Good-bye Amlin, thanks for your contribution

Amlin was added to my High Yield Portfolio (HYP) back in August 2014.  At the time I purchased 963 shares at a price of £4.4986 paying £34 in stamp duty and trading fees for a total investment of £4,366.

When the mainstream media get excited about stock market rises and falls they always seem to conveniently omit mentioning those lovely things called dividends.  From purchase Amlin provided me with £485 of those, they were growing dividends year on year and I was a very happy camper.

Then on the 08 September 2015 Mitsui Sumitomo Insurance Company (MSI) swooped in and made a cash offer for the company.  The rest, as they say is history, with the end result being £6,452 in cash hitting my account on the 08 February 2016.  Totting that all together and Amlin for the short period held provided me with a total return of 59%.  So while I'm sad to see Amlin go I'm not too sad...

So with cash, including some new money, burning a hole in my pocket what to buy?  Market falls have resulted in the UK Equities portion of my portfolio being underweight but not yet enough for active rebalancing so I’ll just passively rebalance for now.  My strategy to build enough dividends to live off in FIRE is also still well in control so I don’t need to add to the HYP.

Click to enlarge, My Annual Dividends

I therefore purchased £8,000 worth of Vanguard’s FTSE250 ETF Tracker, VMID, to continue my plan of further UK Equity diversification.  My UK equity split now looks like:

Victims

In my travels I regularly come across 2 types of people.  The first are those that will set themselves a stiff challenge and then go for it.  The second are those that won’t because it’s not possible for some reason or another.  This second group I call the VICTIMS and I have little time for them.  Note here I am not talking about people who look at a goal, look at what it will take to achieve it and decide it’s not for them.  That is a conscious decision and admirable.

This week I saw the victim card being played on a couple of forums as a reason why the Save Hard, Invest Wisely and Retire Early strategy that we follow here wasn't possible:

“Forgive me if I am wrong, but isn't your entire savings strategy based on earning a top 1% income? Not possible for the other 99%.”

“Retirement Investing Today is probably the one to read if you're a captain of industry, he's very 'on' when it comes to reducing tax, expenses and coping in a high cost of living area. That said, he does have a fairly chunky salary from memory (£90k?) which makes everything flow a bit more smoothly.”

These comments frustrated me a little so what follows is a bit of rant.  If you’re not into rants I’d encourage you to move on to your next piece of regular Saturday reader.

So somebody believes that ‘my entire savings strategy is based on earning a top 1% income’.  The implication then being that because 99% don’t, the strategy can’t work for them, so they’re not going to try it.  A victim if ever I saw one.  Let’s clear this one up shall we.  The top level objective that I set myself way back in 2007 was simply that I wanted to Save Hard which would be achieved by both Earning More and Spending Less.  In the interests of full disclosure if I look back at my earnings when I started this journey and compare to some national statistics I can see that I was in the top 7% of earners in the country.  I therefore freely admit that I wasn't poorly rewarded but I was also a long long way from being in the top 1% of earners as I am today.  My strategy has allowed me to become an earnings 1%’er rather than my strategy becoming possible because I am a 1%’er.  A significant difference.

Orders of Magnitude

When it comes to spending I sweat the small stuff.

I’ll never buy a National Lottery ticket, even the £2 minimum, as I know that the probabilities say that I’m more likely to win significantly more by investing it rather than buying the ticket.  Even if there is a ‘£20.9M Rollover plus a guaranteed raffle millionaire’ tonight.  During the FIRE (financially independent retired early) accrual phase investing that £2 a week turns into nigh on £1,300 after 10 years (assuming a real 4% annualised return).  During the drawdown phase not feeding a weekly lottery habit, even a £2 a week one, means one needs £4,160 less (assuming a 2.5% withdrawal rate) wealth before FIRE becomes a possibility.  I know how hard I have to work to save £4,160.

Unlike many of my colleagues I also don’t pay to participate in a daily morning caffeine fix.  I was travelling on the company dime recently and purchased a coffee at one of these new fangled remote Costa stations.  Cost £2.10.  To feed a workday daily habit like that one is going to be spending £568 per year.  Take the free work supplied coffee; invest the money saved and all of a sudden you’re £6,800 closer to FIRE after 10 years.  Keep the habit up in FIRE and you’d need additional wealth of £21,840 (less a small amount of wealth to make one at home) before calling oneself FIRE’d.  I value earlier FIRE rather than an expensive cup of daily brown but I of course appreciate others might be different as they value it where I don’t.  Having different values is after all one thing that makes the world interesting after all.

