• A Fool and his money are soon parted!

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    Above, “The Fool” from Deviant Art. GOTO: http://elric2012.deviantart.com/art/The-Fool-184185910
    This early proverb was first expressed in rhyme by Thomas Tusser in Five Hundreth Pointes of Good Husbandrie, 1573:
    “A foole & his money,
    be soone at debate:
    which after with sorow,
    repents him to late.”
    The precise wording of the expression comes just a little later, in Dr. John Bridges’ Defence of the Government of the Church of England, 1587:
    “If they pay a penie or two pence more for the reddinesse of them..let them looke to that, a foole and his money is soone parted.”
    Since that time, the proverb has become a piece of familiar accepted wisdom. The problem is that some of us fail to take proper note of same!

    This time of year can be a lonely time for some and also a time when some remember those whom they would have spent the season with, except that they are in the hereafter. For such it is a time of memories, remembering happy celebrations around the piano……

    For me, a particular Christmas was that of 2013, my last in the city of my birth, Leeds in the West Riding. December 2013 was quite an auspicious month: contracts were exchanged on the family home and the cheque paid in, in person late in the afternoon of Friday 6th December at the Lloyds branch in Park Row in the city centre.

    I knew what I was going to do with the sum: use half the proceeds to purchase three good dividend stocks from stockbrokers Redmayne-Bentley LLP of 9 Bond Court in Leeds. These were Royal Dutch Shell, SSE PLC and Phoenix Group.

    I would have wished to spread the risk by acquiring shares in one or more investment trusts but my problem was to maximise the income whilst minimising risk. Such decisions are always and by definition a compromise.

    Shell was chosen because it was a very long established dividend stock used by institutional investors to provide the core income element in many portfolios and it’s balance sheet was one of the strongest in the oil industry. Since January 2014 the price has fallen substantially as a result of a falling oil price and a glut of supply. However, what was on the distant horizon when I purchased the shares – the takeover of British Gas – which will turn Shell into a giant well placed to profit when demand returns – is now expected to take place in early 2016. As the price dropped, I increased the holding in Shell, most dramatically by realising the capital gain on the SSE shares when the Shell shares had dropped to £14.50. This has had the effect of increasing my income but concentrating two thirds of those proceeds into one stock. Risky, when one reads: http://www.bloomberg.com/news/articles/2015-12-21/shell-bg-deal-not-yet-in-the-bag-amid-fears-of-further-oil-slump
    My judgement is however that the deal will go through, demand for oil will at some point in the not too far distant future return and with it and increase in the oil price and the Shell share price.

    I am not disappointed to have come out of SSE as the stock has a medium and long term risk of regulatory and government intervention. Furthermore, SSE is very much into “Green Energy” and we know that end to that particular gravy train will come at some point. Whilst I held them the SSE shares provided me with a good income and a capital gain.

    The third stock, Phoenix Group is a specialist closed life fund business and traces its roots back to Phoenix Life and also Pearl Assurance. Having worked in the insurance industry this is a business I know about. The shareholding was increased to take advantage of a short term drop in the share price and the shares that averaged £7.26 each are now generally trading at well over £9.00 a share, resulting in a good income and a healthy capital gain.

    So I am in the position of not working and having my income provided by four stocks: Shell, Phoenix, Temple Bar Investment Trust and Dunedin Income Growth Investment Trust. When I was in Leeds my income was provided by my late father’s shareholding in Lloyds Bank, the two aforementioned investment trusts and the profit from my clocks and watches business, Corneal Clocks & Watches.

    After October 2008 dividends ceased from Lloyds Bank. With the crash in the share price I have at various points increased the holding five fold. I am bullish about Lloyds medium to long term prospects. With interest rates at their present historic lows and the retail interest rates at the established levels it would be practically impossible for a bank NOT to make enormous profits from the present situation. A greatly simplified explanation as to just how profitable banking is, read on:

    Banking is essentially a business that rents and hires out money – other people’s that is. Your bank rents the money you deposit with them. The rent they pay you is the pitifully small interest rate you receive! Banks hire out money at much higher rates of interest. If you have a credit card, look and see what the APR rate is! Now you understand why banking is so profitable!

    Lloyds has been raking it in – “trousering it” on a monumental scale! However huge sums have been reserved to pay compensation for the mis-selling (largely by the Halifax bank) of payment protection insurance. Lloyds are lobbying the government to set a date whereby all claims have to be submitted. If granted this will be the date when we can expect the profits to soar and with it the share price and the dividend. I am quietly confident that by 2018 or shortly after, I shall receive more or less the same dividend that I did in 2008.

    Why am I relating this detail to strangers?

    Because it demonstrates the lengths to which ordinary folk who have acquired a modest amount of wealth have to go to ensure a reasonable income against very uncertain times. One of the things my late mother was most concerned with is that I maintained the National Insurance contributions for the state pension. This was sound advice but a considerable degree of uncertainty has been placed on this of late. For those born in 1955 it has been announced that the state pension age has gone from 65 to 66. Thus if I am to believe the government, I will receive the state pension (something in the order of £7,500?) in 2021.

    To add a seasonal note: I gave up believing in Santa Claus a long time ago. I have not replaced it with a belief in George Osborne!

    According to Professor Gabriel Paternain, Head of the Department of Pure Mathematics and Mathematical Statistics at the University of Cambridge, the year 2021 follows the year 2020. In May 2020 we will have a General Election. This means that in June or July 2020 we will have an “Emergency Budget.”

    Looking at the huge debts this country is racking up, it does not require the great learning of Professor Paternain to realise that whoever is occupying the position of Chancellor of the Exchequer will be seeking to cut back and the state pension is huge drain upon the public finances.

    The problem as the learned Professor would be very quick to point out is that as people live longer the pension costs keep on rising. An obvious answer is to raise the age at which people begin to receive the pension. In so doing, some people will not receive it as they will die beforehand and that those who do live long enough to receive it will receive it for a shorter overall period.

    This of course poses a political problem for whoever is at the Dispatch Box in June/July 2021 as there will be many people (your Editor included) looking forward to an extra £7,500 or so in their bank accounts the following year. If the then Chancellor softens the blow by delaying by just one year, he will make only a modest saving. A considerable saving would be made by setting the pension age for these folk at 70. This would mean an extra four years to wait.

    There are of course other ways that economies could be made.

    At the present time, we are told to expect a state pension in the order of £7,500. I would not be surprised were the Chancellor of 2021 to announce that the pension would be reformed. This means cut! Present plans are that all those reaching the age of 66 will receive this pension. Rich and poor alike. I would not be surprised if a Chancellor was to announce that the pension would be made up of two parts: the Guaranteed pension (£3,750?) and a Supplementary pension (£3,750?). The Supplementary pension would of course be “means tested” which means that those who have worked and saved for their retirement will be denied it!

    So instead of receiving a nice £7,500 from 66, I reckon I’ll end up receiving a miserly £3,750 from 70.

    Which is why have been fixating of getting as good an income as i can from what assets I have!

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