Saturday 14 December 2019

Real life portfolio returns

I was recently reading a FIRE blog post, from a couple who are still very much deep in the swim phase of the FIRE triathlon, where the post was exploring who in society has the opportunity to FIRE if they so choose.  Of course as many of us FIRE bloggers love a good spreadsheet, the weapon of choice for exploring this was an Excel model and a whole pile of assumptions.  Two of these assumptions were that we were living in a hypothetical world where there is no inflation and where the expected annualised investment portfolio return was 7%.  So to my reading a critical assumption in their Excel model was a real (ie after inflation) portfolio return of 7%!

I’m much further on the FIRE journey than these good folks being in the triathlon bike phase having now been FIRE’d for a little over a year and having been on my FIRE journey for around twelve years.  At one end this means I have more experience and data than these folks but it also means I’m more grey, grizzled and cynical.  With that warning out of the way to me that real 7% return assumption just seems way to bullish!  So I then asked myself why are they using such high returns in their model as not for a second do I think they are trying to deceive?  The simple answer I came up with is that the vast majority of FIRE blogs are from people who are pre-FIRE with many never having witnessed a bear market so they have no real life data, only published financial data.  Then from those that are FIRE’d I am yet to see transparent long term portfolio returns shared.  So today’s post aims to do just that.  Put a stake into the ground where hopefully your comments and other bloggers posts will tear my investing performance apart showing me to be either a poor, average or good investor.  With time that might help us all fine tune the expected returns we can all plug into our much loved spreadsheets.

My portfolio performance is an annualised number covering my investment performance from the end of 2007 until the present day.  This means the portfolio saw the vast majority of the Global Financial Crisis bear market and the bull market since.  The portfolio has also seen annual investment expenses which started high and now run at 0.21%, trading costs, withholding taxes, rebalancing including buy/sell spreads, new purchases and a lot of learning (also called mistakes).  It’s largely based around Modern Portfolio Theory where I started with the methodology described by Tim Hale in Smarter Investing.  It’s included my initial don’t know what I’m doing phase, my I have a strategy and am repositioning myself phase, my tinkering around the edges phase, gradual repositioning (heavier weighting to the likely retirement region/country) to suit the desired retirement location as well as building/maintaining low risk cash/NS&I reserves to support an eventual retirement home purchase.  If I chart all of that the portfolio has changed like this over the years:

RIT Asset Allocation by Year
Click to enlarge, RIT Asset Allocation by Year

If you squint at that chart it looks not unlike a 60% Equities : 40% Bonds asset allocation for the vast majority of the journey.

So then the million dollar question, actually it’s the million pound question as I’m a UK based investor, is what’s my real life portfolio return actually been?  Drum roll please...  The answer is a nominal portfolio return of 6.4%.  During that period inflation has been 2.7%, as measured by the RPI, leaving me with a real portfolio return of 3.7%.  That is a long long way from 7%!

So the next question becomes am I an average, poor or good investor?  Over to you...


  1. I think to get 6 1/2% out of a portfolio that is 40% bonds is pretty good going and certainly isn't possible any more with bond yields being what they are

    You started off with a really weird equity mix though - were you going to move to Australia or something?

    1. The end of 2007 represents the time I started taking responsibility for my financial future. At that point I agree things were weird for a few reasons:
      - I'd lived and worked in a number of countries including the UK, Australia, China and India by that point. While in Australia I was enrolled in their compulsory pension scheme (called Superannuation) where I was invested in Australian equities.
      - I'd also bought some ad-hoc Australian active funds which were non-distributing adding to the problem.
      - Early on there was no holistic plan so the portfolio when I finally pulled it all together was just a series of random ill thought out often default investments partly reflecting where I had lived.
      - Early on there wasn't much wealth anyway so it didn't take a lot to skew the numbers.

      The Australian stuff has also hung around for a few reasons:
      - I still have that Superannuation as it can't be transferred anywhere. Not touching it and just letting it compound up has seen its value grow significantly.
      - At one point Australia was a possible retirement destination so I actually added to my Australian equities by foolishly adding to those non-distributing active funds making the problem even worse. So I was stuck with them while I was earning as I didn't want to have my capital gains taxed at my marginal tax rate.
      - Australia could just be a retirement location of the future. No rush but I'm not going to reduce the Australia exposure until we finalise that thought.

