Saturday, 25 October 2014

Practice Makes Perfect

2007 was the year I started to Save Hard and Invest Wisely for Early Retirement. While today this is a mature strategy (with some 364 posts on this site reflecting that) back then I was an amateur who was reading continuously and running so many Excel simulations that I’m sure at one point I saw smoke rising from my computer.  As it was a year of transition and my financial record keeping was quite sketchy it’s quite difficult for me to say exactly when I started really following the strategy.  I do know that 2008 was the year where the strategy that you see today really matured and I also know that the 5th anniversary of RetirementInvestingToday.com will occur next month.  What however I don’t know is when I really “officially” started living most of the principles that are today mature.

What I do know is that by August 2007 I was already saving large chunks of money while spending little however throughout that month I was also still talking to Independent Financial Advisor’s, IFA’s, who at the time I thought were the secret to success but today firmly believe are not (at least for me, they may be for some).  I also know that it took me until the end of November 2007 to finally sell some funds that were charging me up to 1.78% in fund expenses per annum.  So the “real” Retirement Investing Today anniversary is probably somewhere between September and November.  Given we’re between those 2 dates today I’m going to call October 2007 the date when my journey really began.

October 2014 therefore represents the 7 year anniversary of my journey to financial independence and optional Early Retirement.  The question then becomes has 7 years of practice made perfect?  Well to answer that question I’ve just spent a couple of hours sorting through sketchy old records (this bit wasn’t by choice but rather my better half ‘encouraging’ me to participate in a very late spring clean) which really do make for interesting reading.

Sunday, 19 October 2014

Valuing the UK Stock Market (FTSE 100) - October 2014

Over the past couple of weeks the mainstream media have been getting all excited about recent share price falls.  As a group of people who are paid to write stuff I guess you could easily get excited by a graph like this:

3 Month Chart of the FTSE 100 Price
Click to enlarge, Source: Yahoo Finance

Eyeball this short term chart and of course they’re right.  Over the past 6 or so weeks there is no denying the FTSE100 has fallen 8% or so.  Personally, as a long term investor with a mechanical investment strategy I ignore it all and simply think that markets go up and they go down.  This is more the view I’m interested in looking at:

Chart of the FTSE 100 Price since 1984
Click to enlarge, Source: Yahoo Finance

On this scale the recent pull back is a bit of noise that means nothing more than my next share purchase is likely to be made at a better valuation than it was going to be.  Providing of course that earnings hold up.  Given I’ve now mentioned the valuation word as investors let’s today spend some time valuing the FTSE 100 over the longer term rather than wasting our time on short term price movement discussions.

Firstly let’s normalise the data by:

  • Correcting the chart for the devaluation of the £ through inflation.  For this dataset I use the Consumer Price Index (CPI) to devalue the £.
  • Plotting the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  

The normalised dataset shows that Friday’s FTSE 100 Price is actually still 32% below the Real high of 9,339 seen in October 2000.  We’re also now 23% below the last Real cycle high of 8,171 seen in June 2007.  We are therefore a long way from previous highs.

Chart of the Real FTSE100 Price
Click to enlarge

Sunday, 12 October 2014

A Retirement Investing Today Review 9 Months into 2014

My personal finance life follows a Plan, Do, Check, Act (PDCA) approach.  As I do every quarter it’s time to Check whether my Save Hard, Invest Wisely to Retire Early Plan is working.  It’s important to highlight that unlike many blogs what I write here is a real life, my life, and very serious DIY experiment. If I get it wrong then it’s likely that a ‘derisory’ State Pension awaits.  If I get it right then the world (or Europe in my families case) is our oyster.

SAVE HARD

This quarter I've continued to work very long hours, including a long commute, while as a family we continue to challenge all spending to ensure that every £ will bring improved health and/or happiness.  If it won’t then we don’t spend on it.  The end result is a savings rate for the quarter of 54% of my earnings, where earnings are defined as my gross (ie before tax) earnings plus any employee pension contributions.  This is against a target of 55%.

For the non-regular readers my H2 2014 review details why the target is now 55% compared with 60% when I first started down this road.

RIT Savings Rate
Click to enlarge

Saving Hard score: Conceded Pass.  Close, but no cigar.  1% below target means a little more effort required as we head into the Christmas quarter.  A difficult challenge ahead.

INVEST WISELY

My investing strategy remains pretty much intact however with financial independence now fast approaching this quarter has triggered the need to now start increasing my cash holdings which when combined with my NS&I Index Linked Savings Certificates will eventually buy my family a home.  My current asset allocations are:

RIT Asset Allocations
Click to enlarge

A quick full disclosure in relation to a comment in that last link:  When I first started down this Retirement Investing Today road my family thought that Australia was a preferred early retirement location.  For that reason I divided the “domestic equities” portion of my portfolio equally between Australia and the UK.  That is no longer the case and so I am now actively and gradually reducing my Australia allocation by not investing new money into Australian equities as well as reinvesting Australian equity dividends elsewhere.  The sum of Australia and UK Equity is still aimed to be at target though which simply means my UK Equity portion will increase with time.

