Total in FC	Invested	Cash	Paid in (new capital)	Fees	Losses	Total no of loans
£     2,042	£  2,029.00	£     13	£                       -	£      2	£        -	82

This month's update from last week, 14th Aug.

Funding circle are changing the way you lend and taking away the option to manually decide what businesses you want to lend to. The first time I put money into FC I quite enjoyed having the ability to review the accounts (limited though they were) and consider the business, what the money was for and the likelihood of getting it back. I was playing around a bit, not putting any serious amounts of money in, it was more of an intellectual exercise. Not that I don't care who I lend to now, but the game has changed. The benefit of diversification has taken over and having a small amount of money in each business does mean there's less pressure to analyse each debt... and I confess with the automated function, I don't review any of the loans I've taken out, but at £20 a loan and over 80 in total, would you / have you?

Presumably a country wide, or larger, recession would cause a general downgrade and increased failure rate across the board, but that's why I haven't put a lot more money into the platform.

The changes mean that FC are now just doing two options, balanced or conservative, targeting returns at 7.5% and 4.8% respectively. Apparently selling debts will be easier too - which takes away one of the reasons I invested so lightly in this platform in the first place - as soon as a company defaults no 'man on the street' lender will take that off you. So on the one hand you're losing a little return, but the in theory, the risk of recovering your cash, is lessened and that's a fair trade, even if you don't necessarily want to move down that way down the risk : return see saw.

It will depend on the new user experience, but on balance if the changes make it more of an index experience, so easy to buy, easy to sell, loads of companies to spread risk then I would be more likely to put more money to work here.

It also renders this little experiment slightly redundant! I doubt I'll get information summarising how many loans I have any more. It will just be an overall summary - £2000 invested at 7.5% earning £150pa gross... but we'll see how it goes!

P2P - month 2

Apologies for the delay, the updated numbers are below for todays date, I'll try and be more regular in the future, or go down to a quarterly summary:

Total in FC	Invested	Cash	Paid in (new capital)	Fees	Losses	Total no of loans
£     2,027	£      2,013	£     14	£                       -	£      2	£        -	79

No losses, which is nice. The interest rolls in and new loans are bought, it's very simple and easy to do. One thing is that I had made previous larger loans which means there's a bump in some principle payments which may be allowing this to push on a little quicker than someone starting purely with the £20 loans parts, it also explains why there are interest payments right from the word go.

Universal Basic Income

Interesting article, mirroring the Financial Independence bit of FIRE. I agree with much of it, but there seems to be an assumption that the advance of robots / AI etc will fundamentally destroy jobs and not offset the destroyed jobs with new, different ones. Equally there is no mention that AI in combination with human intelligence is even better again than AI on it's own.

We look back at the industrial revolution and see how it generated wealth and jobs rather than destroy them, why will it be different this time with this digital revolution?
https://www.bloomberg.com/view/articles/2017-06-04/universal-basic-income-is-neither-universal-nor-basic

Still, better safe than sorry in my view, and work towards building your own "universal income" rather than rely on the government to provide it.

Peer to peer experiment - month 1

I've kept away from peer to peer lending as I don't like the downside - namely, if one of the companies you've lent to stops paying, the amount anyone would pay you to take that debt off your hands is going to be negligible. It's pretty much a sunk cost once invested, until the happy day the final repayment is made.

That said I have dipped a toe in the water and haven't suffered any failures yet...

With markets riding high, hinting at lower returns in the future, I turned to Funding Circle to capture some of those juicy returns promoted on their site.

I've topped the account up to £2k and set the automatic selector to go for anything other than those companies with the worst rating. This will mean when either enough interest and repayments accrue, or new cash is added, to hit £20 (I know, high roller!) the auto-bid function will select a new debt to invest in.

At the moment there are 76 loan parts making up the total £2k invested at a gross interest rate of 10%, so in theory good diversification of different companies in different sectors doing their thing, but how will it perform?

I'll post the main features - total invested, any new cash added, income, fees and losses etc. I'll ignore tax (for this experiment anyway) because it's different for everyone and I think the interesting thing is the performance of the investments and Funding Circle as a platform and the companies who go there, not how much the government can bite off for themselves.

In case anyone is interested, this is all my own cash and I haven't been asked to do this by FC or anyone else - my cash, my mistakes!

