July has been a month I will never forget. Firstly, I joined the 2 comma club and then soon after joined the ranks of the financially independent (FI). In all the excitement what I didn’t do was run my regular quarterly update on my year to date performance. I’m going to belatedly do that today as I do want a record of my quarterly performance put down on paper (or pixels)The first quarter of the year started well but the second half was one of the wildest financial rides I think I’ve ever been on. To put it in pounds, shillings and pence by the end of quarter 1 I had added £55,000 to my wealth but by the half year mark that had leapt to £142,000. That is more than my savings and investments have produced in any full prior year of my FIRE journey.
Click to enlarge, RIT Year on Year Change in Wealth (Saving Hard + Investing Wisely)
With strong contributions from both saving and investing let’s look at the detail.
SAVE HARD
I continue to define Saving Hard 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.
Click to enlarge, Where my earnings goes
I cannot reinforce enough just how important Savings have been to my FI journey. On the journey so far savings continues to be the dominant contributor to wealth at 64%. Throughout, at the expense of just about everything except ethics/integrity, I have been doing everything I can to ramp Earnings and I must say it’s worked. In Half 1 (H1) I squirreled away £60,000 which is significant as it already exceeds every annual contribution thus far bar 2 and we’re only half way through the year.
Combining Earnings, Spending and Taxes together results in an average Savings Rate of 58% for quarter 2 against a plan of 55%.
Click to enlarge, RIT Savings Rate
INVEST WISELY
Investment return for H1 2016 (02 January 16 to 04 June 16) was a very healthy 9.3%. My investing strategy continues largely in line with that developed at the start of my DIY journey except for 4 tweaks (with one of those tweaks starting recently) that are now necessary given my relative closeness to FIRE.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 in the Mediterranean. This continues to build nicely with holdings increasing from £224,000 (EUR278,000) at the end of Q1 to £249,000 (EUR295,000) today.
The second is to ‘ensure’ I can live off dividends alone in FIRE. This has required me to increase total wealth, less cash, dividends to 3% with that number coming from a decision to drawdown at 2.5% after expenses. This then leaves a little for reinvestment to ‘safeguard’ the living off dividends idea. With one of my last active funds that I own (a mistake that I’ve written about previously) starting to stabilise dividend payments this looks to have settled right where I need it at 3.0%. In monetary terms 2016 is looking like £20,500, which is EUR23,000 if I convert it at the worst Euro exchange rate since its inception.
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. In Q2 it has stalled a little while I work hard to build cash holdings.
The fourth is my new tweak which is to start working towards my Early Retirement Financial Strategy. This is what my asset allocation looks like today.
Click to enlarge, Current RIT Asset Allocations
Click to enlarge, Current RIT Asset Allocations less home purchase
I’m underweight cash, bonds, international equities and overweight property, commodities, emerging market equities and UK/Australia equities. I’ll get that rebalanced over the coming months before I enter Early Retirement (ER).
I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:
- 44.6% held within SIPP's
- 10.3% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
- 11.4% 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 66.3%. 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. It will also be maximised in 2016/17. 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 what I foresee will be a government continually tinkered private pension access age.
Investment expenses also continue to be treated like the enemy and are stable at 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 H1 returned 7.8% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned 9.8%. The total return of my benchmark is therefore 8.5%. In comparison my portfolio has returned 9.3% which is 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 4.6% resulting in even more out performance for the quarter!
Investment return score: Pass. Healthy out performance when compared to both benchmarks now being tracked. For completeness it’s also important to note 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 half 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 4.9%. In contrast my portfolio has increased at a CAGR of 6.4% (up from 5.9% at the end of Q1 2016 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 3.8%. My whole investment strategy since 2007 has been to generate a long term Real Return of 4% and throughout my journey I’ve always been well behind but it seems it might not have been a fetched target after all.
Long term investment return score: Pass. Still behind plan but catching up fast.
RETIRE EARLY
Combined Saving Hard and Investing Wisely should eventually give Early Financial Independence and the option of Retiring Early. I can now change that should to does! 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 three quarter years into that journey and I’ve done it. It also means I achieved financial independence in less than 9 years.My final chart for today shows just what is possible if you start, stay determined and never ever become a victim.
Click to enlarge, RIT Progress Towards Retirement
1995 to 2007 shows the path to Retirement I was on. Spending most of my earnings, giving plenty away to the financial services sector / HMRC and having no real financial strategy could have meant that today as a 43 year old I might have only been 30% of the way there. I really am so glad I started, stayed at it even though it was at times a very lonely road and never came up with excuses for why I couldn’t do it.