  2. I've only unitised my portfolio since Aug 2016, so my figures are suspect, to say the least. But they do bear out why this couple may well think that they could achieve an annualised return of 7% - my figure is nominal 9.84% over this period.

    However, for the majority of this period I was something like 90% equities, mostly global etf trackers with a heavy small cap slant in OEICs.

    Nowadays I'm c70% bonds (in de-accumualtion) and I will think myself fortunate if I can break even with inflation.

    And I've benefited from the bull run which, IMHO, must be coming to an end.

    So in conclusion, I think this couple are wildly optimistic.

    1. You describe a very significant shift in your portfolio allocations.

      You state " global etf trackers " with a heavy small cap slant. Can you give a few examples

      UK small cap funds have performed extremely well over the last 10 years - just look at the IT companies ( Henderson, Blackrock, Aberforth, and 3 or 4 others ). You must be extremely bearish to have reduced your positions in these funds so significantly.

      Your 70% exposure to " bonds " - I hope that for your sake this includes inflation linked bonds / gilts. UK ILG's have had tremendous performances in the last decade .

      Further info would be appreciated.

    2. I calculate my returns (and have records for) year to date throughout a year, annually and then an annualised total return (which is what I shared here) so unfortunately can't compare without a lot of work.

      I do see a number of FIRE'd bloggers with very high equity allocations, even post 'FIRE', but I take those with a pinch of salt as they are still earning good money with their blogs etc so can manage sequence of returns risk (including the emotional roller coaster that might come with such a high equity allocation).

      As SV says more info behind the big shift would definitely be appreciated.

    3. I'm afraid I never had the discipline to record what my portfolio was exactly, so please forgive me if I'm not exact.
      In February 2016 I was about:-
      20% Vanguard 80% Life strategy
      40% VWRL
      30% Baillie Gifford Global Discovery Fund B Accumulation
      5% National Grid Indexed Linked 6/10/2021
      Various other bits and pieces mainly bond ETFs.

      Now I'm:
      22% Vanguard LS various but mainly <equity
      15% VGOV
      13% Nat Grid indexed Linked 6/10/21
      5% GILS
      3% Vanguard Global Bond
      10% VWRL
      5% TRITAX Big Box
      and various others.
      25% of my bond holdings are indexed linked.

      The reason behind the huge shift is that I believe that I have 'won the game'. I recommend a booklet by William J Bernstein entitled "The ages of the Investor", where he made a comment that changed my entire investing outlook - he said "I realised that in 2007 many investors had "won the game" - that is, accumulated enough assets to successfully retire - then lost it during the financial meltdown of 2007-2009."

      I decided that this would not be me.

    4. Thanks for sharing Borderer. Are you planning on now staying at that level of bonds:equities or will you now start gradually increasing 'equities' again? I believe the common term used is a rising equity glide path which Michael Kitces has written about a few times.

      If you're not planning to increase would you share your planned withdrawal rate?

      Believing you've 'won the game' must be a great position to be in. As I entered into FIRE I thought the same thing but 1 year in I'm not so sure I'm in quite the same state of mind. I'm not negative on it but I'm also no positive - more a Meh! I think it's been pretty obvious that my decompression has been a difficult one...

    5. Hi Rit.
      In answer to your first question as to whether I will maintain my current allocation - yes, probably for my foreseeable future. I am putting security before everything else, not that anything is 'secure' as such.

      A collapse in the world's bond markets would be 2007-2009 equity collapse for me, although I am mainly Gov bonds aka Lars.

      I do not calculate my withdrawal rate by reference to any kind of % portfolio drawdown. Instead I have constructed an extremely detailed 'business plan' type cashflow forecast for the next 40 years. (Ridiculous of course, but the old adage, 'those who fail to plan, plan to...')

      >Fortunately, my wife, a retired Chartered Acountant, maintains records of our spending going back to the dawn of time, categorised by what it is spent on.

      Using cautious personal inflation predictions, we can project future expenditure with a reasonable level of confidence.