Early Retirement Dude

I hadn't seen this blog before, I like it!
https://earlyretirementdude.com/

Alchemy

I’ve been reading Memiors of Extraordinary Popular Delusions and the Madness of Crowds (free on Kindle!) and I’ve got to the chapter on alchemy, the philosophers stone and the water of life… one paragraph in particular stands out:

“Three causes especially have excited the discontent of mankind; and, by impelling us to seek remedies for the irremediable, have bewildered us in a maze of madness and error. These are death, toil, and ignorance of the future”

Alchemy, or the means to turn base metals into gold and silver, was a big thing for a long long, long, time only moving out of favour as the rigours of scientific endeavour starting making their presence felt. The book lists lots of people who wasted their lives seeking a means to allow them to cast a magic spell and have gold appear instead of toiling for it. The book also goes into the tulip mania, the South Sea bubble and other cases of mass hysteria when companies offered the impossible in the markets, amazing riches in short spaces of time, with surely no risk.

To ask whether we are in the middle of a stock market bubble is not a new one reading this and a couple of other things made me wonder about the passive debate and whether it’s creating its own passive bubble.

Firstly what is a bubble, google will provide some good alternatives, I’ve heard that its irrational exuberance or fundamentals getting so far out of whack that the mean reversion is hideous. Or long dated exposures on short term money. Others will be able to explain better than that and everyone knows a bubble after it bursts!

Is this a stock market bubble? Are we in the midst of a passive index mania? Can anyone get rich quick? Is the popular delusion that you just need a simple tracker and that’s it, let riches come your way?

The S&P500 is very high, the Shiller PE has only been higher twice and that was before the Wall St crash and the dot come boom. The Reformed Broker said: http://thereformedbroker.com/2017/05/09/into-the-teeth-of-the-next-bear/

If we are in the midst of a mania that implies lots of people involved who have no idea and simply participating gets them rich. If so, and when therefore markets correct, those people will be burned and will not come back to the market for some time. That implies lower returns for longer and potentially the comeback of actively managed funds, even if that is only a reaction to people rotating out of passives.

No matter I hear you say – periods of lower performance are find because that means I’m buying cheaper units so my future returns on those units will be higher, so fine. However, I was also listening to the podcast (by Capital Allocators) where they discuss the 'Bet with Buffet', you know, the one where he bets a hedge fund guy they can’t beat the S&P500 over a ten year period. Well, in that there are a few excuses for losing but equally there was the assertion that the S&P hasn’t had such a strong run over such a sustained period.

This isn’t to say simply following the market and using passive indexes won’t continue to work and outperform a multitude of active funds, but has this period of outperformance been artificially driven? If it's artificially driven up, can it be artificially driven down? If you’re wholly passive and expecting a 7% or 8% total return and that falls to 4% or 5% for a similar period, 10yrs, how does that impact your retirement plans?

It seems that as soon as something is entirely assumed in the market such as; “passives are the only way for performance, everything else fails”, it seems the rug will be pulled out from under you. Maybe I’m just reading too much about the markets at the moment from a FIRE lens which applies the passive approach a lot more than others, however it seems unlikely that markets can continue on the winning streak and the above is a possible outcome following a big drop.

When thinking about all this I remember a sketch from Mitchell and Webb. Webb asks Mitchell about alchemists. Mitchell, a stockbroker, provides an explanation and then asks if Webb had ever thought about the coincidence that the allure of alchemy faded away through the 17^th and 18^th centuries just as stock exchanges came into being across Europe…

I’m not, and can’t, suggest an appropriate alternative for you, nor can I reveal the future, but like most things it pays to keep an open mind and a check on your emotions.

Great post

http://tonyisola.com/2017/05/the-ultimate-alternative-investment-happiness/

A lot to take from this and a lot is easy to forget when climbing the slopes towards financial independence.

Tips and tricks

I started writing this in a longer format and it sounded terribly smug, so I'll provide the short version. If you're reading this, you'll have a good idea of what's what anyway;

Assumed income - I travel a fair amount with work so my pay is never static, always different with expenses. It's further skewed by the pension contributions and healthcare etc, so it's a bit all over the place. To this end I started assuming my actual pay was what it was prior to my last raise. This means there's always a little more at the end of the month to put in savings!

Net worth - really glad I started monitoring this. It's not like I've suddenly saved a load of money, but it really keeps the discipline on watching the pennies as I found I was tricking myself to the upside and didn't necessarily deserve the pats on the back I was giving myself.

Savings targets - If I take the free money my company gives me towards my pension as free money (not unreasonable) then my automatic savings rate is just under 50% pcm using post tax income. Having learned the sky doesn't fall in if you push yourself a little more I've bumped up the pension contributions to hit this level. Now I'll take a pause and even, whisper it, maybe treat myself with whatever is left!

Looking at it another way, I am automatically saving two and a half months of spending every month. So, say my average personal spend per month is £500 - lunches, the odd drink or night out, new tyres for my bike, take aways etc, I'm automatically saving £1,250pcm. It's not just going to cash, I wouldn't be able to call on the money that goes into pensions etc if I needed it, but it's a nice way to think about it!