Retiring early score: Pass Pass Pass! If in 2007 I was offered that chart I would have taken it without a second thought.
The first half of 2016 will be remembered as a financial success for a long long time. 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 having jumped to 5.0% after some 1 year investments matured. 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.
Some very good returns there RIT. Considering the effects of 2008 on the CAGR, the 6.4% must give you a lot of confidence. If you were to have started out a year later, I guess the returns would be nearer 10% p.a.
ReplyDeleteAll the best with your FI plans during the coming months!
You're pretty much spot on John. A year later and the nominal return would be 9.5%. I'm kind of glad the downturn is in there though as it gives me an idea of what is possible going forwards given I'm sure we'll have plenty more booms and busts.
DeleteJust one other point RIT, you propose to start drawdown at 2.5% which is within the inflation-adjusted figure of 3.8% but will the actual sum taken out be a higher %?
DeleteI imagine you could safely draw 2.5% + inflation each year going forward.
Your hypothesis is correct John. The plan is based around starting at 2.5% to get starting maximum earnings and then increasing that by inflation annually.
DeleteIn reality I don't think we'll be able to spend that much. In 2015 excluding rent (and I do acknowledge I'll have home owner maintenance costs) and work costs I spent £7,400. We'll spend a bit more this year as 2016 is the year we will try to finalise our Mediterranean country and region. In FIRE I expect I'll spend more than 2015 as I'll be pursuing other interests when I would today be working but I don't think it will be extreme as a lot of the things I want to do a lot more of (hiking, cycling, swimming etc) are nearly free.
Far more discrete referral for P2P lender than some other UK PF bloggers! If I wasn't already using them, I would sign up based on your tactful inclusion.
ReplyDeleteWould be interested to know how you are finding RateSetter as an investment?
DeleteCongratulations RIT,
ReplyDeleteWho would have expected FTSE 100 equities to be a star performer post the Brexit vote ? ( even though it is almost certainly in response to the increased value of foreign earnings since the £ weakened and therefore will only be a temporary effect)
Looking at your cash holdings - you have 10.3% in NSILC's - a recent statement from NS states 1.39% tax free growth over the last 12 months . Are you happy to cash these in other than at their renewal dates ?- as you will lose some indexing uplift ( but I suppose @ 1.39% that will not be too hard to forgo)
I am going to re-state a previous comment. You are going to be living in a new country ? with a new language and most likely with few friends as contacts initially. A house that is inviting and that people want to come to - just to see , or relax or be entertained and meet others would be an essential requirement to help speed that process up . OK - it is often easier initially to meet people or get to know them on neutral ground eg in a pub / restaurant / park / beach or other public places- but hopefully your home will also become part of your social life and sharing with friends / family .
In your position - at your age and with children living at home -I would not be skimping on investing in a house in the best position possible for what you can afford. Once you know where you are going to put your roots down - put the strongest and deepest roots possible - that way things will grow quicker !
Along with the uncertainty as to which country you are going to be living in - it must be tempting to feel you are not going to commit too much into your property- because at this stage it all seems a bit vague and uncertain and you have not had your initial trial of living abroad . I do urge you to re-consider the cash allocation you are setting aside for purchase. 300 K in euros may just not be quite enough . If you fall in love with something @ 350K are you really going to have to walk away from it - having tried your best to reduce the price as much as you can ? Further weakening of the £ would also be a risk to your property pot - a UK recession might make that more likely.
But - may congratulations on your achievements so far - it must be exciting ( and a bit frightening ) to know you are nearly at the point of turning your aims into reality.
A lot of what you say resonates with my thinking and is actually very close to some recent conversations my better half and I have been having. So much so I’m wondering if you have my flat bugged :-)
DeleteFirstly, the easy one, the ILSC’s. My recent statement also states 1.39%. Here, I think it will depend on when we buy, where we buy and what Mr Market is doing at the time. If equities are in a bear market then I would probably just cash in the ILSC’s and lose the interest. If they’re not then, for example, I have some active (read expensive) Aus funds still hanging around like a bad smell which I can’t sell in the UK as the tax would kill me but if I moved to say Cyprus I could sell with no tax.
