Surging inflation is one of the nastiest, portfolio-crumbling threats investors face – not least because defending against it is as difficult as defeating dry rot. The last few years have taught us a great deal about what does and does not work, so here’s our updated guide on the best inflation hedges.

Note: All investment returns quoted in this article are annualised real returns.1 

How to hedge against inflation 

There are three asset classes worth considering as inflation hedges:

• Individual index-linked gilts
• Broad commodities
• Gold

A good inflation hedge should:

• Respond quickly to high inflation, with correspondingly high nominal returns. 
• Work reliably across many different time periods, countries, and inflation regimes.
• Deliver reasonable long-term returns over time.

Not a single asset class (including our three prospects above) comfortably fulfils our definition of a ‘good inflation hedge’. I’ll explain why below.

And so sadly there is no magic bullet answer to the question: “what is the best hedge against inflation?”

Taken together, the top inflation hedges resemble a ragtag crew of mercenary misfits. Sometimes they’ll come through for you: unleashing a spectacular display of inflation-busting pyrotechnics. Other times, they’ll fall on their face like a drunk, trousers round their ankles. An embarrassing mistake. 

These complications mean we believe deliberate inflation-hedging is a less attractive option for early- to mid-stage accumulators than for near-retirees and decumulators.

When you’ve decades to go, concentrate on beating inflation over time with a strong dose of global equities. That makes more sense than hedging against a short-term risk.

As for near-retirees and decumulators, let’s consider which of the reputed inflation hedges you may want on your side.

Inflation hedge: index-linked gilts

If you buy individual index-linked gilts (not index-linked gilt funds or ETFs) then they will hedge against UK inflation provided you hold them until maturity.

For example, if you put £1,000 into the index-linked gilt UKGI 1.25 11/27 – and hold until maturity – then your £1,000 will grow in line with RPI, until your capital (or principal) is returned to you on the bond’s 22 November 2027 maturity date.

On top of that, if you reinvest your RPI-adjusted coupon (interest) payments into the bond, then you’ll approximately earn the current real yield of 0.11% per annum.

That is far from an awesome return. But it’s better than the negative rates inflation-linked bonds were earning until recently.

And at least you know that money invested on this basis will keep pace with inflation.

For Brits, this is the best inflation hedge you can buy in the sense that it will reliably protect your purchasing power against official inflation.

That’s because no other investment is index-linked to a UK inflation measure.

Caveats a go-go

If you sell your individual index-linked gilt2 before maturity then you may make a capital loss (or gain) due to price risk.

Price risk is the risk that the price of your bond drops as its real yield changes before maturity.

If bond yields spike hard and fast enough, then a linker’s price can fall so far that you’re not adequately compensated by the bond’s inflation-linking features.

But – and forgive me for going on about it – bond mechanics mean you can defuse any price risk simply by holding your bond to maturity. (You must also reinvest your coupons in a timely manner to earn the real yield on offer when you bought in, too.)

Price risk is the reason why inflation-linked funds and ETFs are not a guaranteed inflation hedge.

Bond managers typically sell their securities before maturity in order to maintain their fund’s target duration.

As interest rates took off in 2022, managers were therefore booking capital losses as prices fell in response to rising bond yields.

The longer your fund’s duration, the deeper your loss. Short-duration inflation-linked funds were less badly damaged, but they still didn’t keep up with inflation in 2022 and 2023.

For more on how to buy and use individual index-linked gilts, read up on how a rolling linker ladder works and learn how to build an index-linked gilt ladder.

If you maintain part of your portfolio as a ladder of individual index-linked gilts then you can sensibly leave your inflation-hedging efforts at that.

But…

Vanguard points out that index-linked bonds aren’t likely to prop up the rest of your portfolio when the money-munching monster runs amok.

That’s because short-term index-linked bond yields are so slim, that our allocation can’t be expected to do much more than return your money with a few inflation-adjusted sprinkles on top.

(Note, Vanguard talks about US TIPS. But the same is true – perhaps more so – for inflation-linked gilts.)

More concretely, linkers fall short of our ‘deliver reasonable long-term returns’ criteria.

So let’s push on and look at the inflation-hedging properties of commodities.

