The S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - June 2013

This is the monthly review of the S&P500 including a couple of S&P 500 valuation metrics.  Last month’s review can be found here.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,627.  That is a fall of 0.8% when compared with 1,640, which is the average closing Price of each trading day last month.  It is 22.9% above last year’s June monthly Price of 1,323.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I’m a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

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This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

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S&P500 Earnings

As Reported Nominal Annual Earnings (using a combination of actual and estimated earnings) are currently $90.96.  That compares with this time last year at $87.92 implying earnings growth of 3.5% year on year.  Or course this looks better than it really is as inflation flatters the result.  I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.

The Regional House Prices of England & Wales

The Land Registry House Price dataset uses repeat sales regression on houses which have been sold more than once to calculate an increase or decrease in price.  As it analyses each house and compares the latest buying price to the previous buying price it is by definition mix adjusting its data also.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.

If we look at April 2013 for all of England & Wales it tells us that house prices were £161,458 which month on month is an increase of 0.4% and year on year is an increase of 0.7%.  If this was published in the mainstream media readers would think house prices are still rising.

The chart below then plots the complete Land Registry dataset for England & Wales since January 1995.  Analysis of this chart would make readers think that prices weren't in fact rising but had actually been stagnant for a number of years now.

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This however really doesn't tell the full story.  Cutting the data by Regional House Prices reveals the chart below.

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To enable some analyse of this regional dataset let’s convert each region into an Index that starts at 100 on January 1995. Now we’re getting somewhere.  England & Wales House Prices can now be characterised by 3 distinct regional variations.  London is a law unto itself with prices up 400% since January 1995.  They also look to be continuing to head northward.  The House Prices of the South East, South West and East Anglia have stagnated with prices up 280-290% since January 1995.  House Prices are then falling, and have been for some time, if you’re in the North, North West, Yorks & Humber, East Midlands, Wales or the West Midlands.

A Simple Low Expense, Low Tax Investment Portfolio for DIY Beginners

There are about as many investment strategies and investment options as there are investors. I also believe that many of these are offered because the people behind them have already worked out that it is in their favour to offer them but I am sometimes accused of being cynical. I don’t actually begrudge them for this as we all have to make a living in this increasingly complex world but I do have a problem with how some products and services are made to sound more complex than perhaps they should which the cynic in me again believes is being used to deter people from going DIY.

I think back to 2007 when I first realised that for the first 12 years of my life I had been working for everybody but myself. And if I didn't start taking responsibility for my own future quickly I was going to end up with little more than a State Pension (or some other form of welfare) that would be provided at an age chosen by the government of the time. I needed to start saving and investing without further delay.

I did what the mainstream world tells us all to do. I spoke with Financial Planners who I believe in hindsight were making what they were offering sound more complicated than it needed to be. I also read about what looked like complex investment products which would not only give me a fantastic return but would in some instances possibly even put man on the moon.  I'm possibly even guilty of it when I talk about my own low charge strategy and some of the other concepts we cover on this site. I think it’s a simple concept but thinking back to what I knew when I first started down this road it would have been nothing short of confusing. Of course the difference is that I don’t get wealthy at your expense. I'm not for a minute suggesting that there is anything illegal or misleading going on but I am glad that I went DIY as I believe that I would have had no better return plus I've saved on all the fees and expenses which are now part of my wealth which is compounding nicely.

Since going DIY I am happy with progress however one area I know I went wrong is during the first couple of years when I knew nothing and was trying to learn. This period of time definitely cost me and while I don’t regret it as it taught me what I know today, thinking back I really should have just used the KISS rule until I’d educated myself. So let’s do that today and try and build a simple portfolio and strategy which could maybe tide a DIY investing beginner over until they were ready for more complexity. When they are finally ready they probably won’t even have to sell but instead could just build upon what would then be a core holding and if they were never ready then they’d still likely do ok.

I’m Buying Gold (Gold Priced in British Pounds – May 2013 Update)

Gold when priced in USD’s closed on Friday at a nominal $1,388.30.  Convert that into GBP’s and you’re looking at a Nominal Gold Price of £912.53.  Staying in Sterling that is a Nominal Gold month on month price fall of 5.9% and a year on year price fall of 8.4%.  The chart below shows the Nominal Monthly Gold Price in £’s since 1979.

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If we then adjust this Gold chart for the continual devaluation of Sterling through inflation we can see Real Gold Prices which are shown in the chart below.  If this is of particular interest then you might also be interested in understanding if Gold can protect UK Investors from inflation.   The key Real Monthly Gold Price metrics are:

• Real Gold Peak Price was £1,199.2 in January 1980.  At £912.53 we are 23.9% below that peak today.
• The long run average is £542.96 which is therefore still indicating a very large potential overvaluation.
• The trendline indicates the Real Gold Price should today be £506.36 which would indicate even further overvaluation.  

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I aim to hold Gold within my own Low Charge Portfolio.  This isn't because I wear a tin foil hat or think that the world is about to go all Mad Max.  It’s because I want to hold commodities within my portfolio as they have a different correlation with my other asset classes and Gold (unlike many commodities for investors) if bought correctly is one commodity that won’t suffer from contango or backwardation.

Valuing London Property at Borough Level

The mainstream media usually report UK House Prices at a national level.  Recently we went one level deeper by examining English and Welsh property at County Level however this data left an elephant in the room.  That elephant was London, a small village located in the South East of England with a population of 8.2 million, and one which was included as a single data point.  Today let’s go deeper into London and look at the Salaries, House Prices and Value of each London Borough.

To Value the London market by borough we will maintain consistency with our previous definition which is a simple Price to Earnings Ratio (P/E).  As with the County level analysis we will use the Land Registry House Price Index for prices.  We’ll stay with calling high house prices bad (the Borough with the highest average house price, unsurprisingly, is Kensington & Chelsea at £1,104,770 and is shown in dark red) and low house prices good (the Borough with the lowest house price is Barking & Dagenham at £213,581 and is dark green) with all other prices shaded between red and green depending on house price.  What I find amazing is that Barking & Dagenham, the cheapest Borough, is still 32% more expensive than the England and Wales average.

