Q1 2016 – Rocket boosters lit and then stayed lit

Quarter 1 has been what can only be described as one where the rocket boosters fired and subsequently propelled my personal finances forward at a rapid rate of knots.  I passed the one year to FIRE (financially independent retired early) mark during the quarter and then finished the quarter with wealth addition of some £55,000!  To put that into perspective that is more than half of what I achieved through the whole of last year.  Positively both my Saving Hard and Investing Wisely approaches made strong contributions:

Click to enlarge, RIT Year on Year Change in Wealth (Saving Hard + Investing Wisely)

SAVE HARD

I define Saving Hard a little differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employee Pension Contributions minus Spending minus Taxes.  Earn more and one is winning.  Spend less or pay less taxes and you’re also winning.  Savings Rate is then Saving Hard divided by Gross Earnings plus Employee Pension Contributions.  To make it a little more conservative Taxes include any taxes on investments but Earnings include no investment returns.  This encourages me to continually look for the most tax efficient investment methods.

Even with a large portion of my bonus going to those better able to spend it, including HMRC, I was still able to save some £31,000.  This was possible by once again keeping spending nicely in control.  In fact my personal rate of inflation (ex taxes) compared to Q1 2015 was actually -7%.  An interesting dynamic has developed here.  With FIRE being so close my better half and I seem to have just sub-consciously battened down the hatches as we can see the finish line which is then self-fulfilling.

Combining Earnings, Spending and Taxes together results in an average Savings Rate of 48% for quarter 1 against a plan of 55%.  Sounds like a pretty poor effort until I also mention HMRC took 47%, including some back taxes, with us living off the remainder.

Click to enlarge, RIT Savings Rate

Saving Hard score: Conceded Pass.  I yet again missed my savings plan of 55% but against a back drop of back taxes I’ll take it.  Savings were also still able to add 3.6% to my wealth, which is not to be sniffed at, even at this late stage of my journey.  Savings also continues to make the biggest contribution towards my wealth accumulation with 67% now having come from savings and only 33% from investments.  Compound interest is still not really firing on all 4 cylinders.

INVEST WISELY

Investment return for Q1 2016 (02 January 16 to 02 April 16) was a healthy 2.8%.  In 7 out of the last 8 years savings has made a greater contribution to my wealth than investments.  That theme has continued into quarter 1 with my investments contributing £24,000.

My investing strategy continues largely in line with that developed at the start of my DIY journey except for 3 tweaks (now mentioned many times previously) that are now necessary given my relative closeness to Financial Independence.

The first is to increase cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) to give the option of a family home purchase and to ‘ensure’ I can live off dividends alone in FIRE.  This continues to build nicely with holdings increasing from £203,000 at the end of 2015 to £224,000 (EUR278,000) today.  Some more work to do with our dream Mediterranean home still expected to cost EUR350,000.

Click to enlarge, The EUR350,000 Mediterranean View

The second has been to increase total wealth, less cash, dividends to 3% with that number coming from a decision to drawdown at 2.5% after expenses which then leaves a little for reinvestment to ‘safeguard’ the living off dividends idea.  Even though quarter 1 yields few dividends for me this remains well in control with my yield holding at 3.7%.

In 2015 I received £21,600 in dividends with 2016 already looking like being something like dividends of £23,300 (EUR28,900) which is more than I believe I’ll need to fund the lifestyle we’d like to live on the Mediterranean.

Click to enlarge, RIT Annual Dividends

The third has been to begin further diversifying my portfolio as I've reached a critical amount of wealth.  This kicked off with an increased weighting to FTSE250 companies.  I have continued with this theme adding another £8,000 worth of VMID within my ISA.

My current asset allocations now look like this:

Click to enlarge, RIT Asset Allocations

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

• 44.1% held within SIPP's
• 11.5% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
• 11.1% held within a Stocks and Shares ISA.

Tax efficiency score: Conceeded Pass.  At the end of 2015 this was 67.0% and it’s now 66.8%.  At this stage of my journey this now is what it is and not really able to be influenced.  I’m still maximising my ISA contributions with the full £15,240 going in for tax year 2015/16.  I’m also still hitting the pension fairly hard but am also being careful to make sure I have enough outside of pension wrappers to both secure a home and ensure I (hopefully) have more than enough to cover myself between FIRE day zero and the government tinkered private pension access age.