Inflation hedge: commodities 

Numerous research papers point out that commodities sometimes deliver exceptional returns in the teeth of inflationary pressure.

It certainly makes sense that commodities should serve as some kind of inflation hedge, given that the cost of raw materials is often one of the booster rockets strapped to accelerating prices.

That said, most of the research examining the issue is problematic. Usually because the data doesn’t reflect investable commodity indexes, or is quite short-term, or is US-oriented, and so on.

Nonetheless, your heroic Monevator correspondent partially mitigated his own cost-of-living issues by spending time digging up relevant broad commodities data and plotting it against UK inflation – instead of blowing his cash on having a life. You’re welcome.

My conclusion?

Commodities are a partial inflation hedge.

The asset class has delivered spectacular returns at times as inflation begins to stir.

Often the lift-off in commodities presages escalating UK inflation further down the road.

But by the time headline rates are hurting our pockets, commodity prices are often tumbling back down again.

Over a one-year period, commodities are actually negatively correlated with UK inflation (1934 to 2022).

However, commodities outdid the other major asset classes when inflation was above-average (1934 to 2022).

Average annualised returns during inflationary episodes were:

• Commodities: 4.5%
• UK equities: 3.6%
• Gold: 1.8%
• Gilts: -2.2%
• Cash: -1.9%

Meanwhile, the historic annualised real return of commodities was 4.5% (in GBP) across the entire time period from 1934 to 2022.

Thus an allocation to raw materials historically fulfilled the ‘deliver reasonable long-term returns’ part of the brief.

And they have generated extremely high, inflation-beating nominal returns at times.

But commodities cannot be said to work reliably as an inflation hedge. You can shape them around your portfolio like an armoured plate, but you can’t expect them to deflect every inflationary bullet.

Finally, the USP of commodities is also its biggest weakness.

Commodities are useful primarily because they’ve been historically negatively correlated with equities and bonds. And equities and bonds tend to fail together during bouts of galloping inflation.

But commodities can be a terrible drag when the commodity asset class suffers a bear market. The beating taken by commodities between 2008 to 2020 would have shaken the resolve of even the most fanatical inflation-phobe.

We recommend reading the recent Monevator commodities series and researching the asset class yourself before committing any cash.

Inflation hedge: gold

The case for gold as an inflation hedge is similar to – but weaker than for – commodities.

At best, gold’s performance can only be appropriately measured from 1968. That’s because it was caged by government regulation before then.

Monevator investigated the behaviour of gold versus UK inflation when we asked: is gold a good investment?

The long and the short of it is that gold is historically uncorrelated to inflation. You can’t rely on the yellow metal as an inflation hedge.

So why are we even talking about gold? Because it is also negatively correlated with equities and gilts. So occasionally the shiny stuff’s good years have coincided with bouts of unexpected inflation.

Gold just bobbed ahead of inflation in 2022 and 2023. It also had a reasonable 1970s during that stagflationary era.

Golden years

The US-orientated, 2021 research paper The Best Strategies For Inflationary Times stated that gold turned in average returns of 13% during four inflationary regimes post-1971.

But the paper’s authors then break our hopeful hearts by warning:

Looking at averages over all regimes could be misleading because of one influential regime. For example, Erb and Harvey (2013) show that gold’s seeming ability to hedge unexpected inflation is driven by a single observation.

And here is that single observation. The gold price shot up near 200% in 1980:

Source: Claude Erb and Campbell Harvey. The Golden Dilemma. 2013. Page 9.

Even Erb and Harvey say of gold’s relationship with unexpected inflation:

There is effectively no correlation here. Any observed positive relationship is driven by a single year, 1980.

Meanwhile, the long-term GBP annualised returns of gold are hard to pin down. Take your pick from:

• 1900-2022: 0.8%
• 1968-2022: 3.5%
• 1975-2022: 1.5%

Ultimately, gold is a total wildcard.

It may work during an inflationary crisis: the charts show it soaring like a NYC pencil-tower during some years in the 1970s.  

You’d always want gold in your portfolio if you could rely on it doing that.

But then again, gold suffered a 19-year horror show from 1980 to 1999. Losses peaked at -78%. 

Accumulators can happily skip the quandary. Decumulators who want to ward off sequence of returns risk may want to use gold sparingly as disaster insurance. 