For Earnings we’ll also stay with the 2012 Annual Survey of Hours and Earnings (ASHE) which provides information about the levels, distribution and make-up of earnings and hours paid for employees within industries, occupations and regions in the UK.  To ensure that our Earners and Houses are located within the same Borough we’ll use the Earnings by Place of Residence by Local Authority.  We again multiply the data by 52 weeks to convert it to an annual salary.  We stay with calling low earnings bad (the lowest average earnings are £19,183 in Newham which surprisingly is only 8% higher than the lowest County which was Blackpool and is shown in dark red) and high earnings good (the highest average earnings are £59,441 in Kensington and Chelsea and is dark green) with all other earnings shaded between red and green depending on earnings.

Is it Time to Buy a Home

On the 24th of April 2013 the Bank of England and HM Treasury announced that the Funding for Lending Scheme (FLS) would be extended until January 2015.  It was also modified to include selected non-bank providers of credit to the UK economy.  Between the FLS Scheme, a Bank of England Bank Rate of 0.5% and £375 billion of Quantitative Easing mortgage rates have fallen a long way.  Let’s look at the data.

The Bank of England publishes a number of datasets on this topic and I have picked 5 which cover the more common mortgage types available today.  They are the sterling monthly mortgage interest rate of UK monetary financial institutions (excluding Central Bank) covering:

• Standard Variable Rate (SVR) mortgages.  These were starting to rise at glacial speeds but have now pulled back a little.  Today they sit at 4.34%, flat month on month and up 0.24% year on year. 
• Lifetime Tracker mortgages.  These have been flat for some time now.  Currently they are 3.56% which is flat on the month and sees a decrease of 0.04% on the year.
• 2, 3 and 5 Year Fixed Rate Mortgages with a 75% loan to value ratio (LTV) continue the falls that appear to have accelerated in a downwards direction at the same time the original FLS was announced.  Today we see these mortgages at 2.87% (down 0.04% on the month, 0.79% on the year), 2.98% (down 0.32% on the month, 1.05% on the year) and 3.61% (down 0.02% on the month, 0.68% on the year) respectively.  Since the FLS scheme started the falls are 0.82%, 1.03% and 0.50% respectively.

A history of these mortgage rates can be seen in the chart below which also shows the announcement dates of the Bank of England Bank Rate of 0.5%, 4 tranches of Quantitative Easing and Funding for Lending.

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With inflation currently running at 2.9% you can now get an average real inflation adjusted 2 year fixed mortgage for -0.02%, a 3 year for 0.09% and a 5 year for 0.72%.

I’m currently out of the UK property market in rental accommodation but with my Assured Shorthold Tenancy coming up for renewal in the near future plus a Letting Agent that treats me slightly worse than belly button lint every time the annual negotiation begins, it’s time to reassess whether it’s time to buy.  Today is not meant to be a comprehensive piece of data analysis in typical Retirement Investing Today style, that will probably come later as I formulate my thoughts, but more some musings of what is currently running through my mind in the hope of generating some comment from you the valued reader.

Save Hard by Earning More

To gain financial independence or early retirement in the soonest possible time then Saving Hard and Investing Wisely are must do’s.  On the Saving Hard front there are two main routes that we can follow with early retirement coming sooner if both are applied with vigour.  The first is what we talk about regularly including frugal living, opting out of consumerism and watching the small spends because they can quickly add up to big spends to name but three.  This is nothing more than cutting our costs to free up cash for Investing Wisely and is something we can all do by refusing to act like a victim and then simply applying some discipline.

The second is potentially a little more difficult to achieve but equally valid and involves Earning More while increasing your costs to earn that extra by as little as possible.  There are many ways to do this but some options might include maximising your current career to gain promotion, retraining into a new career, taking whatever overtime is offered (if you are lucky enough to be offered overtime), starting a small business, developing a side income or simply starting to sell some of that consumerist tat that you bought before it becomes worthless.

Personally, up until now I've followed the maximise my career to gain promotion option but am starting to now consider some of the other options as financial independence approaches.  Some of the techniques I’ve used to get to my current position have included:

• Looking around and ensuring I have stayed in the top 10% of my peers in terms of delivery.  Where I'm a little slower than others on some tasks it’s meant I have to work a bit longer and where I’m not as smart as someone else it’s meant some self learning or further education.  Both ways have meant more hours invested in my career than most of my peers.
• I've never asked for a pay rise for something I am about to do unless it is of course offered.  Instead I always do the job and then ask for the pay rise.  The advantage of this method is that if they then say no I already have the skills on the CV to move to another organisation where they will recognise and pay for these new skills.
• I'm prepared to commute to maximise earnings.  This one is a little controversial but I look at it from the perspective of maximising my free cash after all costs which includes commuting costs.  More free cash means more savings.
• I'm very flexible.  If the toilet needs cleaning to ensure that project succeeds then I clean the toilet.
• I'm always on the lookout for that door that is partially open even if it means a bit of extra effort in the short term.  This is because you never know where it leaves and on at least 2 occasions it has led to more stable earnings for me.

Valuing the Property of England and Wales at County Level

When we, or indeed many websites, look at what is generally called UK House Prices, House Value or House Affordability it tends to be at a high level covering either the whole United Kingdom or England and Wales.  This is fine if you are looking for macro trends but doesn't give us much of a view at what is happening locally.

Given that we are hearing a lot about the North to South divide or even the London to rest of the UK divide let’s therefore deviate from that traditional macro view and get a bit more local by calculating House Value down to a County level.

To Value the market we are going to stick with our previous definition which is a simple Price to Earnings Ratio (P/E).  Regular readers will know that for Price we normally use Nominal House Prices as published by the Nationwide and for Earnings the Office for National Statistics KAB9 Nominal Earnings which are both published monthly.  Unfortunately these aren't available down to County level and so we need to introduce two new datasets.

