Stabilising – musings on 2022

I was not going to write this 4 years of FIRE post but I’ve had a number of requests for it which made me do a little thinking.  In the end I thought it might add a little value as it’s no secret that my FIRE journey has been a roller coaster of ups and downs around the personable side of FIRE with the financial side in hindsight actually being the easy bit.  This is in stark contrast to many of the FIRE blogs out there which mostly just show the ups.  So here goes…

Location

We are still in Australia and loving it.  Thank-you FIRE.  In fact we’re loving it so much that I can’t see us ever returning to the UK.  Some day we might return to Europe, well the Mediterranean, but it’s nothing more than a reflection that in hindsight Cyprus was a wonderful experience where we (well I mainly) just didn’t give it enough of a chance.  The lifestyle available to us here in Australia is just too good and continues to improve almost daily as we build friendships and integrate more.  We just love the weather which allows a more outdoors life that suits us and we love the lack of crowds where we live.  It’s also many little things like where we are we can get a GP appointment either that day or if not the next morning.  Something that was never possible where we lived in the UK.  Oh, and can you believe in many of the parks here they have free electric barbecues…

Work

As I closed out 2021 I was working 4 days per week.  Closing out 2022 and that is now down to 2 days a week.  Purpose outside of my ‘career’ was something I really struggled with and so a gradual reduction in the hours of a day job, while I build a great life outside of it, is something that has been really working well for me.  Slow and steady is winning this race.

Also what helps immensely is the role I now do is 100% work from home, 99% no stress and also because I’m FIRE I don’t have to take any bullsh*t.  The problem is this helps make me very successful in my role which means for my 2 days of work I now make more than the Australian average weekly ordinary time earnings for full-time adults.  I am truly blessed.  The only negative is this results in periodic requests to increase my hours which is about the only pressure I get in the role.

2021 also saw me close out my professional registration.  Surprisingly, there was not a single piece of sellers remorse associated with this action which I think means this part of my life is now closing in a positive way. 

Transitioning – musings on 2021

2021 has been my third year since I took that initial leap into the FIRE unknown and for me it’s been my biggest year ever for change.  Some good and some not so good.  So with the sun fast setting on 2021 I thought it was time to take stock and write some of this down.  Warning: If you don’t like blog posts that jump around this one may not be for you but if you want to know what FIRE can truly do to a person then I hope you find it helpful.

COVID-19

One of the 2021 elephants in the (influencing my life) room has of course been COVID-19.  What I’ve found interesting is that it’s not the virus itself giving me mortality concerns.  After all I’m a late 40’s healthy person who drinks very little, eats nutritious food, now has little to no stress, exercises regularly and doesn’t smoke or party hard so that part of life will probably turn out ok if it happens.

What I have however started to become concerned about is watching what a mix of a virus + power + politics + money + mainstream media selling fear + no real debate let alone scientific debate can turn the world into.  

For example here in Australia I watched many Victorians being coerced into vaccination not because they thought it was the right thing to do for their and their fellow citizens health but because without it they’d lose their jobs and ability to feed their families.  Coercion is never right in my books. 

Another example is that I am truly shocked at what seems to be going on in Austria where very soon if you are an honest law-abiding citizen who just wants to live in peace you will soon find yourself having committed a crime punishable by large fines or imprisonment.  It really does feel like we’ve regressed as a society significantly.

My COVID-19 coping mechanism is to minimise my contact with those selling fear, notably the ‘news’, which has resulted in a significant improvement in my wellbeing.

Housing

Housing has been a big topic for us this year.  Firstly, let’s cover our current living arrangements.  We are still renting in a beautiful part of the world close to the ocean (including visible sea life and plenty of water sports) and forests (including up close wildlife like kangaroos and plenty of trails) which we are absolutely loving.  We’ve invested in some new bicycles and are really racking the miles up.  So far so good.

Toto, I’ve a feeling we’re not in Kansas anymore and 2020 in review

Usually at this time of year I publish a year in review which covers a little of the qualitative and a lot of the quantitative.  Given the year we’ve just had, along with quantitative needs now being significantly lessened given the stage of my FIRE life I’m currently in, I feel it’s worthy to flip that weighting as it really has been a year to both remember and to forget.  Additionally and hopefully once you see the qualitative you’ll understand why it’s been a long time between blog drinks.