But the case for gold as an inflation hedge is weak. 

Inflation hedge: real estate

Property is often named on the roster of potential inflation hedges. However, the renowned investment researchers Dimson, Marsh, and Staunton found that commercial real estate returns are negatively impacted by high inflation, though less so than broad equities. 

However, that could be an artefact of sluggish property prices. In other words, the inflation effect is simply delayed in comparison to liquid equity markets. 

Because REITs have reasonable long-term returns but a negative relationship with inflation, we think commercial property is best thought of as an inflation-beating strategy. As opposed to an inflation hedge. 

Dimson, Marsh, and Staunton tentatively suggest that residential property is quite resistant to inflation. But returns still have a negative relationship with high prices.

However the verdict in The Best Strategies For Inflationary Times is a little more encouraging. 

UK residential property delivered a 1% average return during high inflation periods. Returns were positive in 57% of the 14 periods examined between 1926 and 2020. 

Incredibly, Japanese residential property delivered 12% average returns with a 100% positive return across six high inflation episodes from 1926 to 2020. 

But US residential property returns were -2% during inflationary bouts. It only mounted a positive response a quarter of the time.

Location, location, location

Keep in mind that unique factors could be at play in each of these markets.

And we also can’t ignore the fact that historical records of property prices are notoriously problematic.

Long-term data typically fails to capture high-resolution details such as ownership costs, rental assumptions, taxes, default risks, transaction costs, and illiquidity.

You have to put a peg on your nose every time you lend credence to historical property returns.

UK homeowners conditioned by a 30-year property bull market have long thought of their castles as a bastion against inflation.

And residential property did deliver a positive return in two out of three episodes during the ‘70s, according to The Best Strategies For Inflationary Times. 

But that’s little comfort for anyone struggling to get on the housing ladder.

Moreover, it’s difficult to diversify residential risks.

Even a portfolio of rental properties is prey to local market conditions. These can swamp any inflation effect.

Inflation hedge: stocks and equity sectors

Can individual stocks or sectors serve up inflation hedging salvation where the broad equity market cannot? 

Dimson, Marsh, and Staunton sound dubious: 

It is tough to find individual equities, or classes of equities, or sectors that are reliable as hedges against inflation, whether the focus is on utilities, infrastructure, REITs, stocks with low inflation betas, or other attributes.

Meanwhile, Neville et al investigate the performance of 12 US stock sectors in The Best Strategies For Inflationary Times. Every sector except energy stocks posted negative returns during high inflation periods. 

The energy sector did manage a 1% average return during those periods. But the return was only positive 50% of the time.

Notably, average returns were -19% during the 1972-74 recession that was infamously fuelled by the OPEC oil embargo. 

Ultimately, equity prices are subject to a swirl of forces beyond inflation. These can confound a simple thesis such as ‘high oil prices must be good for oil firms’. 

Looking for the X factor

Three other equity sub-asset classes posted positive returns during high inflation regimes according to Neville et al. These were three of the risk factors:

• Momentum
• Quality
• Investment

Momentum looks especially hopeful, with 8% average returns and positive returns in three-quarters of the scenarios considered in The Best Strategies For Inflationary Times.

The snag is these compelling results tested the ‘long-short’ version of cross-sectional momentum.

But us ordinary UK investors can only access long-only momentum ETFs. Which offer a diluted version of the pure form examined in the paper. 

Once again our hopes are stymied by the gap between backtested theory and investible reality. 

The authors also say they’re cautious about momentum’s results, due to its low statistical significance and its sensitivity to their chosen dates:

For example, January 1975 was a very negative month for cross-sectional momentum, and our inflationary regime stops in December 1974. Equally, late 2008 through early 2009 was catastrophic for momentum, and our inflationary period ends in July 2008.

However, the authors do make encouraging observations about the benefit of straightforward international equity diversification:

Equities really only struggle when two or more countries are suffering. This is consistent with a global bout of inflation being very negative for equity markets. 

The results also suggest benefits to international diversification. For example, taking the UK perspective, US and Japanese equities generate +6% and +9% real annualized returns during UK inflation regimes, respectively.