For House Prices we will use the Land Registry House Price Index.  As a reminder this index uses repeat sales regression on houses which have been sold more than once to calculate an increase or decrease.  As it analyses each house and compares the latest buying price to the previous buying price it is by definition mix adjusting its data also.  This is then combined with a Geometric Mean price which was taken in April 2000 to calculate the index.  It is seasonally adjusted and covers properties from England and Wales.  It covers buyers using both cash and mortgages.  We are using the latest published data which comes from March 2013.  The analysis is arranged according to the Regions and County’s defined by the Land Registry and is shown in the Table below.  Unlike the mainstream media we are going to call high house prices bad (the County with the highest house price is London at £374,568 and is shown in dark red) and low house prices good (the County with the lowest house price is Merthyr Tydfil at £66,511 and is dark green) with all other prices shaded between red and green depending on house price.

For Earnings we are using the Annual Survey of Hours and Earnings (ASHE) which provides information about the levels, distribution and make-up of earnings and hours paid for employees within industries, occupations and regions in the UK.  Unfortunately, as the name implies, it is only published annually and so we will use the 2012 dataset.  To ensure that our Earners and Houses are located within the same County we’ll use the Earnings by Place of Residence by Local Authority.  This dataset presents weekly Earnings at both median (the middle point from each distribution) and mean (the average) levels which we have arranged into each Land Registry Region and County in the Table below.  We then multiply the data by 52 weeks to convert it to an annual salary.  We are calling low earnings bad (the lowest average earnings are £17,794 in Blackpool and are dark red) and high earnings good (the highest average earnings are £40,466 in Windsor and Maidenhead and are dark green) with all other earnings shaded between red and green depending on earnings.

Financial Repression and UK Average Weekly Earnings – May 2013 Update

We live in interesting times.  The government and mainstream media would have us believe that these are times of austerity.  Of course we live in no such thing.  The miniscule efforts made by the government thus far has already resulted in much gnashing of teeth and yet for the 2012-13 financial year the UK government still borrowed £120.6 billion that it didn’t have.  Every UK based man, woman and child just added a further £1,925 onto the tab.

So if we don’t live in times of austerity what are we living in?  I think I’ve managed to find the answer.  It’s officially called Financial Repression.  Please do click on the Wikipedia link and let me know if you agree?  It looks to be a method that allows the masses to be a slowly boiled frog as most won’t notice what is going on due to a money illusion.  What makes me think this is the route chosen by our politically masters?

We all know that the Bank of England has been ignoring the 2% inflation target for a long time now but the new Remit for the Bank of England Monetary Policy Committee dated 20 March 2013 now explicitly sanctions it with the statement that “The remit recognises that inflation will on occasion depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the target in these circumstances may cause undesirable volatility in output. This reflects the short-term trade-offs that must be made between inflation and output variability in setting monetary policy. It therefore allows for a balanced approach to the objectives set out in the remit, while retaining the primacy of price stability and the inflation target.”  This gives new Governor Carney official free reign to keep the Official Bank Rate at near zero while continuing to Quantitative Ease (QE) like there is no tomorrow.  The aim here seems to be to keep inflation running without allowing it to run away.  It will be interesting to see if they can walk that tight rope.

So we now have the inflation.  Next you need to control and drive interest rates, such as on government debt, to a value that is less than the inflation you are creating.  QE is and will come to the rescue here by creating a major buyer, in this case the Bank of England.  Basel III then creates another buyer, in this case Banks, by requiring Tier 1 capital levels to be increased from 4% to 6%.  Banks can count government debt as Tier 1 capital creating an additional domestic market for government gilts.  Lots of buyers means rising prices and falling yields.  This has also created a captive domestic market for government debt which Financial Repression requires.

I feel we now have most of the Financial Repression boxes ticked.  Interest rates are controlled, the government owns plenty of banks, reserve requirements are rising and we have the domestic market for government debt.  The one that is missing is capital controls but our Cyprus friends have shown us how easy that is to implement when the time is right.

The Cheapest Loan

You’ve done your homework on understanding how debt works and decided to take on a loan.  No matter whether that loan is a mortgage, personal loan or credit card then the next step is to ensure that you end up with the cheapest or lowest cost loan you can, along with one that actually meets your needs.  To do this you have no choice but to find a quiet place, where with a fresh cup of tea, you can read the small print of each loan provider you are considering and in parallel run some maths to calculate who is the cheapest provider based on all that small print.  It’s key to do the maths because when it comes to loans, as with investments, small amounts over long periods and fees matter.

If you want to do the maths yourself then Excel’s PMT function will get you a long way.  This gives the repayment amount for a loan given an interest rate, the number of constant periods the loan is taken over and the present value of the loan.  If you don’t have Excel or aren't mathematically savvy then you could also use a loan or mortgage calculator to do a lot of the work for you.

Let’s look at a few simple case studies, which build in complexity, to show just how important it is to run the numbers.

Case Study 1 - All else being equal secure the lowest interest rate you can  

Bank A is offering a loan with an annual interest rate of 5% (the interest rate) and Bank B has a rate of 5.5%.  The loan amount is for £10,000 (the present value of the loan), you are going to make the repayments monthly and you intend to take the loan over 10 years (the number of constant periods will be 10x12=120 months because you pay monthly).   To calculate the monthly repayment for the first scenario you would enter the following into Excel ‘=PMT(5%/12, 10*12,-£10,000)’ which would give you a repayment to Bank A of£106.07 per month.  Note you have to divide the interest rate by 12 months as the repayment is made monthly.  If you run the same calculation for Bank B’s interest rate of 5.5% the monthly repayment would be £108.53.

At first glance it doesn’t seem like much of a difference.  After all it’s only £2.46 per month however this is no different to the Latte a Day case study I’ve run before which demonstrates how small amounts matter.  Over the 10 year period the total interest paid is £2,728 and £3,023 respectively.  That 0.5% actually means 10.8% more in interest payments.   It’s also important to remember that the longer the loan period the worse this effect.  For example lengthen the loan term to 20 years and that 10.8% becomes 11.5%.  This is Compound Interest at work.

