Tuesday, 30 April 2013

The New FTSE 100 Cyclically Adjusted Price Earnings Ratio (FTSE 100 CAPE) Update - April 2013

Welcome to the new look UK FTSE 100 monthly stock market review which includes a couple of valuation metrics.  The last time we looked at this dataset was on the 10 March 2013.  This monthly review will now loosely follow the same format we use for the S&P 500 which will enable us to get some consistency across regions going forward.

FTSE 100 Price

At market close on Tuesday the FTSE 100 was priced at 6,430.  That is a rise of 0.8% when compared with the 01 March 2013 Price of 6,379 and 9.5% above the 02 April 2013 Price of 5,875.  How this pricing compares with history can be seen in the chart below.

Chart of the FTSE 100 Price
Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media.  Let’s now remove the sensationalism 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.  

Looking at the chart this way reveals the FTSE 100 in a very different light.  That light shows that the compound annual growth rate (CAGR) in today’s £’s has only been 2.0%.  Correct it by the Retail Prices Index (RPI) and that falls to 1.2%.

Chart of the Real FTSE100 Price
Click to enlarge

FTSE 100 Earnings

As Reported Nominal Annual Earnings are currently 483, up from 458 on the 01 March 2013.  They are down 18.3% on last year and 23.0% on October 2011’s 628.  Or course this looks better than it really is as inflation flatters the result.  I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.

Chart of Real FTSE 100 Earnings
Click to enlarge

Monday, 29 April 2013

What type of Investor are you?

There are a multitude of investment opportunities and investment products available today to help investors meet their goals, which might include retirement or financial independence.  Before you look at those products in detail you must first ascend to 30,000 feet and decide what type of Investor you are or intend to be.  At this level I see there are essentially 4 types of investor which can be profiled by answering 2 questions:

  1. Am I going to be an Active or Passive Investor?
  2. Do I want to be DIY or have somebody make my investment decisions for me in consultation with me?

Let’s look at each in turn.

Active vs Passive Investing

The debate over which of these strategies is better has been going on for years.  Passive investments aim to do nothing more than track a market index.  That could be a stock market index like the FTSE All Share Index or a bond market index like the Barclays UK Government Inflation-Linked Bond Index.  These types of investments don’t need talented managers or analysts but simply a decent computer system that will enable the assets purchased to replicate the market.  Importantly when selecting these types of investments you will be looking for ones that track the chosen index as closely as possible.  Therefore if you are passive investing well you will never beat the market but should get pretty close to its nominal performance.

Active investments on the other hand are run by professional managers who are supported by analysts and researchers.  They will conduct extensive market research on the investment opportunities within their remit with the specific aim of beating the market.  It must however be remembered that the law of averages dictates that for every active investment manager that beats the market somebody or something has to not beat the market.  Some of these will be other professional managers.   Pick one of those and you would have been better off going passive.

Active investments typically carry higher expenses than passive investments.  After all those managers, analysts and researchers aren’t working for free and expect to be paid.  Therefore they must beat the market by at least their expenses if they are to be a better bet than the passive investment option.

DIY or Financial Advisor Investing

The second decision you need to make is are you prepared to go it alone, make all of your own investment decisions and live with the consequences.  It should not be underestimated how important planning for retirement or financial independence is.  In many instances you will only ever get one shot at it.  If you go DIY you must be therefore prepared to read a lot and really think through what you are trying to achieve.  You’ll need to accurately assess where you are today, where you want to go and when you want to get there.  You will need to determine how risk tolerant you are, while also realising that, for example, 100% of the lowest risk asset class today will likely not give you the lowest risk portfolio.  You’ll then need to crash all of that information with a lot of research on different asset classes and investment wrappers to build a diversified, tax minimised investment portfolio, with expenses at a level you are happy with, that will give a high probability of meeting your goals.  You’ll need to t
hen review your portfolio regularly to determine if or when you want to rebalance those investments and also ascertain if you are still on target to meet your goals.

Sunday, 28 April 2013

The Best Performing Stock Market in the World

In the modern day we see many of the emerging economies of the world moving forward with high growth while in contrast many of the mature western economies have anaemic growth at best.  This was reinforced last week with the UK reporting preliminary quarterly growth of 0.3% (1.3% annualised) while the US fared better with an annualised 2.5%.  In contrast on the 15 April 2013 we heard that China was growing at 7.7%.  Does this mean we should all be selling our mature market equities and loading up on emerging markets?  Or do we get enough benefit from the fact that many mature market companies are exposed to high growth markets?