This is perhaps one of the drivers behind the large international equity allocations run by some of the major UK pension funds coming out of the inflationary 1970s and 80s.

Inflation-hedge: timberland

Timberland enthusiasts describe it as the dream package. Who wouldn’t want an inflation hedge that offers good risk-adjusted returns, plus low correlations with equities and bonds?

But even fund managers selling timber investments confess the asset class has been a moderate inflation hedge at best.

Alternative investment firm Domain Capital states:

Timber has been found to be positively correlated with unanticipated inflation. During periods of high inflation, as in the 1970s, timber provided a partial inflation hedge. With a correlation of 0.34 to inflation during the 1970s, timber prices tended to outpace unexpectedly high inflation. 

Here’s a recap of how correlation metrics work:

• 1 = Perfect positive correlation: when one thing goes up so does the other
• 0 = Zero correlation: the two things being measured have no influence upon each other 
• -1 = Perfect negative correlation: when one thing goes up, the other goes down

A correlation of 0.34 during the stagflationary 1970s is not great.

The timberland / inflation correlation then drops to 0.29 between 2003 to 2017. 

Between 1987 and 2010, the correlation was 0.64 according to Barclays Global Inflation-Linked Products – A User’s Guide.

That compares with inflation correlations of 0.80 to commodities and 0.84 to short-term index-linked gilts.

But the even bigger problem I encountered when trying to stand up timberland is that sources tend to use data from the NCREIF Timberland Index. 

This US index has two main issues:

• It only tracks timberland’s performance from 1987. That’s a pretty short timescale. Especially given that – until recent years – inflation had been quite benign since the late 1980s.  

• The index is dominated by private equity companies that invest in timber and forestry. Those companies are inaccessible to retail investors like us. 

Instead, we can invest in publicly-traded timber REITs and forest product companies.

Barking up the wrong tree

The S&P Global Timber & Forestry Index is the most popular index covering public timberland firms. 

You can gain exposure to it via an iShares ETF with the ticker WOOD. (See what they did there?)

But we’re stumped again! Public timber stocks are much less effective inflation hedges than their private equity brethren, according to the paper Assessing the Inflation Hedging Ability of Timberland Assets in the United States.

Its authors concluded:

Private-equity timberland assets can hedge both expected and unexpected inflation, and the ability becomes stronger as the investment time increases.

In contrast, public-equity timberland asset is not effective in hedging either.

As for timberland’s diversification benefits, they say:

​​In summary, private-equity timberland assets have a negative correlation with the market and are a good hedge against actual inflation.

On the other hand, public-equity timberland assets behave more like common stocks and have a high correlation with the market.

The study covers the period 1987 through 2009. But it chimes with my anecdotal experience of keeping an eye on iShares’ WOOD. 

WOOD’s returns have been closely correlated to MSCI World ETFs. Ultimately, I’ve not been able to justify branching out into timber. [Ed – fired!] 

Inflation hedge: trend following

Trend-following scored average returns of 25% in inflationary periods according to The Best Strategies For Inflationary Times. It also worked reliably in all eight scenarios. 

Returns for the entire 1926 to 2020 period were an astounding 16%.

At this point, I wish I knew how to execute a proprietary trend-following strategy using futures and forwards contracts associated with commodities, currency, bond, and equity prices.

Because that’s what the authors backtested.

They name check their methodology. But I’d guess this strategy is beyond the ken of most people.

Other inflation hedges  

Our final inflation hedging candidates are collectibles: wine, art and stamps.

The Best Strategies For Inflationary Times suggests they have game:

Collectible	Inflation episode average return (%)	Anti-inflation reliability (%)
Wine	5	50
Art	7	63
Stamps	9	75

But once again the academics are building a case on an index you can’t invest in. The underlying data ignores transaction fees, storage, and insurance costs. All of which would chomp down those returns. 

Moreover the average punter is going to struggle to put together a diverse basket of Old Masters. 

Right now there’s no ETF tracking the market for Picassos, Warhols, and Cézannes. 

If you can profitably swim in those waters then the best of luck to you. But hopefully you’re not just sticking this treasure in a vault for the purpose of inflation hedging. 

The Investor covered some of the pitfalls of investing in illiquid and opaque markets in his piece on alternative asset classes.