I also sweat the small stuff when it comes to investing expenses.

Navigating the Never Ending Changes to Pensions

In recent years it feels like every Spending Review, Autumn Statement and Budget presented by our wonderful government includes pensions tinkering which is usually detrimental to what I and many others are trying to achieve.  I'm now at the point where prudence means I have to run some simulations to ensure I don’t fall foul of some new rule or other.  This has forced me to do some research and so in the spirit of sharing here goes.

Wealth warning.  I am not a pensions expert nor a financial planner.  I've also made investment mistakes in the past and will certainly make them in the future.  I also don’t know every pension rule and regulation out there.  I dread to think how long it would take someone to learn all of those.  Therefore this is not a recommendation of any type but instead hopefully provides some terms and tit bits that you the reader may not be aware of which will then encourage you to do some research like I have been.

At their heart defined contribution pensions are nothing more than a tax deferral scheme.  The deal is that you agree to lock up your money for the future and agree to follow the (continually changing) terms and conditions.  In exchange the government (currently) allows you to not pay tax on it now but rather when you unlock it in the future.  I agree to participate as for me it has the potential to be quite beneficial to wealth building as my current effective tax rate is now 47% (45% additional rate + 2% national insurance) and in the future that tax rate could be:

• 0% and maybe a bit of 20% if we stay in the UK.  On top of that current rules will allow 25% to be taken as a tax free lump sum (TFLS);
• 0%, 15% and 25% if we head to Malta; or
• 0%, 19.5% and 21.5% if we head to Spain

That is a big enough incentive for me to use pensions as part of my overall investment strategy.  To maximise the benefit I want to get as much into my pension wrapper as possible while ensuring I keep enough outside of the wrapper to cover all costs and government tinkering between early retirement and my private pension access age which is currently age 55.  I think the first is an easier thing to calculate than the second given current government form.

2015, Saved by Saving

Looking back on 2015 and I have to conclude that it was a good year for building wealth at a rapid rate.  All in I was able to increase net worth by 14% or £105,000!  That said in terms of the different ways I am using to build wealth it was unfortunately also a very binary year which is demonstrated nicely by the chart below:

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

Let’s look at the year in a bit more detail.  Before passing judgment on anything below it is also worth noting that the below represents everything that I have financially.  There is no Defined Benefit Pension waiting in the wings, no future inheritance and certainly no bank of mum and dad waiting in case it all goes pete tong.

As always we’ll focus on and score the three areas that I believe are essential to get over the Financial Independence line - Save Hard, Invest Wisely and Retire Early.

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.

2015 was a brilliant year for increasing earnings thanks to a healthy bonus early in the year along with a good salary increase.  In total earnings were up 54%!  Of course this doesn’t come for free with my company taking a very large pound of flesh in return.  I do not expect and am not planning on something similar in 2016 particularly as the year starts with a dire bonus.  As far as building wealth goes it’s also not quite as good as it sounds as HMRC now takes the lion’s share however that said I am also certainly not complaining.

I’m now 8 and a bit years into my FIRE (financially independent retired early) journey and I can smell victory.  I think this is now further helping me to live well below my means in addition to the spending method I developed a long time ago.

An Interesting Week

Source: wikipedia

Rather than a particular focus this week my brain has been a little all over the place.  Maybe it’s the after effects of too much Christmas and New Year cheer...  What it means though is that instead of a detailed focused post today what you get is a smattering of random thoughts.  If that’s not your thing then you might want to move onto your next piece of Saturday reading.

Stock Market Fun

The big boys and girls seem to have come back from their Christmas vacations and (started to?) put the markets back in their place.  On the week:

• China’s Shanghai Composite Index is down 10.0%;
• The US’s S&P500 is down 6.0%;
• Japan’s Nikkei 225 is down 7.0%;
• Our FTSE100 is down 5.3%; and
• Our FTSE250 is down 4.0%

It’s only a week of market action but I thought it might be interesting to compare that action to a diversified portfolio that has different asset classes across multiple countries.  I hope I have one of those so comparing to my portfolio I’m down 2.3% on the week.  I’m not yet at FIRE but even now in pounds, shillings and pence that is a fall of £19,320 which is more than a year’s worth of post FIRE post home purchase living expenses.