      I project our future investment returns as equal to inflation.

      The forecast income v expenditure provides our future cashflow and budget.

      Into year 2 and it's OK so far, but with the vagaries of the future?

    6. Thanks for sharing Borderer. It's interesting you mention security as that word is also something I've been wrestling with. I'll also add the words risk and volatility. If I compare:
      - If history repeats you should have lower volatility than me (more bonds, less equities) and for this lower volatility you are definitely accepting you will drawdown on your portfolio (assumption of future investment returns equalling inflation and low allocation to equities).
      - If history repeats I'm accepting I'll have higher volatility but in the worst historic sequence of returns after 30 years I end up with a little more than I started with in real terms. After 40 years a lot more.

      The question then becomes who is taking the most risk from a security perspective? I'm going to think about that a little bit as we both are trying to manage our risks but coming at it from a very different perspective. My first thought is that it's impossible to know and only the future will tell us. As somebody who wants to control the situation I do struggle a little with that.

    7. I can absolutely see where your coming from. The difference between us is that:-
      I am older than you - in 3 years I will draw a state pension, so my RE is only a few years, whilst yours is extraordinary.
      I already own my house mortgage free.
      My wife has a DB pension that covers all the 'needs'.

      So in a sense I am in an 'enviable' position that I can afford to make a 'poor' investment decision by limiting risk (or at least volatility, which might not be the same thing).

      Trying to control the situation is, I think, both our aims, but I know that if I was in your position I would play the odds as you are.

  3. My numbers go back 30+ years, and suggest your ~4% annual real return is about right.

    To give that number some historical benchmarks to compare to, the average real interest rate in the United Kingdom over the last ~350 years is a little over 3%.

    The average annual United Kingdom nominal house price growth rate over the last ~175 years was about 4%.

    1. As long as I'm an average investor, or maybe that should be a market return less low expenses investor, I'll be happy. As after all that's what I've set myself up for both in accumulation and drawdown.

  4. RIT,

    I am questioning your graph and wonder if the cash and bonds bands should be displayed differently . You have stated before that you regard NS&I IL saving certs as bond equivalents - but they are really more like cash ( money invested " pays out " or grows at what was RPI and is now CPI ) The sum invested is not at risk - unlike ILG's which fluctuate in value - and standard gilts are even more susceptible to perceived prospects for UK and world economy , base rates, state of the £'s value and inflation ( these are the main influencers )

    If your " bond " holdings are mainly IL certs then I would suggest that the bonds ( grey band ) should mainly be pink ( cash or its equivs ) That would change the graph to show a fairly constant exposure to cash.

    I am mentioning this as many bonds , bond funds and etf's have performed relatively poorly over the last 10 years ( except IL bonds globally ).

    Similarly cash has offered very little in the way of growth or income. Those who have remained fully invested in equities have done very well since 2007. NB many IT's , OEIC's etc hold cash and some bonds in their " equity " funds whereas an index tracker/ etf holds no cash - which has added to their apparent ( and real ) outperformance.

    1. I suspect you are right. These days I definitely treat my ILSC's like cash as they form a large part of our home purchase fund. To put it into perspective with the ILSC's as 'bonds' I have 13.8% cash and 21.5% bonds (as displayed). Recategorise and cash becomes 22.2% with bonds at 13.1%.

      With what remains 54% is UK ILGs (INXG) and 46% is global developed world corporate bonds ex financials (ISXF).

      My cash, ex ILSC's, is currently yielding 2.2% meaning before tax I'm just about holding my own against RPI and am winning against CPIH. Of course the critical one for us is house prices in our final retirement country...

  5. RPI is now regarded as an inappropriate index due to the discovery that its underlying mathematics leads to a factually incorrect upwards bias in its figures.

    Over the period at issue the (now regarded as more correct) CPIH index is indicating about ~2% so RIT can congratulate himself on doing about 0.7% points better than is his current thinking - i.e. the real return is about 4.4% (which is about 10% better than the more long term figures supplied by in-deed-a-bly). So, WELL DONE RIT, on that basis.

    That said, this period is one of VERY PECULIAR economic times compared to anything that has been encountered previously and RIT was, perhaps, just lucky to ride a boom in both share prices and bond prices.