The New FTSE 100 Cyclically Adjusted Price Earnings Ratio (FTSE 100 CAPE) Update - April 2013

Welcome to the new look UK FTSE 100 monthly stock market review which includes a couple of valuation metrics.  The last time we looked at this dataset was on the 10 March 2013.  This monthly review will now loosely follow the same format we use for the S&P 500 which will enable us to get some consistency across regions going forward.

FTSE 100 Price

At market close on Tuesday the FTSE 100 was priced at 6,430.  That is a rise of 0.8% when compared with the 01 March 2013 Price of 6,379 and 9.5% above the 02 April 2013 Price of 5,875.  How this pricing compares with history can be seen in the chart below.

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This is a similar chart to that which you will see in many places within the mainstream media.  Let’s now remove the sensationalism by:

• Correcting the chart for the devaluation of the £ through inflation.  For this dataset I use the Consumer Price Index (CPI) to devalue the £.
• Plotting the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  

Looking at the chart this way reveals the FTSE 100 in a very different light.  That light shows that the compound annual growth rate (CAGR) in today’s £’s has only been 2.0%.  Correct it by the Retail Prices Index (RPI) and that falls to 1.2%.

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FTSE 100 Earnings

As Reported Nominal Annual Earnings are currently 483, up from 458 on the 01 March 2013.  They are down 18.3% on last year and 23.0% on October 2011’s 628.  Or course this looks better than it really is as inflation flatters the result.  I therefore plot a chart below, again on a logarithmic axis, showing Real (inflation adjusted) Earnings performance over the long term.

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What type of Investor are you?

There are a multitude of investment opportunities and investment products available today to help investors meet their goals, which might include retirement or financial independence.  Before you look at those products in detail you must first ascend to 30,000 feet and decide what type of Investor you are or intend to be.  At this level I see there are essentially 4 types of investor which can be profiled by answering 2 questions:

1. Am I going to be an Active or Passive Investor?
2. Do I want to be DIY or have somebody make my investment decisions for me in consultation with me?

Let’s look at each in turn.

Active vs Passive Investing

The debate over which of these strategies is better has been going on for years.  Passive investments aim to do nothing more than track a market index.  That could be a stock market index like the FTSE All Share Index or a bond market index like the Barclays UK Government Inflation-Linked Bond Index.  These types of investments don’t need talented managers or analysts but simply a decent computer system that will enable the assets purchased to replicate the market.  Importantly when selecting these types of investments you will be looking for ones that track the chosen index as closely as possible.  Therefore if you are passive investing well you will never beat the market but should get pretty close to its nominal performance.

Active investments on the other hand are run by professional managers who are supported by analysts and researchers.  They will conduct extensive market research on the investment opportunities within their remit with the specific aim of beating the market.  It must however be remembered that the law of averages dictates that for every active investment manager that beats the market somebody or something has to not beat the market.  Some of these will be other professional managers.   Pick one of those and you would have been better off going passive.

Active investments typically carry higher expenses than passive investments.  After all those managers, analysts and researchers aren’t working for free and expect to be paid.  Therefore they must beat the market by at least their expenses if they are to be a better bet than the passive investment option.

DIY or Financial Advisor Investing

The second decision you need to make is are you prepared to go it alone, make all of your own investment decisions and live with the consequences.  It should not be underestimated how important planning for retirement or financial independence is.  In many instances you will only ever get one shot at it.  If you go DIY you must be therefore prepared to read a lot and really think through what you are trying to achieve.  You’ll need to accurately assess where you are today, where you want to go and when you want to get there.  You will need to determine how risk tolerant you are, while also realising that, for example, 100% of the lowest risk asset class today will likely not give you the lowest risk portfolio.  You’ll then need to crash all of that information with a lot of research on different asset classes and investment wrappers to build a diversified, tax minimised investment portfolio, with expenses at a level you are happy with, that will give a high probability of meeting your goals.  You’ll need to t
hen review your portfolio regularly to determine if or when you want to rebalance those investments and also ascertain if you are still on target to meet your goals.

The Best Performing Stock Market in the World

In the modern day we see many of the emerging economies of the world moving forward with high growth while in contrast many of the mature western economies have anaemic growth at best.  This was reinforced last week with the UK reporting preliminary quarterly growth of 0.3% (1.3% annualised) while the US fared better with an annualised 2.5%.  In contrast on the 15 April 2013 we heard that China was growing at 7.7%.  Does this mean we should all be selling our mature market equities and loading up on emerging markets?  Or do we get enough benefit from the fact that many mature market companies are exposed to high growth markets?

To try and get an idea I ran the Google search “the best performing stock market in the world” and was rewarded with the result that in 2012 the Venezuela IBC returned around 300%.  I was disappointed with this result and the majority of the other Google results for three main reasons:

• As a private investor are we really going to put a significant portion of our wealth into the Venezuela stock market?  Or the Turkish XU100, Egyptian EGX, Pakistan KSE or the Kenya NSE for that matter?  Well as somebody who is searching for consistent return over many years I know I’m not.
• The majority of results simply show the performance of the major stock market within each country.  This is flawed because each of these markets is priced in the local currency of each country and we all know that currencies move for all manner of reasons including varying rates of currency devaluation caused by inflation.  You therefore cannot compare one with the other as they have different units.  It would be like saying Car A which is travelling at 110 km/hour is going faster than Car B which is travelling at 100 miles/hour.  A clearly ludicrous statement. 
• As the results only use the major stock market for each country they are only looking at the capital gain of each of these markets.  If we truly want to understand the best performing market then we should also consider the contribution from dividends because dividends matter.

Let’s therefore answer the question from a personal long term investor perspective while considering the three points above.