Beating inflation

So where does that leave us, except more disillusioned than ever? 

As previously stated, because inflation hedging is so problematic I’d skip it if I was still an accumulator saving for retirement. I’d rely on straightforward global equities to beat inflation instead. 

But decumulators and retirees are highly vulnerable to unexpected inflation. 

The most reliable buy-and-hold method to hedge inflation is to create a ladder of individual index-linked gilts. 

You might also consider an allocation to broad commodities and even gold as modelled in our decumulation strategy portfolio.

Hedging your hedging bets

You may consider inflation to be such a threat that it justifies a small percentage to each of the assets we’ve covered. This way you have a diversified hedge against inflation. 

Is it worth it? Only you can decide what’s right for you. 

I’ll give the last word to Dimson, Staunton, and Marsh. Their peerless work acts as a shining light for us ordinary investors in search of answers:

Inflation protection has a cost in terms of lower expected returns. While an inflation-protected portfolio may perform better when there is a shock to the general price level, during periods of disinflation or deflation such a portfolio can be expected to under-perform.

Take it steady,

The Accumulator

1. Annualised is the average annual return accounting for gains and losses. Real return is the amount the investment grows (or shrinks) over a period after inflation is stripped out. [↩]
2. Colloquially known as a ‘linker’. [↩]

What caught my eye this week.

Articles in the mainstream media about what only the mainstream media calls ‘the FIRE movement’ are a staple nowadays.

And some of them have been kinder – or flat-out more accurate – than others.

Lingering recollections of the worst can have you reading the first few lines of a new take on ‘Those Wacky Folk Who Don’t Want To Work For The Man Forever To Buy Stuff They Don’t Need’ through your fingers.

But by any standard, The New York Times’ latest encounter in the wild with FIRE practitioners – which we can all read for free thanks to a gift link from the ever-vital Abnormal Returns – is one of the better ones.

At least it is once you get past the headline: Your Neighbors Are Retiring in Their 30s. Why Can’t You?

Hard bargaining

This time the focus is on FatFIRE. That is, retiring early because you can retire early because you’re loaded.

Once the preserve of rock stars, footballers, bankers, and criminals who really did manage to pull off one last job, FatFIRE is now a realistic prospect for anybody who can hold down a job with one of The Magnificent Seven tech giants for a decade.

But beware!

The New York Times’ article notes that:

“…while most other FIRE communities steer toward the friendly and pragmatic, FatFIRE’s adherents tend to be jaded, brusque, laser-focused. They hunt for the ‘exit’, in the tech-world manner of speaking: a fast, lucrative way out. On the r/FatFIRE subreddit, aspirants ogle severance packages, geo-arbitrage, REIT, tax loopholes, high-risk options straddles and potential business moonshots.”

The article’s author Amy Wang does a nice job contrasting these FIRE stormtroopers with the ‘stoic ultraminimalists living off beans’ of yesteryear – and she makes me feel ancient by doing so.

Then again, it was only a few weeks ago I republished Jacob Fisker’s extreme frugality pieces on Monevator myself – almost as a hymn to that lost era.

I guess there’s something in the air.

DefaultFIRE

It’s true our kind of blog has attracted a broader range of readers over the years.

With respect to Monevator this definitely includes a sizeable cohort who’d either be deemed FatFIRE or wanting to go that way.

Much more so than in the old days, I reckon. I wonder why that is?

Has modern work – even sexy make-a-packet work – become so dispiriting that even the high-fliers want to fly away?

Is it Instagram filling our heads with dreams about what, where, and who we could be doing instead?

Or is it – whisper it – the invisible hand of capitalism fingering its way into our secret plans for financial independence, to make sure that if we’re going to do it then at least we’ll buy all the mod cons first?

Perhaps everyone always had a bit of FIRE in them. A decade of these articles has simply brought it to the surface.

More darkly though, I wonder whether a few years into a cost-of-living crisis, eating beans and turning down the central heating just doesn’t seem so newsworthy anymore.

Have a great weekend. Enjoy the sun!

[continue reading…]

I love the analogy of saving and investing as rolling a snowball down a hill. Your portfolio starts off ping pong ball-sized – but you can end up with an avalanche of money.