To try and get an idea I ran the Google search “the best performing stock market in the world” and was rewarded with the result that in 2012 the Venezuela IBC returned around 300%.  I was disappointed with this result and the majority of the other Google results for three main reasons:

  • As a private investor are we really going to put a significant portion of our wealth into the Venezuela stock market?  Or the Turkish XU100, Egyptian EGX, Pakistan KSE or the Kenya NSE for that matter?  Well as somebody who is searching for consistent return over many years I know I’m not.
  • The majority of results simply show the performance of the major stock market within each country.  This is flawed because each of these markets is priced in the local currency of each country and we all know that currencies move for all manner of reasons including varying rates of currency devaluation caused by inflation.  You therefore cannot compare one with the other as they have different units.  It would be like saying Car A which is travelling at 110 km/hour is going faster than Car B which is travelling at 100 miles/hour.  A clearly ludicrous statement. 
  • As the results only use the major stock market for each country they are only looking at the capital gain of each of these markets.  If we truly want to understand the best performing market then we should also consider the contribution from dividends because dividends matter.

Let’s therefore answer the question from a personal long term investor perspective while considering the three points above.

Sunday, 21 April 2013

The New S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - April 2013

I've been publishing a review of the S&P500 and all its nuances every month for over 3 years.  This is data that I personally use for my own investments and as my knowledge has grown so too has the content posted but the format has remained largely unchanged.  I've received no complaints but to me the format has now grown a little unwieldy, not as clear as it could be and probably most importantly I've become a little bored with it.  Last month’s review can be found here.  I've therefore spent some time reformatting the charts, adding some more relevant historical content and hopefully arranging the content into something a little more logical.  I hope it works for you.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,555.  That is a rise of 0.3% when compared with 1,551, which is the average closing Price of each trading day last month.  It is 12.2% above last year’s April monthly Price of 1,386.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I'm a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

Chart of the Monthly S&P500 Price
Click to enlarge

This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

  • Correct the chart for the devaluation of the US Dollar through inflation.  This unfortunately means, unlike the mainstream media in recent times, I can’t report that the S&P500 has reached new all time highs as in real terms it is still 22.5% below the Real high reached in August 2000.
  • Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

Chart of the Monthly Real S&P500 Price
Click to enlarge

Monday, 15 April 2013

The Cheapest Home Insurance

We've previously run the maths to demonstrate how quickly small regular amounts of expenditure can add up to large amounts.  We've also analysed how it is important to save large amounts if you are chasing financial independence in a short space of time.  This is because over a short period compound interest doesn't really get time to work its magic.  It is therefore crucial to ruthlessly look at every piece of expenditure you make to identify savings.  Those savings can then be invested wisely.

One piece of expenditure that is not small and repeats year in year out in various forms forever is insurance.  Depending on your level of acceptance of risk and life situation you might be paying for car insurance, home insurance, life insurance, travel insurance, health insurance and income protection insurance to name only  a few right now.  That is a lot of insurances.  Let’s therefore pick one and by using Retirement Investing Today principles think through how we might be able to reduce our insurance spend leaving more money for financial independence investing.

In the UK home insurance is a generic term which actually covers 2 very separate insurance types.  The first is buildings insurance which protects you from damage to the fabric of your home and so will cover floors, walls, and roofs.  It usually also protects you from damage to fixtures and fittings such as kitchens and bathrooms.  The second is contents insurance which protects you from loss associated with stuff kept in your home such as furniture, computers and personal belongings.

We’ll look at how we can reduce cost with each type of home insurance in a minute.  However while we have them grouped together one thing I would expect most people, including non Retirement Investing Today readers, to be doing in the modern day is to use price comparison sites to scan the home insurance market for the best deal.  A word of caution though.  No two policies are alike and so you must not just pick the cheapest offering presented by price comparison sites.  Instead you must read all the small print and pick the cheapest product that gives you the protection level you desire.

Let’s now look at each home insurance type in turn to identify a couple of further cost saving ideas:

Building Insurance

Your home is probably the biggest purchase any of us will ever make in our lives.  If you own your home or are renting out a home the responsibility for building insurance sits with you.  This then identifies one saving opportunity.  If you are in rental accommodation, as I am today, then I don’t need buildings insurance as it is my landlord’s responsibility.

Thursday, 11 April 2013

It’s an Advertisement not News

Apologies in advance for an uncharacteristic short post.  Most of my energies this week have gone into pulling together the fourth quarterly Monevator Private Investor Market Roundup.  ( )

Today BBC radio along with their web offering have felt the need to present us with the “news” that the Post Office is to offer current accounts.  I know it’s all very exciting (yawn!) but please stay with me a little longer before you run off and sign up (not!).  This apparently is all in response to the regulator claiming that the High Street today offers little choice for consumers.  Details are scant at the moment but I’d be willing to bet it will be pretty much more of the same with an interest rate on offer of between 0% and 0.1% AER.  I can’t see it correcting the “lack of dynamism” currently on offer from Banks such as Lloyds, RBS, Barclays and HSBC given that it will just be another offering from yet another Bank, albeit from another High Street.  Am I the only one who doesn’t see this as news but instead just a thinly veiled advertisement for a new current account being offered by the Bank of Ireland?