So let’s get the quantitative stuff out of the way.  In my purist FIRE plan I was aiming to spend the lesser of:

• up to 2.5% of initial FIRE wealth plus investment expenses of around 0.2% uprated for inflation annually.  For 2020 that gave me a drawdown target of around £26,084 plus investment expenses.
• up to 85% of my annual dividends.  Dividends were a car crash this year. Once the laggards make their final payments I expect them to be down around 29% year on year.  For 2020 that gave me a drawdown target of around £19,848

Click to enlarge, RIT Annual Dividends

In comparison, during year 2 of FIRE, I withdraw from my wealth a total £19,022.  I met my FIRE goals but boy did it occur unconventionally.  So let’s switch to the story to explain that which is hopefully the interesting bit.

Obfuscation

I’m not sure if it’s the COVID-19 lockdown affecting me, or whether this is really a thing, but over the past month or so I’ve started to really notice companies stretching their take on integrity.  Maybe I was just in a bubble before but for me if you don’t have integrity I don’t want to be anywhere near you.  Let’s look at a few examples that I’ve personally come across.

BT this week published their 4th quarter and year end results.  Within that were these pearls of wisdom - "In order to deal with the potential consequences of Covid-19, allow us to invest in FTTP and 5G, and to fund the major 5-year modernisation programme, we have also taken the difficult decision to suspend the dividend until 2022 and re-base thereafter.”

Now I know that lots of businesses are currently doing it tough but I just cannot see how BT can be worse off because of COVID-19 given we are currently in a world where the majority of communication can only be done via telephone or electronic data transfer.  My view, without having any knowledge of BT, is that the COVID-19 situation is just obfuscation from the fact that the board can’t figure out how to set pricing and manage their cost base to enable investment to stay competitive and give some cash back to the owners of the business.

I also take issue with term “re-base”.  It’s cut or reduce.  I’ve never heard anybody say I’m going to “re-base” my grocery bill.

Fortunately, other than in my FTSE100 tracker, I don’t own BT.

RateSetter is another.  When I first started investing with them they had products called 3 Year, 1 Year and Monthly.  Since then they’ve moved away from that model and amongst a few new products introduced a product called “Access”.

Given the current climate it’s no secret that P2P lenders are doing it tough.  I can accept that it’s so tough that lenders like me might start taking capital losses or even lose the majority of it.  After all with peer-to-peer it’s always stated that “capital is at risk”.

Rebalancing vs taxes vs expenses vs life

With us now being only a single working week away from the new UK financial year and the investment world still feeling the impacts of the COVID-19 situation I thought it might be worthwhile sharing a little about how my portfolio and life is changing given where we currently find ourselves.

Let's start with what my investing strategy, something I first shared way back in 2009 but wasn’t really finalised until 2012, tells me to do.  For this post there are three important pillars:

• If any of my assets, diversified by country and by asset class, gets more than 25% away from the plan then I will either sell or buy as appropriate to move that asset class back to plan
• Minimise taxes meaning I keep more of my wealth for myself
• Minimise investment expenses also meaning I keep more of my wealth for myself

It’s also worth sharing some other information that helped inform my recent decisions:

• My gold had become 25% overweight
• My bonds while not 25% overweight were well overweight
• The UK 2019/20 capital gains tax annual exempt amount is £12,000.  It’s also worth adding that I believe if you sell assets worth more than £48,000 or have gains before taking off losses of £12,000 then you will also have to complete the tax return capital gains summary pages.  Not a financial negative but a time waste worth avoiding if it sensibly can be.
• Once this COVID-19 problem passes it’s looking more and more likely that we’ll be Asian bound for the next part of our FIRE journey.  We’ve still not finalised plans, as we’ve learnt we have no need to rush these types of decisions, but we’re confident enough to start (continue?) shifting our asset allocation over the coming 6 to 12 months.  That involves moving our equity investment bias (may be controversial for some but it’s always been part of my strategy so I’m not changing it) from the UK (HYP, VUKE, VMID) to Asia mainly in the form of the Vanguard FTSE Developed Asia Pacific ex Japan UCITS ETF (VAPX).
• VAPX only went ex dividend/distribution on Thursday with all my Vanguard equity dividends/distributions being paid on the 08 April 2020.
• Within my portfolio I have pensions (all SIPP’s), an ISA, NS&I Index Linked Savings Certificates (ILSCs) and plenty of non-tax efficient investments. 