The Snowball was the perfect title for Warren Buffett’s biography.

That said, sometimes in the midst of your journey to financial freedom you may doubt your snowball is growing. Especially when the markets are going nowhere.

You’re automatically adding money to your accounts each month but your number isn’t growing. You might even feel like your snowball is melting.

Keep at it!

Those regular contributions to your equity funds are buying you ever more productive and money-making assets – regardless of how the market prices them in the short-term.

Sooner or later you’ll be rewarded.

Self-fulfilling prophecy

The point of the snowball analogy is that your savings and investments will gather their own momentum.

You may still be pushing – by adding new money – but most of the extra mass added becomes self-generated.

A snowball gathers ever more snow as its surface area expands while it moves forward.

Your investment pot does this when compound interest moves the dial on your returns. Eventually, when your pot is big enough, just a single year’s returns can equal serious money.

A 10% annual return on £500 – fifty quid – won’t have anyone daydreaming of chucking in their day job.

But a 10% annual return on £500,000 is a cool £50,000 added to the financial freedom fund.

When exactly these numbers start to matter for you – when the importance of internal momentum outweighs new contributions – will depend on your own earnings, savings, and expectations.

But keep saving and investing smartly for long enough and you’ll inevitably get there.

It’s just maths.

Ice ice baby

In a typical year for the markets (as opposed to a rubbish one like 2022) my annual portfolio gains now dwarf anything I’ve ever managed to save over 12 months.

Maybe this sounds like a boast. But it’s just me getting paid for actions I started taking decades ago.

I lived like a graduate student for many years to get my snowball rolling. Lots of people would have seen that as a slog, though personally I never felt very deprived.

So I won’t say I’m lucky. I’m in a position I planned for – and bought and paid for.

(I do though feel fortunate to have been able to make it happen without health mishaps or similar.)

I’d have to earn much more than I ever expect to earn again for additional savings to be the main driver of my wealth from here. My portfolio now does most of the work for me.

It could be you

Perhaps you’ve just begun your own march to financial freedom. Money is tight and the idea of having even £10,000 to compound seems out of reach.

So a portfolio that out-earns your day job feels as faraway as Peter Pan’s Neverland.

I remember that feeling.

Indeed one of the challenges of writing Monevator from the other side of financial freedom is your priorities change as your wealth grows.

To some readers – younger, less flush readers – an article by our contributor Finumus about how best to manage a seven-figure pension pot tax-efficiently might seem fantastical, if not offensive.

But Finumus isn’t likely to write about turning down his central heating to save a few quid. Perhaps he’d do it out of principle – once you have the saving habit it’s hard to kick – but it’s no imperative for him.

And many of our readers are in such a position, or close to it. The challenge has turned to how best to extract the wealth they’ve worked so hard to accumulate.

But many of you still have a long way to go.

Now I happen to think that regularly reading about money management at the wealthier end of the spectrum is still useful and educational.

I’d even dare to say aspirational.

It gives you a vision of where you’re headed. And perhaps what mistakes you might avoid along the way,

But it can also feel a bit like pressing your nose against the window of a restaurant you can’t yet afford.

We’ve tried to find a younger contributor to help with this issue, but nobody has quite worked out for the long haul.

Perhaps they’re all off shouting into an iPhone on TikTok? I have my doubts but who knows.

For now you’re stuck with older duffers trying to recall our roots as young would-be FIRE-ees.

The upside is we’re living proof it can be done. The Accumulator, Finumus, and I all achieved financial freedom in different ways.

It’s not easy, but it’s very doable.

We might disagree about what FIRE means in practice. (I don’t take private helicopters, for example. Finumus’ mileage may vary…)

But for all of us, compound interest is the real deal.

Ignore the haters and just get started.

Money matters

I was prompted to think about all this recently for two reasons.

Firstly, there was Warren Buffett’s latest Berkshire Hathaway meeting – the first without his sidekick Charlie Munger.

Buffett made himself one of the richest men in the world on the back of early frugality, a de facto hedge fund, amazing investment returns – and of course compound interest.

So did Charlie Munger, who was so absent from this year’s meeting. And all the money in the world can’t bring him back.

Memento mori.1

Secondly, and much more prosaically, InvestEngine extended its cashback offer for ISA transfers. (Affiliate link, terms and conditions apply.)