The New S&P 500 Cyclically Adjusted Price Earnings Ratio (S&P500 CAPE) Update - April 2013

I've been publishing a review of the S&P500 and all its nuances every month for over 3 years.  This is data that I personally use for my own investments and as my knowledge has grown so too has the content posted but the format has remained largely unchanged.  I've received no complaints but to me the format has now grown a little unwieldy, not as clear as it could be and probably most importantly I've become a little bored with it.  Last month’s review can be found here.  I've therefore spent some time reformatting the charts, adding some more relevant historical content and hopefully arranging the content into something a little more logical.  I hope it works for you.

S&P500 Price

At market close on Friday the S&P500 was Priced at 1,555.  That is a rise of 0.3% when compared with 1,551, which is the average closing Price of each trading day last month.  It is 12.2% above last year’s April monthly Price of 1,386.  Note that for this index I only look at monthly average Prices as opposed to hourly or daily as I'm a very long term investor and just don’t need the noise associated with more granularity.  I’ll leave that for the traders out there.

We can then look at how this Price compares to history which is shown in the chart below.

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This is a similar chart to that which you will see in many places within the mainstream media when displayed over a long term.  It looks sensational and in my opinion isn’t very helpful.  Let’s therefore adjust it to the chart below where I try to show what is really going on with Prices.  I make two adjustments:

• Correct the chart for the devaluation of the US Dollar through inflation.  This unfortunately means, unlike the mainstream media in recent times, I can’t report that the S&P500 has reached new all time highs as in real terms it is still 22.5% below the Real high reached in August 2000.
• Show the Pricing on a logarithmic scale as opposed to a linear one.  By using this scale percentage changes in price appear the same.  For example let’s say we have two historic prices of 10 and 100.  If they both increase in price by 10% then they increase by 1 and 10 respectively.  On a linear scale it would appear as though the second has increased by a factor of 10 more than the first where on a logarithmic scale they will appear to have changes the same.  Less sensational but more correct. 

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The Cheapest Home Insurance

We've previously run the maths to demonstrate how quickly small regular amounts of expenditure can add up to large amounts.  We've also analysed how it is important to save large amounts if you are chasing financial independence in a short space of time.  This is because over a short period compound interest doesn't really get time to work its magic.  It is therefore crucial to ruthlessly look at every piece of expenditure you make to identify savings.  Those savings can then be invested wisely.

One piece of expenditure that is not small and repeats year in year out in various forms forever is insurance.  Depending on your level of acceptance of risk and life situation you might be paying for car insurance, home insurance, life insurance, travel insurance, health insurance and income protection insurance to name only  a few right now.  That is a lot of insurances.  Let’s therefore pick one and by using Retirement Investing Today principles think through how we might be able to reduce our insurance spend leaving more money for financial independence investing.

In the UK home insurance is a generic term which actually covers 2 very separate insurance types.  The first is buildings insurance which protects you from damage to the fabric of your home and so will cover floors, walls, and roofs.  It usually also protects you from damage to fixtures and fittings such as kitchens and bathrooms.  The second is contents insurance which protects you from loss associated with stuff kept in your home such as furniture, computers and personal belongings.

We’ll look at how we can reduce cost with each type of home insurance in a minute.  However while we have them grouped together one thing I would expect most people, including non Retirement Investing Today readers, to be doing in the modern day is to use price comparison sites to scan the home insurance market for the best deal.  A word of caution though.  No two policies are alike and so you must not just pick the cheapest offering presented by price comparison sites.  Instead you must read all the small print and pick the cheapest product that gives you the protection level you desire.

Let’s now look at each home insurance type in turn to identify a couple of further cost saving ideas:

Building Insurance

Your home is probably the biggest purchase any of us will ever make in our lives.  If you own your home or are renting out a home the responsibility for building insurance sits with you.  This then identifies one saving opportunity.  If you are in rental accommodation, as I am today, then I don’t need buildings insurance as it is my landlord’s responsibility.

It’s an Advertisement not News

Apologies in advance for an uncharacteristic short post.  Most of my energies this week have gone into pulling together the fourth quarterly Monevator Private Investor Market Roundup.  ( )

Today BBC radio along with their web offering have felt the need to present us with the “news” that the Post Office is to offer current accounts.  I know it’s all very exciting (yawn!) but please stay with me a little longer before you run off and sign up (not!).  This apparently is all in response to the regulator claiming that the High Street today offers little choice for consumers.  Details are scant at the moment but I’d be willing to bet it will be pretty much more of the same with an interest rate on offer of between 0% and 0.1% AER.  I can’t see it correcting the “lack of dynamism” currently on offer from Banks such as Lloyds, RBS, Barclays and HSBC given that it will just be another offering from yet another Bank, albeit from another High Street.  Am I the only one who doesn’t see this as news but instead just a thinly veiled advertisement for a new current account being offered by the Bank of Ireland?

UK Savings Account Interest Rates – March 2013 Update

Head over to Martin Lewis at Money Saving Expert and you’ll find that today the best easy access savings account comes from West Bromwich Building Society.  It pays interest of 2.05% AER but forget to switch after 31 May 2014 to the next bank or building society offering the highest interest rate at that time and you’ll lose 0.55% of that.  There are other limitations also which includes only 4 free withdrawals per year and a minimum initial deposit of £10,000 so be sure to read the small print if it looks interesting.  If you want something a bit cleaner then you’re looking at Skipton Building Society with 2% AER which includes a bonus 1% which you’ll lose after a year.

It therefore looks as though since we last looked at Savings Rates in February the best buy market has reached a plateau with 2% AER from Derbyshire being the best available at that time.

I must note that I continue to ignore the Santander 123 account for reasons explained in February.  If you’re using it and would recommend it over other options it would be great to hear from you.

So best buys are flat but what’s happening on average.  Well it’s probably no surprise that interest bearing site deposits are also pretty flat since I last posted at 1.08%. They are also flat since the Funding for Lending Scheme (FLS) was announced.  The interest on fixed maturity savings accounts is however a very different story.  Time deposits with a maturity of less than or equal to 1 year have now fallen 0.72% since FLS was announced ending up at 1.57%.  1 to 2 year maturities fall 0.94% to 2.45%.  Greater than 2 year maturities have fallen 0.84% since FLS to 2.72% but interestingly are up 0.2% on the month.  Could this be the start of a trend?  This is all shown in the chart below.