Secondly, the home. I think I’ve mentioned this a couple of times in the past but my extended family and long term friends are really the definition of embraced globalisation. Neither of our parents currently live in the UK and our long term friends are spread across the world for work. We do have good friends who we’ve known for less time in the UK to consider however. This is I think why ties to the UK are maybe less than many others who generously comment on this blog.
With that in mind your thoughts are very prescient. One of the big advantages of FIRE is that we will be able to spend much more time with family and friends. This needn’t be expensive as accommodation is ‘free’ and spending quality time eating, drinking and being merry can be low cost. Of course we would have airfares if we travelled to them. We do however want to have some spare bedrooms, which might be a study, TV room etc when no one is visiting but which do give privacy and a homely feeling when they visiting to encourage them to visit us for holidays (holidays as they are not FI’d but it would be lower cost for them hopefully helping regularity and it would save us money so win for all).
The speed at which I reached FI really did take me by surprise and as I’ve mentioned I do intend to work for a few more months yet. It could add up to £100k to the pot which will give options I think. We don’t need more stuff so this excess money will likely go into the home or the wealth needed for the extra costs of running the home. Not so much a bigger one but one with maybe a bit more land, maybe a better location, maybe closer to the sea or with better sea views. By having a home where you and friends/family want to be you save on costs like restaurants and bars.
It’s certainly exciting but I must say I am starting to question myself a little as I just know nobody who has done anything like this. I keep running the maths and it continually works but I keep asking myself what have I missed. I must have missed something as an Average Joe in 2007 really shouldn’t be able to make work optional and live happily ever in less than 9 years at age 44.
What you might have missed? Do not underestimate the increasing costs of children, especially if they wish to go to university.
DeleteHL has charges of 0.45% p.a. on the first £250,000 and 0.25% p.a. on £250,000 to £1,000,000. This can be tweaked by using investment trusts or ETFs (where there is a cap on the annual charge) rather than unit trusts. In addition, there would be the charges levied by the fund manager and investment trusts also carry an annual charge.
ReplyDeleteI know that many people have negotiated lower charges with HL (If you don't ask, you don't get) and was wondering if that is what you have done or if you had another strategy to get the very low annual investment expense of 0.27%
Hope you keep blogging by the way, it's been a fascinating journey.
By your questioning I think you're asking about my SIPP charges. I have 2 SIPP's:
Delete1. HL. In this I hold direct equity and ETF's only. This attracts fees of 0.45% capped at £200 pa. So I pay £200. This is therefore 0.019% of my 0.27%.
2. YouInvest. In this I hold OEIC's and ETF's. This attracts a SIPP custody charge of £100 pa (>£20k value) and 0.2% custody charge for the OEIC's capped at £200 pa. So I pay £300. This is therefore 0.029% of my 0.27%.
I'm yet to negotiate with HL but thanks for the idea. I tried pretty hard when YouInvest changed their charging structure but failed dismally.
I can tell you where to live that will guarantee seeing lots of your friends. When we lived in Edinburgh everyone phoned to ask whether they could visit us during the festival.
ReplyDeleteAll you have to do is work out whether there is a Med equivalent.
Edinburgh - a beautiful part of the world but not my cup of tea personally.
DeleteI once heard a statistic that the Mediterranean is the most visited tourist region in the world. If that's true and I'm close to the beach, the mountains, have a pool, a decent BBQ area and some private accommodation for friends and family it might just be a pretty attractive visit location for friends/family.
Hi RIT,
ReplyDeleteI am a newbie to the world of DIY Investing so firstly thank you for sharing your knowledge through this blog and secondly congratulations on becoming FI. If I am not mistaken, SIPPs & pensions in the UK can only be accessed from the age of 55 so since 44.6% of your wealth will be inaccessible to you for another 11 years, have you written a post where I can read up on your thought process on how you plan to fund your lifestyle between the age of 44 to 55 on the accessible 55.4% portion? Thanks ASingh
As it currently stands I'm one of the last that can access my private pension at age 55.
DeleteThere's not really much of a post for funding pre-55 as it's pretty basic. I'll just use the 100%-44.6%=55.4% outside the pension which will spin off dividends that I'll spend. Then whatever dividends spin off in the pension I'll sell off equivalent capital outside the pension to cover spending and rebuy what I've just sold outside in the pension.
Then once I'm 55 it should be happy days. Just spend dividends from both inside and outside the pension.
Hope that makes sense?
Understood, thank you sir.
Deletehi rit , youve done well! how about buying somewhere with small rentable seperate holiday home you could rent out for added income.
ReplyDelete