Now, I have ISAs with a few platforms. Why not transfer one to bag £1,000? It’s free money, after all.

A decade or two ago, when I had much smaller pieces to move around the board, I’d definitely have gone through the hassle – and the risks of being out of the market – to bag the cash.

Even today a grand is a grand. That’s still proper money. Far better to have it than not.

And maybe if I was a passive investor I’d still do the transfer for the cash. InvestEngine is a good platform – see our broker table and review – if you’re building out a very cheap-to-run ETF portfolio. So why not?

But for my sins I find I don’t want to chase the bonus at the cost of curbing my naughty active investing adventures. Not even for the guaranteed return of cash back.

The Investor to himself: “You’ve changed!”

FIRE and forget

Buffett’s billions, Charlie’s absence, and the dulling of my own dash for cash instinct got me thinking about some other things I no longer do to bolster my investment pot.

Have I become lazy? Or is this a natural reaction to having a snowball that’s taken on a life of its own?

Some things I used to do to save that I don’t do anymore

Open bank accounts for switching bonuses. Once I’d move money across numerous bank accounts to get sign-up bonuses and time-limited interest rates. Now it’s too much hassle.

‘Stooze’ to arbitrage interest rates. Stoozing is borrowing low interest debt – typically on 0% credit cards – to earn interest elsewhere before paying back the debt without penalty. I was on The Motley Fool boards when user Stooze popularised it, and I did my time in the trenches. For various reasons, no more.

Ruthlessly track and cut my investment fees. I use several platforms – not least because I’m paranoid – and there are slightly cheaper options I could switch to. For mostly non-financial reasons, I don’t.

Avoid all foreign holidays except for special offer weekend breaks. Fortunately I used to go abroad a lot with work, so this didn’t feel like a huge sacrifice. As I got more guilty about flying I dropped the short getaways too. But these days I will go on holiday, at least in theory. (I still hate organising it!) Contrarily, I still think experiences are overrated versus buying stuff you really want or need. But dropping thousands of pounds just to be somewhere else for a week is no longer almost physically impossible for me.

Shun expensive takeaway coffee. In the 1990s I laughed at friends spending coffee at a 10x markup. Yet the first thing I did when the March 2020 lockdown ended was to head to an indie coffee place for a latte to go. Walking through London again with it felt like freedom. And this from someone who loves making my own coffee! Time was I’d have rather fainted in the street then spend larcenous amounts on a flat white. The latte factor won’t make you rich. But at the start it really does all add up.

Shun buying lunch at places like Pret. I used to wince at the cost. If I had to buy food when out and about I’d go to a supermarket and buy cut-priced pastries and a banana or similar. To be honest I still avoid £6 sandwiches if I’m on my own, but I no longer make a fuss if with my girlfriend or others. Part of my annoyance is I’m a decent cook and I’m amazed at what people will happily pay up for. But I don’t begrudge spending on great food. (Or smelly cooking that I don’t want in my flat. Fish and chips, I’m looking at you!)

Buy all my clothes at TK Maxx, in a charity shop, or in the sales. I still enjoy finding discounted fancy stuff at TK Maxx, but I’m not averse to sometimes spending money in a full-price shop these days. Between 18-30 I mostly I wore what I was given for Christmas and miscellaneous bargains, which I wore until they fell apart.

Buy wasting assets at all. Actually, aside from my aquarium habit – which since childhood has stood in for owning cars, smoking 40-a-day, and crack cocaine when it comes to my budget – you had to prise money out of my hands with a crowbar until my 40s. I’m still no huge fan of rampant consumerism, not least because everything you buy tends to bring extra faff in its wake. (Set-up issues, add-ons, upgrades, return hassles). But once you buy your own place, the ultra-frugal gig is mostly done for.

Get a coach to visit my family instead of the train. For a few years after Uni I’d always go to a bus terminal and trundle around the houses for hours to save on long distance journeys. Nowadays I’m a baller who pays through the nose for a seat on a crowded train with somebody’s luggage in my face.

I could go on (and on) but you get the idea.

Snowball’s gonna snowball

I will always like a bargain and I add money to my SIPP each month. But I’m no longer in Defcon 3 savings mode.