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This all looks bad for somebody who is trying to save hard  but if you’re a worker paying 40% tax then its worse after HMRC has finished with you.  After tax you end up with 0.65, 0.94, 1.47 and 1.63% per annum respectively (0.86, 1.26, 1.96 and 2.18% for 20% taxpayers).  But wait it gets even worse because inflation is also devaluing your savings at the rate of 3.2% per year.  So after inflation and HMRC you’re actually losing savings to the tune of -2.56, -2.27, -1.74 and -1.58% per annum respectively for a 40% taxpayer (-2.35, -1.95, -1.25, -1.03% for 20% taxpayers).

A Retirement Investing Today Review of Quarter 1 2013

For all UK based readers a Happy New Financial Year to you.  I wasn't sure if I should have put the Happy in front because for me a new financial year carries both a positives and a negatives.  The positive is that a new ISA year is upon us meaning I can again begin working hard to fill my full Stocks and Shares ISA allowance which for this year is £11,520.  The negative is that HM Revenue & Customs (HMRC) will soon send me a request to complete a tax return where as always I will be sent a bill because of my now considerable investment sum.  This however is not as bad as it could be as I continue to push hard to minimise taxes paid through tax avoidance schemes such as ISA’s, Pensions and NS&I Index Linked Savings Certificates (ILSC’s).  Over time continual energy to take advantage of these when possible (remember ISA’s are an annual use it or lose it allowance, NS&I ILSC’s come and go on an ad hoc basis and for this financial year the pension contribution limit is for me a very large lower of 100% of earnings or £50,000 which is called the annual allowance) really add up and mean this year I will only be taxed on around one third of my total investment portfolio.  Therefore on the whole I’ll call it a Happy New Financial Year.

In the past I have only tended to publish my own personal financial position on an annual basis even though I track value weekly and performance monthly.  I now intend to publish my own situation on a quarterly basis for 2 reasons:

• My 2012 annual review showed that in the metrics that I measure myself against I had one conceded pass and one fail.  By publishing more regularly I hope that it will force me to hold myself more accountable to my objectives plus also allow more time for recovery should I fall off the rails.
• The 2012 annual review sparked some good discussion so was clearly worthwhile to both myself and some readers. 

My own personal situation follows everything I talk about on this Site to the letter.  The site is all about Save Hard, Invest Wisely, Retire Early so as with the 2012 Review let’s continue to use those 6 words as a theme.

SAVE HARD

I am now into a fifth year of aiming to save 60% of my earnings, which I define as my gross (ie before tax) earnings plus any employee pension contributions.  This is a very tough target particularly in the current age where we have increased taxes and prices going up due to unrelenting inflation while at the same time my salary is not moving in nominal terms.  My company is currently at the point of annual “salary reviews” but even though I have worked hard over the past year and delivered a lot I expect the same increase as last year which was a large 0%.  I did however manage to this year secure a bonus so I can’t really complain as many of my fellow UK residents I'm sure received nothing.


In addition to hard work Saving Hard has also required me to live frugally and opt out of consumerism. This on the whole has been a very positive experience however every now and then I come close to straying from the path. For example I don’t own an Apple iPhone, Nokia Lumia or Samsung Galaxy mobile phone which I'm told are the current must haves. Instead my personal phone is on a Pay As You Go contract which does not include data and is carried for emergencies only. To be honest I don’t covet a modern smart phone but I would love one of these to simplify reading when on the go and to make staying in touch with the world a little easier. Instead I stick with good old fashioned books and an old laptop which seems to get slower and slower every day.

UK House Value vs UK House Affordability – March 2013

This is the monthly UK House Affordability update, which is the metric that I believe is the key driver of UK House Prices.  It also updates UK House Value which is the metric I am using to assess when it is time to buy a UK home and Sales Volumes.  The last update can be found here.

Let’s first update the key data being used to calculate both UK House Value and UK House Affordability plus report on Volumes:

• UK Nominal House Prices.  There are numerous UK House Price Indices which each measure something different.  This analysis has always used the Nationwide Historical House Price dataset which measures the price of a Standard House and so this month we stay with that for consistency.  March 2013 house prices were reported as £164,630.  Month on month that is a rise of £1,992 (+1.2%).  Year on year also sees an increase of £1,303 (+0.8%).
• UK Real House Prices.  If we account for the devaluation of the £ through inflation (the Retail Prices Index) we see a different picture.  Month on month that increase of £1,992 turns into an increase of £810 (+0.5%).  Year on year that £1,303 increase turns into a decrease of £4,525 (-2.8%).  In real terms prices are now back to those around January 2003.
• UK House Sales Volume.  Sales volumes according to the Land Registry were 53,860 in December 2012.  Month on month that is a fall of 14.0% and year on year a fall of 15.3%.  Volumes are now 40% of peak sales in May 2002 and 66% of the dataset average volume.  
• UK Nominal Earnings.  I choose to use the Office for National Statistics (ONS) Average Weekly Earnings KAB9 dataset which is the seasonally adjusted average weekly earnings of both the public and private sector including bonuses.  January 2013 sees earnings at £470.  Month on month that is a nominal decrease of £2 (-0.4%).  Year on year sees a nominal increase of £5 (+1.1%).  With inflation (the Retail Prices Index) running at 3.3% over the same yearly period the purchasing power of those that work continues to be eroded.
• UK Mortgage Rates.  The proxy I use to monitor mortgage interest rates is the Bank of England dataset IUMTLMV which is the monthly interest rate of UK resident banks and building societies sterling Standard Variable Rate (SVR) mortgage to households (not seasonally adjusted).  February 2013 sees a mortgage rate of 4.4% which is flat month on month and year on year is an increase of 0.26%.  While this metric sees mortgage rates increasing a number of mortgages are seeing falls largely because of the Funding for Lending Scheme (FLS).  2, 3 and 5 Year Fixed Rate Mortgages with high 25% Loan to Value Ratios (LTV) requirements have seen year on year falls of between 0.5% and 0.59% and at 2.87% for a 2 year effectively mean negative real interest rates.  