    Another thing that occurs to me is that this period is one where RIT was in his "accumulation phase" so it is, anyway, not appropriate to apply the average inflation/deflation for the whole period to all of RIT's present capital? Each tranche of capital that came newly within RIT's control should really be evaluated separately. i.e. In the limit, RIT might have invested only 0.1% of his capital at outset and 99.9% of capital in the last two days, but been lucky to achieve ~4.4% in those last two days. I don't know - maybe RIT's underlying maths takes account of this.

    1. I agree that I've definitely ridden this long bull market but my early days also includes the vast majority of the GFC bear so my records do cover a full'ish cycle. By the end of 2007 my recollection was that markets like the S&P500 were only off their peaks by a couple of percent with the 'fun', market wise, really not getting started until 2008.

      I record capital in flows and out flows weekly in my main spreadsheet. I then use XIRR to annualise it so I believe I am doing as you suggest is best practice. I agree this can make a big difference with people on a FIRE journey because the rate of capital addition can be very large compared to the market return, particularly in the early days. In my case my progress to FI was very close to 1% per month of which 55% was savings and 45% investment return.

  6. My detailed records go back to the end of 2006 and my compound return to end-2018 was 9.6%. I expect something similar for 2019, but won't so the actual calculations until the end of the year.

    So on paper 6% real looks achievable, but I would say this period is somewhat flattering, and with valuations mostly high at present, I would expect the next decade to produce lower returns.

    I think people in the accumulation phase often make optimistic assumptions, as they get them to FIRE sooner. In the decumulation phase, you only need to hit your SWR, which is probably around 3% real.

    That still seems achievable, if you hold enough equities.

    1. Nice job Mike. Have you achieved that with passive investing (eg with a high overall equity allocation and say high US allocation within those equities) or active investing? Would love to know a bit more detail.

      As we know in the accumulation phase optimistic assumptions, or any assumptions for that matter, actually don't matter. What matters is starting and then you'll be FIRE when you are FIRE. Of course in drawdown it matters a lot as you might be limited in ability to rebuild capital. If optimism helps to get people started then that sounds like a good thing to me.

  7. You are all much smarter than me, but I think it can help to be bullish in the early days. It makes the end goal seem easier for one. Also personal inflation is not the same as RPI etc, and once someone's focus is on FIRE there's a good chance they'll find ways to reduce personal inflation as well as costs more generally (and maybe find some ways to increase income). Add in the power of compounding and while the underlying assumptions may be wrong, the end result may be right.

    I was really struck on my journey to FIRE how long it took to save enough for a house but once purchased outright, how quickly I was able to get to FIRE afterwards. Having our own house meant we could install solar as well as a wood burner - massively cutting energy bills. Plus we no longer had rent to pay. That allowed for massive contributions to my pension. Add in a lot of luck (market timing, tax savings and a new source of income), and it quickly became a runaway train. There is a lot of truth to the adage that money attracts money.

    1. Hi Anon, on this site none of us are smarter than the other. We're all just trying to share our experiences and knowledge (with some being right and some being wrong). We can then challenge that to hopefully settle on an overall smart way forward.

      You make a couple of very good points:
      - Re personal inflation. I know that over the past few years my personal inflation rate has been a lot greater than CPIH or RPI. This was predominantly driven by our decision to rent a home with an extra bedroom (which brought us a huge amount of value so was worth it) and our decision to move to Cyprus and return. Into 2020 I'd expect it to settle down but it'll definitely rise again if we choose to emigrate again.
      - Re FIRE acceleration post home purchase. I can very much see that even though we're still renting as while we were in the accumulation phase renting was circa 45% of our total spending. On top of that if you grab some self sufficiency via PV panels, water tanks, insulation, home orientation etc you're even further ahead.

    2. But always bear in mind, in de-accumulation, your personal inflation rate.
      Income, i.e. pensions, indexed linked investments &etc are of course governed by published figures, but expenditure inflation is unique to each individual.

  8. Oh, since you're sharing.... taking my returns from the accounts I have managed myself since 31/12/2007 (which excludes a couple of important ones), my annual return is around 5.3% - before inflation. According to Quicken.