Lenses

A chart of the monthly FTSE 100 price looks something like this:

Click to enlarge, Monthly FTSE 100 Price

This is the chart that you’ll see on all the mainstream media channels and it shows that the FTSE 100 still has about 32% to fall if it’s going to match the worst of the global financial crisis (GFC).  This sounds like a long way until one thinks about a big failing with this type of chart.  It’s unit of measurement…  The FTSE 100 is priced in £’s and they’re constantly being devalued via inflation.  So, let’s take out a different lens and try and look at the chart in real, inflation adjusted, terms.

Firstly, let’s correct for the consumer price index (CPI):

Click to enlarge, Real (CPI) Monthly FTSE 100 Price

That shows that instead of falls of 32% being needed it’s actually closer to falls of 16% for parity with the worst of the GFC.

Perspective

If you were a trader on the financial markets, I’d think that you’ve probably had quite an interesting week.  After all the S&P500 is down 11.5% (an official correction without even going back into the declines of the previous week), our FTSE100 is down 11.1%, the Nikkei225 is down a more modest 9.6% while the ASX200 is down 9.8%.

Word on the street is that this has been caused by fear of what coronavirus, or to use its catchier name, COVID-19, could do to global financial performance, including the more than 1,000 companies contained within just those four faceless indices I’ve mentioned.  Years ago I proved I was a useless trader so with that in mind I’d also still suggest that some of the moves are caused by the coronavirus being a good excuse to have a market pullback given markets like the S&P500’s current hefty valuation.

Down market moves like this then give those of us who are paid to sell drama a great opportunity to come up with headlines like “Coronavirus meltdown: Airlines plunge as global stock markets suffer their worst week since the 2008 financial crisis” (I won’t link to the source of that one but if you’re interested Google is your friend) through to something a little more data driven like “Shares drop in worst week since financial crisis”

If you didn’t take personal finance seriously, articles like those might even be enough to cause you to panic (whether or not the first $100 billion trading day for the ETF SPY (an S&P500 tracker) was panic is of course debatable) with your own wealth or even not get started on the road to financial independence in the first place.

Insanity and 2019 in review

“Insanity is doing the same thing over and over and expecting different results” – not Albert Einstein as I always thought but actually Rita Mae Brown 

2019 represented my first full year of FIRE, albeit with a slip-up back to FI during the year, which was then later corrected.  Despite a lot of my pre-FIRE posts being financial in nature finances actually occupied very little of my mind through 2019.  Having my wealth increase by £148,000 and my spending, albeit profligate, significantly less than this certainly helped here.

What did occupy a lot of my mind, as regular readers will be well aware, was the psychological, emotive and decompression elements of FIRE.  So let’s start here first and take a snap shot of where I find myself.

Nearly 14 months into my decompression I would have to say that while the days are getting easier I am still very much deep in the decompression mud.  There are still many unanswered questions and much soul searching (or is that naval gazing) going on.  To help with that I’ve tried to continue with the human being while changing only one thing at a time theme I started mid-year.  One conclusion I’ve come to, and started to accept, is that it’s unlikely that I have a “silver bullet” single purpose in me and I’m really ok with that.  My purpose doesn’t have to occupy 60 hours per week, like my previous job, so why I was thinking that is beyond me.  Instead I’m starting to take great joy in many small “successes” that without FIRE I wouldn’t have been able to do.  That extra 3 miles of hiking into the forest, seeing something new, because I have the time...  That 3 hour lunch with a loved one that builds a stronger bond because I have the time...

The one change I have made is that an old friend asked me to help with a very short term very temporary job.  I never expected it to be purposeful (so it’s a job and not work) but I did think it would be interesting so took it on.  I just hope that is helping with my decompression and not clouding it.

2019 HYP Review

It’s now a little over 8 years ago that I started to build my UK High Yield Portfolio (HYP).  It was a much talked about strategy back in the Motley Fool forum days and today still gets plenty of attention on the Lemon Fool forums today.  I built the portfolio between November 2011 and July 2015 by which time I’d amassed 17 shares across multiple sectors.  That included a token amount of Royal Mail Group (ticker: RMG) during the initial public offering in 2013 and the spin-off of S32 by BHP in 2015.