It's clearly massaging the numbers for impact, but when I think back to where I was a few years ago, it's a massive difference and goes to show what can be done when you focus.

Tie the above together and hopefully the snowball will grow just that little bit quicker.

The return of Gordon Brown thinking?

The more we get into this, the more that Brexit seems like a bad idea. The more the Tories obfuscate and delay, the more it seems they are either rubbish and ill-prepared, or realise just what a bad hand this is. I say Tories, what I mean is those having to deal with it, not the gang who are so fixated on leaving they would seemingly be happy to impoverish the whole country to prove a point, or increase their perception of self-worth.

Anyway, I’ve been thinking about the relatively infamous session of the select committee where David Davis said the dog had eaten his homework  when asked what the cost to the UK would be of leaving the EU without any sort of deal. He, sort of, admitted that crashing out in this way would mean, amongst other issues, loss of passporting rights for financial institutions, loss the European health card, open skies as well as a range of tariffs on goods and services. All things that would hurt us, but, you know… #takebackcontrol

His excuse to the teacher was that he needed to consider department by department, industry by industry what the impact could be and how it could be mitigated. One example of such mitigation was the a new computer system would be able to authorise goods moving across borders in a matter of seconds, not days or weeks as might otherwise happen, which to some companies would off-set any issue of tariffs which would also be imposed.

I see his point, I’m sure it would help and might even make the difference when it comes to a 10% additional tariff to sell into the EU. Would it against a 30-40% tariff as agriculture would get hit with? I don’t know, I don’t run my own international business, but it seems like a much larger hurdle to offset.

The other issue is you’re still selling into the EU so you have to meet the standards and rules set by the EU and a system which allows access into the EU in seconds, can also reject it in seconds too. So if you don’t meet the requirements, no trade, oh and we won’t have any say on those standards either, but, you know… #takebackcontrol

So how else could the Government mitigate these tariffs?

Something along the lines of the Government rolling out the lower corporation tax regime they are touting? The idea of lowering it would be to help attract companies to set up here and offset the tariffs raised from being outside the single market. A low rate also aims to reduce the benefit of legitimately avoiding paying tax. Apparently lowering tax rates, and presumably being consistent about their level into the future, increases the tax you receive as companies and people pay fewer accountants to find schemes to shelter their income from the taxman. The UK corporation tax level is currently 19% - too low, too high? Who knows, lower it further could see an increase, or it could start to reduce the tax take if it’s currently at the right level.

The other fiscal levers the government can pull is personal tax rates. They’ve already raised the tax free rate to £11.5k pa and you can stick £20k into an ISA.  There was a promise in the 2015 general election to raise the level where you pay the higher rate to £50k, though I imagine that might get lost in the upcoming manifesto.

If the government lower tax rates for the rich to incentivise them to stay in the same way as for companies, then the issue is what happens when the next recession occurs? Unemployment is very low, participation rates are really pretty high, tax rates are low and potentially going lower, but the deficit isn’t forecast to be gone for another few years.  

If something were to trigger a recession in those next few years, like, I don’t know, a botched negotiation by May, then how does the government stimulate without borrowing massively? What other levers are there to pull – interest rates, not at the moment, cutting taxes, apparently not, more government austerity, after 7yrs, seems unlikely to be successful. So they would have to borrow and spend, currency goes down further, inflation goes up more, but if taxes have to rise it removes the incentive for international companies to base themselves here anyway further reducing the tax take.

The UK leaving the EU might not trigger a recession by itself, it could even see the wonderful outcomes promised by team Leave… but it won’t mean there won’t ever be another recession, and to pretend otherwise makes you Gordon Brown. To go ahead with a hard Brexit and the fiscal measures and mitigation which have been hinted at in order to retain competitiveness is, on present course, leaving very little room for manoeuvre for when the next downturn comes.

To get a decent deal with the EU, whilst being able to trade freely with the rest of the world will require a level of skill in negotiation and diplomacy which seems utterly beyond the current government on current performance.

It was the best of times, it was the worst of times

This time a month ago was Christmas Day! I know, seems like longer.

In some ways Christmas is the perfect storm of conspicuous consumption, socially obliged spending and unnecessary unhealthy excess. On the other hand it’s a way to get two to three weeks off work easily with all the bank holidays and if you manage your family duties then you can spend a good majority of that time doing whatever you like.

A lot of the focus of PF blogs is about what you would do with the extra time if being a wage slave wasn’t a necessity. Well, what did you do over Christmas? Have a nice long break at home, not spending much by seeing friends for walks in parks or taking advantage of the quiet time by going to the gym when you want and taking in some free museums or other attractions in town? Did you work? Aiming to add some extra capital to add to the freedom fund?