    2008 and 2009 were brutal, as you say.

    I have tracked my entire invested portfolio rigorously since 1/1/13 and since then my returns have been much better: >10% compound. But you are right that until you go through a bear market you can't really judge long term returns properly.

    I consider I will achieve 7% p.a. pre inflation on a consistent basis. I hope I'm not being too overoptimistic, but as you say, history suggests I am being!

  9. I like the frankness of this post because there is a lot of bluster in what people boast and few people talk openly about the howlers that they've made over the years and only talk up their successes.

    I've looked at my numbers going back to 2008 (when my spreadsheet was reborn after my old one from 2001 died).
    For every pound I earned (after tax) I spent 58p and saved/invested 42p. That 42p has grown into 89p over that time giving a 7.1% nominal compound interest rate.
    This ignores a lot of things and might not be totally right (to 3dp) but I think that it's pretty accurate and I'm quite happy with it.
    It could be better but then again, I could have spent that money in the first place and lose 100% of it.

    1. Yes, howlers a plenty in my investing journey. I was unlucky enough to buy Alfred McAlpine a couple of weeks before fraud was discovered at its slate mining business wiping 23m of its bottom line. Ouch.
      But sometimes you get lucky. Many years ago I bought British coal after a tip that it hadn't updated its land bank values for several years, and would do so in its next accounts. So I put a limit order to buy at I think £1.25. Due to some kind of computer error the limit order was executed at £0.07!
      Comme cie, comme ca.

  10. Howlers : Ferranti, Corton Beach , Butte Mining, Polly Peck , transferring a pension fund from Standard Life ( due to overfunding issues and potential tax liabilities ) into Equitable Life ( mainly ) With Profits fund 2 years before the GARS scandal.

    Thankfully these were all quite a long time ago and most had been self-invested speculative purchases without even a modicum of research. Maybe I did learn from these - as I stopped speculating and started investing.

  11. It is refreshing to hear about others successes and " failures " ( mainly the failing is perceived by ourselves alone ). The contributors have been prepared to reveal a spy-hole into their investment portfolios .

    As I have mentioned a few times over the years my main concern for RIT has been that he is not a houseowner - therefore his investment portfolio + pensions represent a large proportion of his total wealth and assets . Those who are lucky enough to be houseowners ( and may have been able to ride some of the bull market in UK residential property over the last 30-40 years ) may now have a significant proportion of their total assets in UK bricks and mortar.

    So RIT's exposure to risk has been far greater over the last 13 years compared to someone with an identical portfolio but who also owns their own house ( I am assuming such a house has an average Eng/Scot/ Wales /NI value - and yes it very much matters where you have been living )

    A full and thorough investment review should cover all of your assets and liabilities, considering your will, pensions, life insurances, health record and family history, and possible future inheritances . I would not recommend including potential future lottery successes or ERNIE payouts - keep it as real as possible.

  12. Since tracking my portfolio since October 2013 annualised returns of 8.99% per annum net of all costs. Interestingly the portion managed by an IFA has done slightly better than my own efforts. If I strip out the costs of my IFA it would have done better in theory but maybe not in practice, hard to tell.

  13. Some howlers from me:
    - As stringvest highlights not buying a house. I've written about it in the past and I could easily write another post on it today. While working my thinking was keeping myself flexible for my 'career' with me intending to buy in my early retirement location. To go with that I thought they were over valued (similar problem to trading vs investing below). What I should have done is bought something modest somewhere and then rented it while I rented elsewhere if I had to move for work.
    - Trading rather than investing. That includes not understanding contango/backwardation and how x2/x4 funds work. Why I thought I knew more than the market I'll never know.
    - Buying some active funds because they had good historic performance.
    - Not watching investment expenses.
    - Not starting investing through ISA's from day 1.

  14. Agree totally. Since 2008 there's been a 10 year bull market boosted by QE and stimulative policies. These are now unwinding so I'm expected a low growth future for equities. Millenials may not havet had a bear market or correction so think the party will continue. You are wise to have a bond and cash allocation in your portfolio to smooth volatility. Lowvretugnd are likely as those policies unwind themselves and the market returns to the rational trend line. UK stocks I think may be undervalued though cause of high dividend yield and uncertainty over brexit. So agree more modest returns is what you'd expect as more likely.