London Housing

It’s all too rare that The Investor over at the excellent Monevator has a good rant but there was some good value this week with the post they don’t tax free time.  Like The Investor I've watched the London property market go insane so this comment

“But with London prices having moved from extreme to insane to “oh, so this is what my grandmother meant when she said flinched at 50p for a bag of chips that used to cost a ha’penny”...”

was particularly amusing.  Now every year I try and assess the house value of all the counties ofEngland and Wales so I already knew it was insane and really no longer a place for anyone who isn't an oligarch or money launderer.  Hell even the bankers can’t afford it any more.  In light of this throwing this chart together this week did make me smile:

Click to enlarge, London first time buyer gross house price to earnings ratios

Does this make my first picture today relevant?

2015 HYP Review

The vast majority of my low cost portfolio consists of low cost trackers.  The one big exception to this is my UK High Yield Portfolio (HYP), which has just completed its 4th calendar year and contains a not insignificant £60,000 or so of my hard earned wealth.

I am a big believer in passive index tracking as I don’t believe it’s possible to consistently beat the market over a very long time (think 40 years or so in my case).  So why did I start a HYP then?  It all centred on trying to understand my own psychology.  At some point in the not too distant future I'm no longer going to be in the portfolio accrual stage and instead will start drawing down on my wealth.  As a very early retiree my draw down phase is with any luck going to be a long time.  It could even be equivalent to my whole 43 years of life so far.  For me at least I feel that selling down assets to eat on a good day could be psychologically difficult even for somebody as rational as me.  I could only imagine how difficult it would be if Mr Market had tanked by 50%.  So with that in mind I set myself a task to position my portfolio to have a very good chance of being able to live off the dividends and interest only from my portfolio.

The HYP has helped me achieve that goal with my total portfolio dividends and interest (less the funds allocated for a home purchase) currently generating a yield of 3.6% against a planned retirement withdrawal rate of 2.5%.  With this now being well in control I haven’t had a need to add a great deal to the HYP this year.  Additions have been limited to:

• BP.  Bought in January 2015 and currently sitting on an annualised capital loss of -11.1% and a forecast dividend yield of 7.4%.
• Rio Tinto.  Bought in March 2015 and currently sitting on an annualised capital loss of -37.1% (ouch!) and a forecast dividend yield of 7.5%.
• Legal & General.  Bought in May 2015 and currently sitting on an annualised capital loss of -1.1% and a forecast dividend yield of 5.0%.
• National Grid.  Bought in July 2015 and currently sitting on an annualised capital gain of +25.3% and a forecast dividend yield of 4.7%.

The complete HYP and their respective values are shown in the chart below.  The purchasing rule that I follow is the amount of the next purchase is the median share value of the current portfolio (with the exception of RMG and S32).

Click to enlarge, Retirement Investing Today High Yield Portfolio

Giving my bonus to those better able to spend it

I believe that I work hard.  In fact I'm now at the point (and have been for a few months) where I'm wondering if I can increase my discretionary energy further or whether doing so will result in burn-out.  I'm therefore for now maintaining status quo while I better understand my long term capability.  Fortunately, that hard work typically transfers into results meaning another year has passed where my personal work objectives have been yet again knocked out of the park.  Great I hear you say, another year of big bonuses, which you’ll save all of, which will pull you even closer to FIRE.  I wish it were true...

Firstly, bonuses at my company are structured in such a way that it considers your objectives as well as the objectives of the company as a whole.  I can sort of understand this as it protects the company in very bad times such as those seen at the bottom of the Global Financial Crisis.  So has company performance been good this year?  Unfortunately the answer to that question is a resounding no.  If I was asked was the company doing well I would of course give a very different answer but hey ho.  The end result of all this is that a large portion of my bonus will not pay out.  Of course the portion not paid out goes straight to the bottom line meaning a large portion of my hard work this year has gone to enriching the owners of the company.

Happy Christmas to all readers

People First. Then Money. Then Things - Suze Orman.

RateSetter Peer-to-Peer Lending – It can no longer be called an experiment

I first dipped my toe into the Peer-to-Peer lending arena back in May 2014.  Research at that time suggested for me there were two viable alternatives – Zopa and RateSetter.  I went with RateSetter and duly deposited £10,000.

Since that first investment I've gradually continued to invest and as of today have a not insignificant £43,769 or 5% of my total wealth invested in RateSetter.  With this amount invested I can no longer say I'm experimenting.  My market of choice is the 3 Year Income market however recently I've started to move some new/repayment money into the 1 Year market and as a home purchase gets even closer I’ll start moving into the Monthly market.  My lending has so far achieved an annualised 4.5%.  A result I'm ok with.

