Weekend reading: The risk of ruin

What caught my eye this week.

When I finally secured a huge mortgage to buy my London flat in 2018, I confided to a friend that I was excited but also nervous, because for the first time in my life I could go bankrupt.

My friend thought that was crazy talk. He knew I had enough in liquid investments – albeit mostly in ISAs, which I didn’t want to ouch – to pay off the mortgage outright if I had to.

Maybe I was just trying to get out of buying the next round?

But I was dead serious and it wasn’t even difficult to imagine a scenario in which I lost everything.

A once-in-a-hundred years recession. Stagflation. Interest rates soar and the housing market collapses. The stock market crumbles – and my active investing does worse. Perhaps I try to trade my way through the unprecedented chaos and blow up completely.

After a few years of this I get ill and find it hard to work.

I’m in negative equity. A 1930s-style crash has toasted my shares. I’m spending the last of my savings to keep the lights on.

One day I update my spreadsheet on a now-ancient laptop and it shows I have a negative net worth.

The sort of thing that has happened to people throughout history.

All too plausible.

For whom the bell tolls

Of course I didn’t judge that my utter ruin was very likely. I’d hardly have bought with a mortgage if I thought  bankruptcy was a 50/50 coin toss. Not even at 95/5 odds.

However I did see it was possible. Indeed I felt this new risk entering the fringes of my sense of self, like icy fingers reaching out from various potential futures. If I strained my imagination, I could almost see the hypothetical disaster lands in the distance – like Frodo and Sam seeing the smoke of Mordor from a sunny green hill, long before they get there.

This visceral reaction was not surprising to me. I’d always hated debt.

I’ve noted before that I’m pretty sure taking out the mortgage tilted my active investing. Particularly in 2018, when I was first getting used to having debt in the picture.

2022 felt much worse than previous bear markets, too. Previously I almost whistled through those.

When Liz Truss drove the ship straight into an iceberg – just as I was coming up to remortgage – I wasn’t whistling anymore.

There’d still be a long way to go, but I knew that any march towards one of my worst-case scenarios would start something like that.

“I wouldn’t risk it”

In my experience most people don’t think this way.

Rather, they see things as pretty binary.

People will take out a mortgage because they have a job and they can meet the payments. This makes the mortgage ‘safe’.

Or they won’t take out a mortgage because they are worried about what would happen if they lost their job, and house prices fell. Mortgages are ‘too risky’.

Of course, savvy Monevator types like us know both things are true, right?

Well yes – but then consider all the debate we have whenever we discuss paying off the mortgage versus investing.

I’ve been called an idiot who shouldn’t dare to blog about money for having a big mortgage while I’m also investing. At the same time I’ve been chided for being wary of leveraged ETFs by none other than Monevator contributor Finumus.

Or you’ll discover that those same people criticising me for preserving my ISAs while running a mortgage also have pensions and a big mortgage themselves. They are just bucketing differently to me.

The thing is, everyone is right!

Risk does increase expected returns.

At the same time risk increases, well, risk.

And not only along a smooth spectrum either, where riskier things are more volatile but if you ignore the noise you’ll be okay.

Also in a very Old Testament sense, where risky things can kill you.

Risk in the moment

Morgan Housel illustrated this brilliantly this week with a series of graphs. I won’t pinch them all (please read his excellent post) but here’s the gist:

The black line represents anything volatile. It could be the stock market, house prices, your income, your health. Perhaps a blend that represents how things are going for you right now.

The red lines are tolerance bands introduced by debt.

How much can you take?

It’s a notional concept – obviously if the stock market soared, say, that wouldn’t directly hurt someone just because they had a mortgage – so don’t take it literally.

Rather it shows how debt is narrowing your window of resilience.

Particularly if you have a lot of debt:

This is a great illustration for how I think about the interaction of debt and risk.

Go and read Morgan’s post for the full picture.

What doesn’t kill you can still kill you

Even a lot of debt and tough times won’t kill you if things go your way.

And milder brushes with danger are soon forgotten.

It’s 2024 and Liz Truss is now just a writer of comic novels. (Or biographies or political treaties, I’m not sure which). As things turned out I was able to remortgage for 4.49%, not 8-9%. And my portfolio has healed.

But there are worlds where those things didn’t happen. They got worse than merely wobbly for me.

Meanwhile, my friend from the 2018 chat is now more nervous about money than he was back then.

What has always seemed to me a gung-ho attitude serves him well in business. He’s a far better entrepreneur than I could ever be.

But yoyo-ing towards the fringes of an eight-figure net worth and back as private markets boomed and bust over the past few years has taken its toll.

Interestingly, he paid off his mortgage a few years ago, when times were especially rosy for him.