Dividend Reinvestment is a must to Maximise Wealth Building

There are almost as many investment strategies as there are financial websites.  These might include everything from you must buy this share as it’s a guaranteed ten bagger through to a fund that looks like it will protect you no matter the economic weather.  Of course the strategies discussed will also likely be dependent on whether the person writing the strategy has a vested interest of some description.

I’ve laid out my strategy for all to see however it glossed over an exceptionally important element.  That element is share dividends and specifically how crucial it is to reinvest them while you are building your portfolio.  If you are a UK Investor Monevator touched on this topic back when I was first starting on my Retirement Investing Today journey and more recently DIY Investor has also reinforced their importance but it’s the must have Investing Bible for UK Investors that really reinforces the point with the section entitled “Spend dividends at your peril”.  Dividend reinvestment is important because it is likely they make up a significant proportion of the total return that comes from your individual share holdings, High Yield Portfolio (HYP) or Index Tracking Fund to name but three.  By reinvesting you both get that extra cash into your portfolio, instead of being tempted to buy something you likely don’t really need, but additionally you also then get those dividends compounding year on year.

Let’s look at whether reinvesting dividends is still important in more recent times using my recently built FTSE100, FTSE250, FTSE Small Cap and FTSE All Share data sets.  For today’s analysis I am using the period 18 March 2008 (the first date I was able to source all data required) to the recent market close of the 28 March 2013.  The annualised return or compound annual growth rate (CAGR) for capital growth only and dividend reinvestment for these four datasets is shown below.

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Building FTSE100, FTSE250, FTSE Small Cap and FTSE All Share Data Sets

There are many UK stock market Indices, each of which is trying to measure something different.  The one mostly reported by the mainstream media is the FTSE 100 which is also the Index we regularly use to value the UK stock market.

This week I was looking to dive a bit deeper into some of these other UK Indices to conduct some more detailed analysis.  I trawled the internet for datasets but surprisingly, given the sheer amount of financial data freely available online, I came up blank for sensible datasets.  I therefore had to put my more detailed analysis on hold and spend a number of hours reconstructing a number of FTSE UK indices.  While I haven’t conducted a large amount of analysis yet I thought it was worth sharing the data as it will form a basis for a number of pieces of analysis I intend to do going forward.

The FTSE indices I’ve chosen to reconstruct are:

• The FTSE100 Index which consists of the 100 largest UK public companies.  These 100 companies make up about 81% of the UK market. 
• The FTSE250 Index which is the next 250 largest companies after the FTSE100.  These 250 companies make up about 15% of the UK market.    
• The FTSE Small Cap Index contains smaller companies outside of the FTSE100 and FTSE250. These companies make up about 2% of the UK market.    
• The FTSE All Share Index which is a combination of the FTSE100, FTSE250 and FTSE Small Cap Indices.  It therefore contains about 98% of the UK market.

Each of these Indices has two variants.  The first is the Price version of the Index which is the weighted market capitalisation of the companies within the Index on the day of interest.  These are the Indices you usually see on television or in the papers.  The second is the Total Return Index which assumes that all dividends (or other cash distributions) are reinvested back into the Index.  By looking at the change in both of these Index values between any two dates you can calculate a lot of interesting information which includes:

• The Price Index will allow you to calculate the annualised Capital Gains that you could have achieved, after expenses, if you had bought a tracker fund or ETF and it tracked the index well.
• By then calculating the annualised gain from the Total Return Index and subtracting the Price Index annualised Capital Gain we can then calculate the additional annual return that could have been gained by that same fund or ETF through reinvested dividends.  I intend to run this analysis in an upcoming post as this is one reason why I was looking for the data in the first instance.

Charts for the FTSE100, FTSE250, FTSE Small Cap and FTSE All Share Price and Total Return Indices can be seen below.  These take the value of the respective Index on the first possible investment day of each month.

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Gold Priced in British Pounds (GBP or £’s) – March 2013 Update

As I’m writing this post the mainstream media is telling me that Gold, when priced in its globally quoted, currency is trading at $1589.50 an ounce.  In recent times when priced in US Dollars Gold has been tarnishing somewhat (and I used to think that it was only Silver that tarnished).  Compared with the February 2013 average it has fallen in price by 2.3% and compared with the March 2012 average it has fallen by 5.0%.  If you’re an Investor paid or spending in US Dollars then these are probably relevant numbers however as a UK Investor the numbers are bordering on being meaningless.  Let’s therefore have a look at what is happening to Gold when priced in Pound Sterling.  If you’re interested in history the last update of this metric was in January 2013.

The chart below shows the Nominal Monthly Gold Price in £’s since 1979.  The key Nominal Gold metrics are:

• The Nominal Gold Price is currently £1,054.16 which is 0.3% above the January 2013 Price of £1,051.35.
• Year on Year Nominal Gold Prices are only 0.4% below the March 2012 Price of £1,057.94. 

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In contrast with US Dollar Investors we can see that UK Investors are just not seeing price falls.  This is caused by Sterling devaluing against the Dollar at a rate pretty close to the fall in Gold Prices when measured in its globally quoted currency.

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – March 2013 Update

 This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:

• The FTSE 100 Price is currently 6,484 which is a gain of 2.1% on the 01 February 2013 Price of 6,347 and 9.3% above the 01 March 2012 Price of 5,931.
• The FTSE 100 Dividend Yield is currently 3.42% which is down against the 01 February 2013 yield of 3.47%.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 14.44.  
• The Price and the P/E Ratio allows us to calculate the FTSE 100 As Reported Earnings (which are the last reported year’s earnings and are made up of the sum of the latest two half years earnings) as 449.  They are down 13.0% month on month and down a large 23.9% year on year.  The Earnings Yield is therefore 6.9%.