Peer-to-peer lending has a very different risk profile to that of a vanilla savings account and given this is money I have planned for an eventual home purchase I'm sensitive to these risks.  For starters you are not eligible for the Financial Services Compensation Scheme (FSCS) which protects the first £85,000 (£75,000 from 01 January 2016) of savings so your capital is at risk.  RateSetter does offer some protection in the form of a Provision Fund which reimburses lenders (ie us) if a borrowers payment is missed.  I like to keep an eye on defaults and this fund.  When I first started investing the Provision Fund was £6,328,472 which was set against £179,536,557 of loans.  So by value 3.5% of payments would have had to be reneged on before I potentially started to see losses.

Today the Provision Fund has grown to £16,543,201 against loans of £510,819,525 so protection has been diminished to defaults of 3.2% by value.  So far in 2015 the actual default rate has been 0.55% so the Provision Fund is more than covering what’s happening this year.

Of course this year is not a year like 2008 and unfortunately RateSetter was not in business at that time so I can’t check the default rates to compare against the Provision Fund.  Zopa was however in business and they currently have a 2015 actual default rate of 0.13% and back in 2008 saw actual defaults of 4.67%.  So in 2015 it looks like RateSetter’s loan book is riskier than Zopa’s and the Zopa default rate would have more than depleted the RateSetter Provision Fund.  I’ll also make a hypothesis that if/when we have another ‘Global Financial Crisis’ (or equivalent) RateSetter will see actual defaults higher than Zopa.  This is not surprising given a quick check this morning shows Zopa 3 year loans at 3.8% while RateSetter 3 year loans are at 4.8%.  Risk vs Reward and all that.

US vs UK vs Aus Equity Valuations

The largest country equity holding within my portfolio is my home country, the United Kingdom, at 20.4% of total portfolio value.  This is then followed by Australian equities at 10.1% (a mistake I've mentioned numerous times previously) and then US equities at a relatively paltry 4.5%.  The Equity markets of these three countries make one third of my portfolio and so their performance (particularly that of the UK) matters.

My total portfolio year to date is under water by a few percent and since I started my DIY journey to FIRE (financially independent retired early) in late 2007 I've only managed a real (after inflation) annualised 3%.  Looking at the data what is clear is that to date I have backed the wrong horse.  Let’s take a look.

Firstly the US S&P500:

Click to enlarge, S&P500 Price Performance, Source: Yahoo Finance

Now the UK FTSE100:

Click to enlarge, FTSE100 Price Performance, Source: Yahoo Finance

And finally the Australian ASX200:

Click to enlarge, ASX200 Price Performance, Source: Yahoo Finance

Year to date the S&P500 is down 2.3%.  In comparison the FTSE100 is down 9.3% and the ASX200 is down 7.0%.

Monthly Financial Decisions

Here on Retirement Investing Today I talk about a lot of different themes and learnings.  As I learn I also then update some of those themes from time to time.  This might make it sound like my financial life is complicated and full of tinkering.  It’s actually the opposite of that and actually requires very few decisions on a monthly basis.  This is partly because the themes I write about cover the complete spectrum of my past, present and future investing life and partly because 8 years into this FIRE journey I now know (I hope) what I'm doing.  Let me demonstrate using November 2015 as an example.

On the Spending front history tells me that because I'm a lightweight consumer I don’t need to budget.  So I don’t.  For any purchase I do however still mentally ask myself do I really need this, can I buy less of it and is this giving me the best value for money.  Roll that into November and it resulted in 36 purchases with the lowest purchase being £1.70 for a work lunch and the highest being £1,148 for rent.  After rent and work costs (my tracked metric as this is what will be relevant in FIRE) my spending was well in control at £430 for the month.  This reinforces yet again that I don’t need to start budgeting.

Click to enlarge, RIT November 2015 Spending

My wealth is currently spread as follows:

Click to enlarge, RIT Low Charge Investment Portfolio

My Wealth spreadsheet tells me that against plan my Equities are positioned as follows:

• International Equities are 20.4% underweight
• UK Equities are 14.6% underweight
• Emerging Markets are 10.2% underweight; and
• Australian Equities are well overweight as in hindsight this was a mistake that I now can’t correct so will just let sit and spin off dividends ‘forever’.