True, if I still religiously did all the stuff above then it would mean a decent chunk of extra cash going into my portfolio.

But I guess that given where I’m at financially, it no longer feels it’s worth all the friction and going without.

Does this mean I was foolish to ever sweat the small stuff, as some writers like to suggest?

Emphatically not!

A snowball has to start somewhere and getting started is the hardest thing.

Moreover, the act of cutting back and developing a savings habit is its own reward. One that will pay off big time over a long life.

Those habits are still with me, after all. It’s really just that the sticker prices that have changed.

I’ll happily buy a latte today. But I’m still not driving a show-off car, for example.

Time waits for no one

I don’t care for maths that says frugality can wait until you can earn and save a lot more – even as late as your 50s.

Or that one day you’ll look back and see you could have gone for sushi more often in your 20s.

I don’t believe it works that way.

Sure, you’re 50, earning £X and chucking £Y into your pension.

But I’m already financial free by then, thanks to saving hard, investing, and compound interest.

And as I said, saving and investing is a habit.

Yes, some people get religion late – say 10-20 years away from their State Pension. A few might cut to the bone and still end up comfortably ahead.

But personally I’d bet every day of the week on the person who begins to put real money away by age 25 as the one more likely to end up financially free.

Of course there’s a balance. I didn’t always get it right myself.

Sometimes I was too tight.

It’s also true there are certain experiences that are best had when you’re young. But I’d argue most of these are at the cheaper end of the spectrum, anyway.

Backpacking across Asia staying in youth hostels and scrounging street food with your buddies?

That’s probably worth putting money aside for in your 20s as a one-off experience. It won’t be the same when you’re much older and more easily able to afford it. (Assuming you even have the freedom to go).

But a lavish weekend on a whim in New York, staying at the trendiest hotels, and populating your Instagram account with all your fine dining?

That’s a hard no from me if you’re under-40 and not a Murdoch heir.

Remember, young people are already rich. You don’t need to spend much to play to your strengths.

Ways to start your snowball rolling

Struggling to get going? Here’s a few things we wrote earlier that might help:

• Conjure big savings without sacrificing your quality of life.
• How to stick to your savings goals.
• Simple savings tips to help you on the way.
• 101 ways to save money.

Saving is far more important than investing for the first few years of your journey, and if I was whisked back to my late-20s I’d do almost everything the same again.

Even when your snowball isn’t growing much on its own, it’s fun that you can make it noticeably bigger just by chucking more money at it.

As we’ve discussed, eventually your portfolio takes on a life of its own. Then how it grows is more down to the markets than anything you can control. Your financial future is mostly about your investment returns, not your income or savings.

I’ll look at passing this crucial crossover point in a future post. (Subscribe to ensure you see it.)

The not-so-abominable snowball

My best advice would be to enjoy the journey to getting your own snowball going as best you can.

Unless you get a kickstart from an inheritance, a big bonus, or the Bank of Mum and Dad, then the first £10,000 – outside of any pseudo-compulsory workplace pension – is probably the hardest.

Not just in terms of the cash. Also in the mentality shift that says your money is not all there for spending.

The first £100,000 is no walk in the park either. Especially if you’re trying to save a house deposit at the same time.

But after £100,000 you start going places.

A return of 10% is £10,000 extra in a year gathered up by your snowball.

Of course sometimes you’ll do a lot worse, but some years far better too.

Median full-time earnings in the UK are £35,000. So a portfolio that bolts-on £10,000 in a year is a very valuable asset.

With ups and downs, it will only get better from there.

It’s hard to believe it when you start and everything is about cutting and saving, but it’s actually fun watching your portfolio grow.

Stay with this journey, and you’ll find the impulse to spend money on material tat falls away too – even as your ability to splash the cash grows out of all proportion.

That’s not to say you shouldn’t spend any money, especially once you’re on-track or have achieved your goals. None of us is taking anything with us when the clock runs out.

But just having a decent financial buffer at your back – and building the habit of living well whatever The Jones’ are doing – is pleasurable in its own right.

Getting there will probably be one of the biggest achievements of your life. Try to savour the journey!

And start your snowball rolling.

1. Literally: “Remember you must die.” [↩]