I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:

  • 44.3% held within Pension Wrappers with the majority being within a Youinvest SIPP
  • 14.4% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
  • 9.9% held within a TD Trading ISA.  

Tax efficiency score: Conceded Pass.  At the end of June 2014 I was 68.9% tax efficiently invested.  In this quarter that has reduced slightly to 68.5% however with NS&I Index Linked Certificates currently unavailable and a definite unwillingness to expose myself much more to Pensions given the continual risk of government meddling I'm a little stuck.  If any readers have tax efficiency ideas I’d love to hear about them.

Saturday, 4 October 2014

Investing mechanically with index trackers is boring

My retirement investment strategy has been relatively unchanged since I started this blog in 2009.  When you boil it all down around 90% of it is nothing more than a diversified portfolio of assets that do nothing more than track indices through the use of low cost ETF’s and funds.  Each month I add to this portfolio with new money and all I do is buy whichever asset class has been performing the worst (ie whichever class is most underweight).  Should an asset class ever deviate from its target holding by 25% then I would either buy or sell back to nominal holding.  This however seems to happen very infrequently because of my continual new money entering the portfolio

Let me demonstrate just how boring this all is.  It is the morning of the 3rd of October 2014 and already all of my mechanical index tracking investing decisions for the month have been completed.  This is what has occurred:
  • Last weekend, as I do every weekend, saw my Excel spreadsheet that shows my financial position and compares it to my long ago mechanically set target allocation updated.  Boring and absolutely no brain power required.  Total time spent 10 minutes.
  • My employer paid me on the last day of the month, Tuesday.  Total time spent to ensure money had cleared in my account was 5 minutes.
  • I’m a big believer in the Pay Yourself First mantra and I’m ruthless at it.  This means before I pay any bills, before I buy any food, before I do anything I Save Hard.  So with money in the bank and one eye on my Excel spreadsheet I knew I needed to allocate to cash and so 100% of my savings were moved over to RateSetter.  Total time to move my money and set-up an auto investment in their 3 year market at 5.0% was 5 minutes.  Again, boring and absolutely no brain power required.  
  • Over the next few days my employer will get around to salary sacrificing a big chunk of my salary into my employer selected defined contribution pension fund.  I know that my current set-up will have 20% of this invested into an Emerging Markets Index Tracker and 80% will go to an Index Linked Gilt Tracker.  Next weekend I’ll login to make sure that my employer has completed the transfer and the investment is correct.  Total time will be 5 minutes and again it will boring plus require absolutely no brain power.
By next weekend I will have spent 25 minutes managing what is now a very large amount of wealth.  I am also done until next month.  However while it’s incredibly boring and requires no brain power boy is it effective.  Having been at it for a few years I now honestly believe that this strategy is all that somebody needs to build wealth successfully.

Saturday, 27 September 2014

How difficult is it to segregate our assets

In the modern, in my opinion overly complex, financial world there must by now be nearly as many investment risks as there are grains of sand on that now long forgotten Spanish beach where you spent your summer holiday.  One of these is that your broker/wrapper/online provider goes belly up and takes your wealth with it because they failed to segregate your assets from their own through fraud, negligence or even good old fashioned incompetence.  Here I am currently most exposed through my SIPP provider Youinvest, my ISA provider TD Direct, my trading account provider Hargreaves Lansdown and the large insurance company (the name of which I won’t mention as I could never recommend any element of their offering) who ‘looks after’ my defined contribution pension offered through my employer.

The same problem exists if the same fate befalls your fund manager.  Here I'm personally seeing significant exposure through Vanguard, State Street Global Advisors (SSgA) and BlackRock (think iShares).

It’s a risk I've known about for some time but on a scale of risks that I’m conscious of I had it ranked fairly low, thus wasn't doing too much about, as I thought that:

  1. The process of segregating your customers assets from your own really isn't very difficult so it should occur through negligence or incompetence very infrequently;
  2. Given its simplicity non-segregation would be easily and quickly identified by the firms accountants, compliance officers, auditors and/or regulator should it occur; and
  3. Non-segregated amounts, should they occur, would be relatively small in relation to total assets under management so result in only a relatively small loss given a large sum would be like an elephant standing in the room for those same accountants, compliance officers, auditors and/or regulators.


News this week tells me that my assumptions were naive and just plain wrong with Barclays investment arm having owned up to having “£16.5bn of clients' assets "at risk" between November 2007 and January 2012”.  This is neither a small amount of money nor a short period of time.  It also happened to occur during the period when Barclays was in severe financial difficulties and had to be ‘bailed out’ by the state investment funds and royal families of Qatar and Abu Dhabi to the tune of £7.3 billion.  It’s also not the only time with them having been penalised back in 2011 for “failing to ring-fence client money in one of its accounts for more than eight years”.  Of course Barclays say that ‘it did not profit from the issue and no customers lost out’ but they would say that wouldn't they and given the timing it could have easily been a very different story.