Or did you go for it a bit and think, well, it is Christmas after all? Some FIRE’y types might say it should be cheap outings, enjoying the down time doing things in your way. Others might say unless you’re already rich you should stay working as hard as possible.

Assuming that you’re on The Path and have a good knowledge of personal finance I say, for what it’s worth, that you have to do what you want to do whether working or early retired. Taking Christmas as the example, if you are a massive fan then why deprive yourself of the things you love doing? Surely the point of aiming for an early retirement is to be able to focus on the things you love.

Not only that, but as I’ve said before, it can be counterproductive. If you’re driving your spending so your savings hit x25 annual costs but in so doing deny yourself the pleasure of those interests it means you will face extra costs post work… so your x25 figure must get bigger and  you risk running out of capital sooner.

I think you need to continue to indulge and work on your hobbies, interests and passions during your work life so you are better set up for your post work life and in a better place to pay for it. What would be worse; thinking you're signing out of the office for the last time, only to realise a year later you actually have to go back to work as you don’t have enough cash? Or working a bit longer, knowing really what makes you tick and that all your costs are genuinely covered allowing a smooth, stress-free, transition to early retirement whilst having enjoyed life more in the lead up?

So if your credit card bill is a bit bigger than normal, don’t let it get out of control, but don’t admonish yourself either, just factor it in to the bigger plan.

Is solar worth it?

Feed in tariffs, low or no electricity bills, limited reliance on the grid and ample opportunity to be a proper smug so and so to your friends! What’s not to love!

I’ve briefly looked into the possibility of solar in the past but it’s never been the slam dunk it’s advertised as, so I thought I would lay out my thinking here to try and get it straight and come to a conclusion, for now.

Previously I’ve gone so far as to have a couple of quotes put together, so the amounts below are roughly right tweaked for simplicity, and give a decent indication of the way the wind is blowing… or which way the sun is shining, to butcher a metaphor!

Assume we have a total gas and electric cost of £100, of which £70 is electricity, that’s £840 of electricity costs per year.

Against that we assume that however many panels we can cram on the roof will account for 65% of that cost, so a saving of £546, say £550 a year.

On top of that you get Feed in Tariff and export payments of maybe another £180 a year, so a total benefit of £730 per year (£550+180). Sounds good!

A couple of years ago the approximate cost was £8k to have this all installed, but a bit of a search on line shows the cost coming down to maybe £6k.

Some basic maths says £730 / £6,000 = 12% yield – again, pretty good, much better than the FTSE!

So, if you stop there, that’s all good. Money invested £6k, return 12%, lower bills, greener planet.

Reversing the maths (6000 / 730) gives 8.2, ie, just over 8yrs to get your money back on the initial outlay. However, whilst this is an investment, in that it provides a return, it is not one which can be assumed into perpetuity because this is a piece of machinery which will fail.

So, if you want perpetually low electricity costs you would need to save the money from the reduced bills for 8yrs to pay yourself back for solar kit number 1, and then wait another 8yrs until you have enough to replace the system… in theory, 16yrs until you actually realise your “free” energy…

If the system can run perfectly for 20yrs, and some give guarantees for 25yrs to match the feed in tariff contract, then you’re looking at 4-8yrs of free energy.

Is it worth it?

Maybe, but life may get in the way. You probably won’t stay in the same house for 20yrs. You could keep all the savings looking to move after 7 or 8years hoping the person buying your house will be happy to inherit an aging solar system and happy to pay for replacement kit when the time comes… but that’s not the reason why you move house is it. Ignoring general house price inflation do you get premium for having solar and cheaper energy bills… maybe… enough of a premium? Who knows. But what happens when you move to another place with no solar – do you give up and pay more or shell out again for another new system?

The alternative to subsidise your bills would be to put the same money in the market and use the dividends to pay the electric bill. But you aren’t going to get 12%, or not sustainably anyway, so to get the same reduction to your bill (£45pcm) you would need £18.2k (assuming a 3% yield and no tax), or £13.6k if you’re happy with the 4% rule. Or live in darkness in the winter…

The initial fag packet conclusion is either the cost of the panels has to drop a lot more to a pay-back period of 5yrs or less, or it’s simply better to save the extra and stick it in the markets?

I would certainly be interested to hear if anyone has looked into it more closely, or thinks any of the above is wrong. Please let me know!!!

This...

https://ofdollarsanddata.com/2017/01/02/how-hedge-funds-get-rich/

You might not be investing in a hedge fund, but a reminder of the pernicious impact of fees.