Today the portfolio is down to 16 shares because of the forced Amlin sale in 2016.  It was set up to be close to a low tinker portfolio with only a few mechanical rules that would trigger a sale if there were big changes to a share.  For example if the actual value of a holding became 50% larger than the median share holding I would sell 25% (I’m looking at you Astra Zeneca, ticker: AZN, who is now 2.4 times the median) or if the actual dividend yield dropped below 50% of the FTSE All Share.

As it’s turned out to date I’ve done precisely zero tinkering unless forced by corporate events.  This means in 2019 there were again no buys or sells.  The complete HYP and the respective values of each share are shown in the chart below.  The purchasing rule that I followed while building the HYP was the amount of the next purchase was the median share value of the current portfolio (with the exception of RMG and S32).

Click to enlarge, Retirement Investing Today High Yield Portfolio

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.

1 year and 10 year FIRE anniversaries

November 2019 marks a couple of significant anniversaries for me.  The first anniversary is that it’s now 10 years since I started this blog with this first very amateurish post.  As far as the FIRE movement goes, particularly when we compare it with the number of FIRE blogs today, these were very quiet days.  Notably Early Retirement Extreme wasn’t quite 2 years old while Mr Money Mustache was still more than a year away from making his first appearance.

The second anniversary is that it’s now 1 year since I pulled the FIRE’ing pin and for me at least I think that term is a good analogy.  It really was like a hand grenade going off in my world.

Looking back over those 10 years I’ve learnt quite a few things and I thought it might be useful to jot a few of them down in no particular order of importance:

1. FIRE is both solving a quantitative and a qualitative problem.  I also now believe in the early days of a FIRE journey it’s mostly quantitative problem solving but with time the problems become more qualitative in nature.   For example if you want to FIRE you need to quickly learn how to earn more, spend less (which when combined is save hard) and invest wisely, then choose which of those options you’re going to go for.  In parallel to this you’re probably tracking progress.  These are all quantitative problems to solve.  Looking back I was guilty of focusing on these topics for almost the first 9 years of my blogging which in hindsight was a mistake.  What I should have been doing is in parallel being qualitative which is why most of my learnings today are qualitative in nature.  Also where I sit today I know my FIRE problems left to solve are 100% qualitative.  Are you focusing on both the quantitative and qualitative weighted appropriately depending on where you are in your FIRE journey?

Vanguard lowers expenses

If you’re a UK based investor who’s interested in keeping investment expenses low then it’s highly likely that you’re using Vanguard index and exchange traded funds (ETFs).  If that’s you then on Wednesday there was some good news with Vanguard lowering many of the annual expenses associated with these funds.  Full details are here which contains a list of the OCF reductions.

Human being and a 2019 Q3 review

At the end of June I concluded that a potentially positive step forward on my FIRE journey was to focus on being a ‘human being’ rather than a ‘human doing’ for a while.  No action plans, no agendas, no need to be busy...  During this time I woke when my body was ready, enjoyed a non-time limited breakfast, took advantage of the British summer by spending as much time outdoors exercising as possible, read and even just spent time reflecting.  No contribution was made to the world but at the same time nobody was harmed in the making of this drama.  I just was.  At the start I admit it was incredibly difficult but amazingly as time went on my body and mind really started to accept what was happening and even change for the better.  Importantly I’ve also now started to hear and see things about the world I’ve never really noticed before.  In a good way.

As summer then started to fade bags were packed and time was spent in a far flung land.  It sounds so easy and not so different from what many do in the summer, which is take a summer holiday, but this time it was different as it was for a month which not that long ago it would have been impossible for me to do given my job.  Time was spent with some long lost potentially meaningful friends and family which was surreal, educational and importantly thoroughly enjoyable.  At one end of the spectrum an old friend had cried enough and is in the process of rapidly downshifting his life.  He’s already sold his mortgaged detached home and bought a townhouse, got rid of the car loan and instead has gone for something 10 years old, retrained into a career that pays about a quarter of what he was earning and amongst all this I’ve never seen anyone more happy and positive.

At the other end of the spectrum time was spent with a family member who is frantically trying to climb the greasy career pole and doing everything a good consumerist should be doing.  He has the massive mortgage, 2 smart executive lease cars, every branded item you can imagine, amazingly every TV/music streaming option I know about plus one I didn’t and a willingness to drive 10 minutes out of the way for a coffee at his favourite place rather than making a fantastic one at home with his posh coffee machine.  Oh and to go with that his job (work?) has just been put at risk.  I’ve never seen anyone looking so haggard and tired.