Perhaps he was thinking about more than just my next round when we had that conversation, after all?

Have a great weekend.

From Monevator

The decline and fall of a buy-to-let empire – Monevator

Correcting market failure – Monevator [Mogul members]

From the archive-ator: Adrift in the vastness on the way to FIRE – Monevator


Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.

“I am moving – that is it”: tycoon speaks out about the end of non-dom tax status – Guardian

Slowdown in US jobs market revives rate cut talk – BBC

Five ways retirees are cashing in their pensions: latest FCA data – Which

£27bn Paddy Power owner Flutter to move its primary listing to New York – Independent

Young American’s wealth grew by 50% over the past four years – CNBC

Ireland reaps €700m Brexit bonanza from customs duties – Guardian

Brexit means Poles will be richer than Britons in five years, says Tusk – Telegraph via MSN

Buying a first home is even harder when you’re single – BBC

Products and services

Virgin Money offers unique 10% interest switch incentive – Which

Santander joins rivals in increasing mortgage rates [Twice!]This Is Money

Get £200 cashback with an Interactive Investor SIPP. New customers only. Minimum £15,000 account size. Terms apply – Interactive Investor

Britons cashing in on high gold prices by selling gold back to the Mint – This Is Money

Mortgage rate switches explained – Be Clever With Your Cash

Transfer your ISA to InvestEngine by 31 May and you could get up to £2,500 as a cashback bonus (T&Cs apply. Capital at risk) – InvestEngine

M&S versus Waitrose: how do the upmarket grocers compare? – Which

Fractional home ownership is taking off in the US – Wired

Netflix forces Basic customers to change subscription – Be Clever With Your Cash

Remote coastal homes for sale, in pictures – Guardian

Comment and opinion

UK inflation: From too high to too low? [Search result]FT

Gen Z aren’t lazy, they just know work doesn’t pay – CityAM

Whose tax is it anyway? [US taxes but interesting]Of Dollars and Data

The fight or flight response and how to overcome it – Vanguard

Many young American women dream of being DINKS, not mothers – Fortune

Why is it so hard to talk about money? – Guardian

Queue with the peasants – Fortunes & Frictions

The pandemic’s aftermath is driving slower disinflation – S.A.H.M.

In my absence – Humble Dollar

The Quietly Saving blog is now 10-years old [Congrats!]Quietly Saving

When to retire mini-special

My perfect daze – Humble Dollar

Can you afford to retire early? [Search result]FT

Want to enjoy retirement? Consider delaying it – Bloomberg via AP

Adventure before dementia – Can I Retire Yet

You’ll need to work longer but will be forced to retire earlier – Random Roger

Naughty corner: Active antics

Berkshire after Buffett: can any stockpicker follow the Oracle? [Free to read]FT

“Your fund is under attack” warns Blackrock as activist targets discounts – Bloomberg via P&I

Beware of benchmarks distorting your process – Klement on Investing

The curious case of catalysts – Behavioural Investment

Kindle book bargains

The Great Post Office Scandal by Nick Wallis – £0.99 on Kindle

Number Go Up by Zeke Faux – £0.99 on Kindle

Elon Musk by Ashlee Vance – £0.99 on Kindle

Chums: How a Tiny Caste of Oxford Tories Took Over the UK by Simon Kuper – £2.89 on Kindle

Environmental factors

Workers at the UK’s last coal-fired plant prepare to say goodbye – BBC

Microsoft signs deal to invest $10bn in renewable energy capacity for data centres – CNBC

Animals in the Galapagos live amid mounds of plastic waste… – Guardian

…could bacteria-infused self-destructing plastic help? – BBC

Let your garden waste rot in the soil – Guardian

London commercial property mini-special

The (almost) radical rebirth of King’s Cross – Guardian

Canary Wharf sees nearly £1.2bn slashed from property values – Reuters via Business Times

US spending on London commercial real estate rebounds to eight-year high – Reuters via LSE

Strongest rent expectations for prime London office rents since Q1 2016 – FMJ

Off our beat

The man compiling the UK’s rail-based walking network – Guardian

Beachcomber finally finds ‘holy grail’ Lego piece from spill 26 years ago – Independent

Seven rules for happiness – Scott Young [h/t Abnormal Returns]

Airpods are really a subscription business – Sherwood

Brooklyn’s bard: Paul Auster’s fiction captured a generation [RIP]Guardian

Britain is not a sicknote nation, but a sick one – The Conversation

Wounded orangutan seen using plant as medicine – BBC

And finally…

“Ask the questions you need to ask, admit without apology what you don’t understand, and do the work to learn what you need to learn as quickly as you can.”
– Bob Iger, The Ride of a Lifetime

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