Investment expenses also continue to be treated like the enemy.  They really haven’t moved since 2015’s 0.27%.

Minimise expenses score: Conceeded Pass.  No improvement but still not shocking.

If I'm Investing Wisely I should be able to at least match a benchmark.  My benchmarks are continually challenged by readers but at least for now my Benchmark here remains a simple UK Equity and Bond Portfolio aligned in percentage terms with the building blocks of my own portfolio which is then rebalanced once every year.  Today that benchmark allocation is 66% UK Equities and 34% UK Bonds. The 2 indices I use to replicate that benchmark are the FTSE 100 Total Return (Capital & Income) Index which in quarter 1 returned -0.4% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned 3.5%.  The total return of my benchmark is therefore 0.9%.  In comparison my 2.8% return results in a significant benchmark beat.  Interestingly, if I was to split the UK Equities portion 50% to the FTSE100 and 50% to the FTSE250 that benchmark would become 0.1% resulting in even more out performance for the quarter!

Investment return score: Pass.  A significant out performance when compared to both benchmarks now being tracked.  I'm even happier knowing that my benchmark doesn't carry any investment costs where my portfolio sees expenses including fund and wrapper expenses, investment spreads, trading commissions, withholding tax on some investments and deducted at source tax on savings interest.

In the scheme of a lifetime of investing this quarter is insignificant.  I'm all about time in the market and not timing the market so as always let’s zoom out and look at my performance since I started down this DIY road.  This still looks excellent when compared to my benchmark with the chart below tracking the performance of my portfolio against my Benchmark and inflation (RPI).  Note that the chart assumes a starting sum of £10,000 which is not my portfolio balance at that time but is instead simply a nominal chosen sum to demonstrate performance.

Click to enlarge, RIT Portfolio Performance vs Benchmark vs Inflation

Since the end of 2007 the benchmark continues to beat inflation with Inflation growing at a Compound Annual Growth Rate (CAGR) of 2.6% compared with the benchmark at 4.1%.  In contrast my portfolio has increased at a CAGR of 5.9% (up from 5.7% at the end of 2015 showing nicely why you don’t want to be out of the market as it can make great strides over short periods of time).  In real inflation adjusted terms that’s therefore now 3.3%.  My whole investment strategy since 2007 has been to generate a long term Real Return of 4% and so I remain well behind plan, but have done some catching up in this quarter, albeit above the 2.5% I intend to drawdown in FIRE so not all bad news.

Long term investment return score: Fail.  Still well ahead of long run benchmark but also well behind plan.

RETIRE EARLY
Combined Saving Hard and Investing Wisely should eventually give Early Financial Independence and the option of Retiring Early.  When I started this blog in November 2009 I stated that my aim was to retire (which at the time I defined as work becoming optional) in less than 7 years.  I am now 6 and half years into that journey and assuming I can continue to save at expected rates, while achieving a real return of 4%, I forecast that financial independence will arrive in about 8 months at current valuations.  If it happens I will have missed my target by the slimmest of amounts however it will still mean FIRE in less than 10 years from when I went DIY in 2007.

Savings and investment return have allowed total wealth to increase 6.4% in a single quarter.  As I write this post wealth is now at £915,000 against a target of a little over £1 million and I can smell victory.  A cool million will give us the Mediterranean lifestyle we desire, with some contingency for exchange rate movements, and vastly increased discretionary spending if we so desire.

My journey to FIRE now looks like this:

Click to enlarge, RIT Path Trodden Towards Financial Independence

Retiring early score: Pass.  Pretty much bang on with my 7 year target from blog start up and also less than 10 years from going DIY.  In a single quarter I’ve accrued a further 6.4% of the wealth I need for FIRE.

I couldn't have asked for more from Q1.  How was yours?

As always please do your own research.

A quick footnote.  Subsequent to my post detailing my experience of P2P lending via RateSetter I've continued at it with annualised returns now at 4.6%.  If any reader is interested in doing something similar RateSetter still have the promotion running where if you've firstly done your own research, then subsequently sign up as a new lender via this link directly and lend £1,000 you’ll receive £100 (I receive £50) after 1 year.  That’s up to a 10% return on top of whatever you get in the RateSetter lending market.  Of course your capital is at risk with peer-to-peer lending so please do make sure you do your own research first.