  15. Good news : my SIPP is showing an annualised return of 23.53%!

    Bad news: that is since 20th January this year when I last unitised the portfolio. A chunk of that growth happened this past week in a post-election surge. All welcome of course, but anyone projecting and relying on that kind of growth year-in year-out is going to end up at the food bank…. I look after 4 share and bonds portfolios (ISA x 2, SIPP x 2) so calculating an average long term return would be a challenge, but I did make an attempt a few years ago and ISTR the average was about 5.5% annualised, with some good years and some awful ones… I do have all the sales, purchases, share splits, rights issues, withdrawals and deposits logged, so I may go back and 'unitise retrospectively' to work out the actual performance; a time-consuming project but then I'm retired now… :-)

  16. These posts demonstrate again that everyone's fire journey is different. The domestic property point is interesting. I bought my home 14 years ago and its worth more than i paid for it but in real terms I have not made a penny. That doesnt bother me in the slightest. As I plod toward the end of the mortgage i like the idea of some security.

    I have committed many "howlers" over the years. I contracted out of SERPS into a dog with profits fund that lost money over 20 years. I missed out on employer pension contributions many years ago by not bothering to fill out basic paperwork in my twenties. So I can safely say I have left plenty of money on the table.

    That said, I have upped the savings rate into ISAS, pensions and other areas in the last 8 years and with the aid of the bull market im probably at the point of skinny fire.

    The test for us all will be a 5 year downturn where values are scalped by 50%. All you can do for that I suppose is keep some cash, diversify and keep everything crossed.

  17. Good to see another candid post from you, @RIT. We are working on a big FIRE debate over on Monevator which we'll run over Christmas, and the subject of your tricky decompression came up. Currently we're not planning to cite you specifically as I don't want to make you regret your candour, but if you'd rather we did (with a link) then please do say.

    In terms of returns, you did invest through the bear market but as you know, sequence of returns plays a huge role.

    If you have the data and a spare day or two then you could try modelling your same annual savings (which I know you believe to be crucial) going into the market in say the reverse order of annual returns (so starting with 2019 and then ending with 2007).

    I suspect the result would be sobering, and your annualised return would come down significantly.

    For reference, my portfolio was already chunky for my means at its peak in 2007, after years of Saving Hard, and it was pretty much halved by the crash to March 2009.

    Luckily I was able to keep contributing new money throughout, which at least kept my spirits up, as well as buying me future gains.

    Definitely best to get the bad years out of the way early when saving and investing, not that we have a choice! :-|

  18. Very interesting thread and happy to share my results. I am an active investor who semi retired at the end of 2018. My Equity weighting has ranged from 80-95% over the last 20 years. Some numbers ( all nominal) :
    Since Jan 2002 - 10.5%
    Since Jan 2011 - 13.5%
    Last 3 years - 10.9%

    I have been through both the 2002 and 2007 bear markets but to be fair both times I had a steady income stream so the next one will be a test ( although there was a 20% drawdown in the S&P 500 exactly a year ago this weak).
    With bond yields so low and them being a pretty reliable predictor of future returns from that aspect of the portfolio, I limit my non-equity allocation to cash and liquid short term instruments - ranging from 2 to 3 years of expenses. Also in a world of low interest rates, prospective returns from every asset class have to be low so modeling 7% real returns is unrealistic to say the least. My withdrawal rate in the first full year of non employment was about 3.3% with no attempt to cut corners and I am pretty OK with managing my capital with that as a base case. One thing I am pretty sure of is that if we transition to an environment in the next decade where interest rates are significantly higher, both bonds and stocks are going to get absolutely killed - similar to what happened between 1966-1976.

  19. Hi, happy to contribute. I started my journey in 2004 when I transferred a company pension to a Section 32. Up until 2017 the CAGR was 7.5% after all charges, since 2017 the CAGR has been 4% so giving me a shade under 7% for the complete investment period. The portfolio has been predominantly in unit trusts but is now re-positioned as a SIPP mainly invested in IT's.