Wednesday, 10 April 2013

UK Savings Account Interest Rates – March 2013 Update

Head over to Martin Lewis at Money Saving Expert and you’ll find that today the best easy access savings account comes from West Bromwich Building Society.  It pays interest of 2.05% AER but forget to switch after 31 May 2014 to the next bank or building society offering the highest interest rate at that time and you’ll lose 0.55% of that.  There are other limitations also which includes only 4 free withdrawals per year and a minimum initial deposit of £10,000 so be sure to read the small print if it looks interesting.  If you want something a bit cleaner then you’re looking at Skipton Building Society with 2% AER which includes a bonus 1% which you’ll lose after a year.

It therefore looks as though since we last looked at Savings Rates in February the best buy market has reached a plateau with 2% AER from Derbyshire being the best available at that time.

I must note that I continue to ignore the Santander 123 account for reasons explained in February.  If you’re using it and would recommend it over other options it would be great to hear from you.

So best buys are flat but what’s happening on average.  Well it’s probably no surprise that interest bearing site deposits are also pretty flat since I last posted at 1.08%. They are also flat since the Funding for Lending Scheme (FLS) was announced.  The interest on fixed maturity savings accounts is however a very different story.  Time deposits with a maturity of less than or equal to 1 year have now fallen 0.72% since FLS was announced ending up at 1.57%.  1 to 2 year maturities fall 0.94% to 2.45%.  Greater than 2 year maturities have fallen 0.84% since FLS to 2.72% but interestingly are up 0.2% on the month.  Could this be the start of a trend?  This is all shown in the chart below.

Average UK Savings Account Interest Rates
Click to enlarge

This all looks bad for somebody who is trying to save hard  but if you’re a worker paying 40% tax then its worse after HMRC has finished with you.  After tax you end up with 0.65, 0.94, 1.47 and 1.63% per annum respectively (0.86, 1.26, 1.96 and 2.18% for 20% taxpayers).  But wait it gets even worse because inflation is also devaluing your savings at the rate of 3.2% per year.  So after inflation and HMRC you’re actually losing savings to the tune of -2.56, -2.27, -1.74 and -1.58% per annum respectively for a 40% taxpayer (-2.35, -1.95, -1.25, -1.03% for 20% taxpayers).

Saturday, 6 April 2013

A Retirement Investing Today Review of Quarter 1 2013

For all UK based readers a Happy New Financial Year to you.  I wasn't sure if I should have put the Happy in front because for me a new financial year carries both a positives and a negatives.  The positive is that a new ISA year is upon us meaning I can again begin working hard to fill my full Stocks and Shares ISA allowance which for this year is £11,520.  The negative is that HM Revenue & Customs (HMRC) will soon send me a request to complete a tax return where as always I will be sent a bill because of my now considerable investment sum.  This however is not as bad as it could be as I continue to push hard to minimise taxes paid through tax avoidance schemes such as ISA’s, Pensions and NS&I Index Linked Savings Certificates (ILSC’s).  Over time continual energy to take advantage of these when possible (remember ISA’s are an annual use it or lose it allowance, NS&I ILSC’s come and go on an ad hoc basis and for this financial year the pension contribution limit is for me a very large lower of 100% of earnings or £50,000 which is called the annual allowance) really add up and mean this year I will only be taxed on around one third of my total investment portfolio.  Therefore on the whole I’ll call it a Happy New Financial Year.

In the past I have only tended to publish my own personal financial position on an annual basis even though I track value weekly and performance monthly.  I now intend to publish my own situation on a quarterly basis for 2 reasons:

  • My 2012 annual review showed that in the metrics that I measure myself against I had one conceded pass and one fail.  By publishing more regularly I hope that it will force me to hold myself more accountable to my objectives plus also allow more time for recovery should I fall off the rails.
  • The 2012 annual review sparked some good discussion so was clearly worthwhile to both myself and some readers. 
My own personal situation follows everything I talk about on this Site to the letter.  The site is all about Save Hard, Invest Wisely, Retire Early so as with the 2012 Review let’s continue to use those 6 words as a theme.


I am now into a fifth year of aiming to save 60% of my earnings, which I define as my gross (ie before tax) earnings plus any employee pension contributions.  This is a very tough target particularly in the current age where we have increased taxes and prices going up due to unrelenting inflation while at the same time my salary is not moving in nominal terms.  My company is currently at the point of annual “salary reviews” but even though I have worked hard over the past year and delivered a lot I expect the same increase as last year which was a large 0%.  I did however manage to this year secure a bonus so I can’t really complain as many of my fellow UK residents I'm sure received nothing.

In addition to hard work Saving Hard has also required me to live frugally and opt out of consumerism. This on the whole has been a very positive experience however every now and then I come close to straying from the path. For example I don’t own an Apple iPhone, Nokia Lumia or Samsung Galaxy mobile phone which I'm told are the current must haves. Instead my personal phone is on a Pay As You Go contract which does not include data and is carried for emergencies only. To be honest I don’t covet a modern smart phone but I would love one of these to simplify reading when on the go and to make staying in touch with the world a little easier. Instead I stick with good old fashioned books and an old laptop which seems to get slower and slower every day.