Consumer for a day

All this Black Friday talk has given me flashbacks to my last consumer experience a few weeks ago.  Now before I go on I do need to warn you that this might be a little biased in its viewpoint given I actually opted out of consumerism many years ago and so far this year have had an average monthly spend on clothing of £2.64, miscellaneous (which covers gifts, gadgets, a suitcase, non-work/entertainment related public transport and homewares) of £15.80 and entertainment of a hefty £56.15.

While I opted out many of those around me haven’t and so I was asked if I’d like to partake in a little ‘retail therapy’ with a close friend.  I hadn't caught up in a while and am conscious I've lost a number of ‘friends’ because of my lack of interest in consumption so I agreed to spend a few hours in a very large East London shopping centre.  It really did reinforce to me that this was no longer my thing.  It particularly hit home when I was looking at a scene not unlike this:

Source: Wikipedia.org

Firstly, not a single thing was as nature intended.  It was all concrete, steel, glass, lights and colours designed to heighten your senses and draw you in like a moth to a flame.  Importantly though watching the shoppers themselves moving through the walkways and aisles really did remind me of a hoard of zombies lumbering along in pursuit of the unknown.  It was all just so passive with everyone moving along to the next bargain waiting for stuff to just wash over them.

Raise the Private Pension Access Age & My Global Exposure

Firstly, an interesting article in the Financial Times today – Retirement experts campaign for pension freedom age to rise to 65 (should be a free click through or alternatively Google the title and you’ll also find it for free).  It looks like the pensions industry is starting to lobby the government to push back the age at which we can access our pensions from as early as 55 (some of us are not that fortunate) to 65.  Apparently, according to the Society for Pension Professionals:

• “...55 “was far too young” to allow full access to retirement savings...”
• “...it is also too young to consider oneself retired from a working life...”
• “Although I recognise this will not be popular it would result in better outcomes in true later life.”

It’s really great to hear that the Pensions industry apparently has our welfare at the top of their agenda.  To be honest though, in my years of investing I've never seen the Pensions industry do anything that has my best interests in mind so I’m not going to start believe their tripe now.  The cynic in me says that this is yet another way to extract more expenses or fees from us.  Just think about all the extra fees available if you can’t access your wealth for another 10 years.  Come to think of it maybe the third bullet point above is actually right.  Maybe it will result in “...better outcomes in true later life”.  It’s just unfortunate that those better outcomes will be for the Pensions industry rather than the punter.

As always some great Comments in response to last week’s post which included some questions around my International exposure.  Rather than give half an answer in a Comment I thought I’d spend some time and give a more thoughtful detailed answer.

As of this morning my Asset Allocation looks like this:

Click to enlarge, Retirement Investing Today Low Charge Investment Portfolio

In pounds, shillings and pence it is £819,004 and represents everything I own.  Let’s work around the pie chart to uncover my Globall exposure.

Further UK Equity Diversification

I am a disciple of Tim Hale who in my humble opinion is the investing granddaddy for UK investors.  From the emails I receive it’s rare that I can’t refer a reader to his book Smarter Investing: Simpler Decisions for Better Results for the answer to their question.  It’s a must read for anyone serious about investing from the UK.

It’s therefore probably no surprise to find out that my investing strategy is largely based around the teachings of his book (I started in 2007 and so I used the first edition as a basis).  At its most basic he starts with what he calls a Level 1 portfolio mix consisting of Level 1 UK equities and Level 1 UK bonds.  He then goes on to show how you might diversify a portion of your wealth away from these to create a portfolio for all seasons.  Importantly though no matter what your investment horizon large allocations always stay with the Level 1 building blocks.  So the question then becomes what Index should be used to represent Level 1 Equities?  As always Hale has the answer with “For your Level 1 equity allocation, the return benchmark should be the return of the whole domestic market, which provides a diversified and representative benchmark as it includes most public companies, be they large or small and weighted according to their market size... The FTSE All Share is the index of choice for the rational investor.”

I followed this guidance with no other exposure to UK Equities other than the All Share until late 2011 when I realised, that for me at least, I wanted more dividends than my strategy was forecast to give me at the end of my accumulation stage.  I therefore started to diversify a percentage away from Level UK Equities towards a UK based High Yield Portfolio (HYP).  Today that HYP contains 17 companies with 83% of them by valuation coming from the FTSE100 and 16% coming from the FTSE250.  I then continued with this strategy until I reached the point where it looked like my total portfolio would enable me to live off the dividends.  I’m fairly comfortably there now and so don’t need to keep growing my dividends at such a great rate.