The parallels between the two were so surreal as to be quite disturbing and they certainly helped me further cement what’s important going forwards.  It also made me truly thankful for what I have done as that family member could so easily have been me if I hadn’t pursued FIRE.

Within an hour or so of that meaningful friend we have also identified a possible FIRE location where we could build ourselves a dream home so some time was spent understanding land prices and getting some building quotes.  The good news is that we have plenty of wealth to move this idea forward.

Click to enlarge, Not sure my finger would be as green as this potential neighbour

reFIRE and a 2019 Half 1 review

A few months after returning to my industry, albeit in a different role in the pursuit of meaningful work, I’ve left the company and am back to FIRE.  Soon after joining it became very obvious that while there were some pieces of meaningful work (where I define work as something you do for purpose) the vast majority of what I was going to be doing was just a job (which I define as something you do because you need the money) and right now I don’t need a job.  The excellent tool over at Engaging Data clearly shows that provided history rhymes my biggest risk now isn’t running out of money but running out of life.

Click to enlarge, Is the risk running out of money or running out of life

Reflecting on this I think a few themes are emerging...

Firstly, some people can learn by brainstorming or thinking while some people learn by trystorming or doing.  I now see that I learn the best when I can do the second.  So going forwards I need to always find ways of experimenting before going all in.

Secondly, I deliberately went back to a similar role that I had done a number of years previously which at the time I felt was the highest level of meaningful work I had ever experienced.  Living it again enabled me to see that the role, my industry and my own needs had changed beyond recognition and at some point, much like the boiled frog, my meaningful work / career had actually predominantly become just a job with me just not noticing.

Reflecting on this change... I originally pursued FIRE as back in 2007 I saw some changes starting to occur that made me think my job at the time would eventually be outsourced to a low cost country.  Faced with no job I came up with the choices of FIRE or retrain into a new career.  I took on FIRE.  Looking now at what had forced many of the changes to my industry, making me also now incompatible, it was largely driven by what I initially saw.  That is globalisation requiring extreme cost reduction and reduced quality achieved by investment reduction, partly achieved by outsourcing, while at the same time ramping expectations far faster than answers could be found.  So while the changes occurring didn’t directly take my job directly by the time I FIREd they certainly helped reduce the level of meaningful work.

Sobering retirement income drawdown demonstrations – 12.5 years in

Another year has passed for our UK early retiree.  A year ago I wrote that in the worlds biggest economy, the United States, Donald Trump was starting trade wars and the S&P500 cyclically adjusted price earnings (CAPE) ratio was sitting at 32.0 against a long run average of 16.9.  A year on it’s almost déjà vu with the trade war with China still rumbling along and the S&P500 still on a high 30.4.  Closer to home I wrote that we had a Brexit shambles playing out in slow motion that might just ruin the economy for a long time.  A year on and the whole Brexit situation has moved on to become a joke with politicians continuing to promise unicorns while the FTSE100 has fallen 2.8% in nominal terms.  Of course dividends continued to be paid which will have dampened that fall.

Against this environment it’s unlikely a UK early retiree who has opted for a higher withdrawal rate will be dancing for joy but let’s take a look.

This update of the drawdown demonstrations now has our retiree some 12.5 years in to retirement.  It assumes our retiree is not one of the lucky ones sitting on a defined benefit pension (although it’s likely they’d need some other income source in the early years if they’re going to FIRE), isn’t intending to buy an annuity (again, not likely for the early years of FIRE) and isn’t planning on living off the State Pension (although 12.5 years in to retirement our UK retiree might just be starting to get to an age where there might be some predictability in what they might receive here so they might want to start baking a portion into their models).

We are now fast approaching the half way mark that the 4% rule is based upon and this simulation assumes retirement was taken on the 31 December 2006.  If this date sounds convenient then you’re right.  The date was deliberately chosen as it is the year prior to the commencement of the global financial crisis and so hopefully represents a modern worst case.  Someday it may even go down in history as one of the time periods which saw a poor sequence of returns however of course that will only become clear when we are firmly looking in the rear view mirror many years hence.