So we find ourselves in a continuation of the interesting situation that I highlighted last month.  Nominal Earnings are falling off a cliff and have been consistently falling since October 2011’s Earnings of 628.  They are now down 28.5% since then yet in comparison Prices are increasing.  Nominal Prices are up 27.7% over the same period.

The first chart below provides a historic view of the Real (CPI adjusted) FTSE 100 Price and the Real FTSE 100 P/E.  Look at the trend line of the Real Price.  After you strip out the effects of inflation the perceived market value is doing not much more than oscillating above and below a flat line which we are now sitting on.  The second chart provides a historic view of the Real Earnings along with a rolling Real 10 Year Earnings Average for the FTSE 100.

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The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – March 2013 Update

With the mainstream media this week reporting new nominal highs for the Dow Jones Industrial Average lets also run our own regular analysis of the US market to get some detail on what is really going on in this market.   As always instead of the Dow, which only looks at 30 large companies, we’ll turn our attention to the S&P500 which looks at 500 leading public companies.  Last month’s update can be found here.

Before we crunch the numbers it’s worth pointing out that while titles like Asian markets climb after Dow Jones hits record high make for great headlines, I can’t help but feel that this is misleading the general public as they might actually think that the market is at new highs.  Of course regular readers will know that Dow isn’t at a new Real (inflation adjusted) high, but only at Nominal highs, as the unit of measure that the Dow and S&P500 is measured in, the US Dollar, is constantly being devalued through inflation.  When it comes to the S&P500, the Real high was way back in 2000 and we are still some 22.5% below that level.  

Let’s now look at the key S&P 500 metrics:

• The S&P 500 Price is currently 1,543 which is a rise of 2.0% on last month’s Price of 1,512 and 11.1% above this time last year’s monthly Price of 1,389.
• The S&P 500 Dividend Yield is currently 2.0%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $89.63 for an Earnings Yield of 5.8%.
• The S&P 500 P/E Ratio is currently 17.2 which is up from last month’s 17.0.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

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UK Mortgage Interest Rates – March 2013 Update

This is the regular UK mortgage interest update for March 2013.  The headline for this month is that the UK Government / Bank of England market manipulation scheme known as the Funding for Lending Scheme (FLS) is working.  Last month’s update can be found here.

Let’s firstly look at the raw data.  The Bank of England publishes a number of datasets on this topic and I have picked 5 which cover the more common mortgage types available today.  They are the sterling monthly mortgage interest rate of UK monetary financial institutions (excluding Central Bank) covering:

• Standard Variable Rate (SVR) mortgages.  These continue to rise.  Today they sit at 4.4%, up 0.03% month on month and 0.22% year on year.
• Lifetime Tracker mortgages.  These also continue to rise.  Currently they are 3.68% which is a monthly increase of 0.04% and a yearly increase of 0.11%.
• 2, 3 and 5 Year Fixed Rate Mortgages with a 75% loan to value ratio (LTV) on the other hand are falling significantly.  These are the mortgages you would expect to be affected by the Funding for Lending Scheme.  This is because the Scheme is “theoretically” only available for a limited period.  (As a reminder the scheme started on the 01 August.  From this date Banks and Building Societies have access to the scheme for 18 months with the scheme allowing borrowing for a period of up to 4 years.)  Today we see these mortgages at 3.06% (down 0.29% on the month, 0.21% on the year), 3.41% (down 0.26% on the month, 0.36% on the year) and 3.65% (down 0.24% on the month, 0.53% on the year) respectively.  Since the scheme started the falls are 0.63%, 0.60% and 0.46% respectively.

A history of these mortgage rates can be seen in the chart below which also shows the announcement dates of some of the well known schemes that have had a large effect on the market, namely a Bank of England Bank Rate of 0.5%, 4 tranches of Quantitative Easing and Funding for Lending.

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What this all means is that today an average 2 year fixed mortgage can be had for a real (inflation adjusted) rate of -0.22%.  Yes you read that right.  Mortgage rates in real terms are negative.  3 and 5 year real rates are also negligible at 0.13% and 0.37% respectively.  The question is how much lower can they drive rates in nominal terms?  I can’t see it being much further given that the Bank of England want and will do everything they can to engineer inflation.  Tracking these rates for the next few months will give us a good steer.

Debt – Instant Gratification vs Long Term Wealth Creation

The Free Dictionary defines debt as an “obligation or liability to pay or render something to someone else”.  In the context of Personal Finance I have a different definition of debt which is that it is a “decision to consume now without the necessary wealth to pay for that consumption.  Should interest be charged on that consumption and opportunity cost considered then the consumption now will likely be smaller than would have been possible should the wealth have first been created.”

If this was the official definition of debt it would then be obvious to people that by using debt you are likely getting less now than you could have had later in exchange for taking instant gratification today.  This therefore affects your opportunity to create wealth.  I do not believe that the majority of people appreciate this when they go into debt to buy something.  My definition also tells you this is for 2 reasons:

1.    Interest charges.  Buy it now without the means to pay for it up front and the end result is that each loan repayment being made to repay the debt is going to include a principle portion, which will eventually cover the original purchase price, plus an interest charge.  If you instead chose to save what would have been the regular repayment amount until you have saved up enough to pay cash then two phenomenon occur:

• You will save the amount needed for the purchase faster than the equivalent loan will be repaid because what would have been the interest portion is adding to your savings. 
• If you saved until what would have been the last loan repayment day then you will end up with more cash than the original purchase price, again because of the interest portion.

2.    Opportunity Cost.  This is rarely if ever discussed when people discuss debt but it should be considered as its effect can be considerable.  If you don’t make the purchase or defer the purchase then the money you would have used to fund the debt repayment can be invested to generate a return for you elsewhere.

It’s important to note that these statements are based on the assumption that the purchase does not rise in price at a rate higher than the interest charge.  If this was the case then you would also have to include the opportunity cost (including considering the risk of that other opportunity) of deploying the debt repayment s elsewhere.  If after this calculation the price was still rising at a faster rate then the debt may actually help with wealth creation while also giving instant gratification.

Has the UK Already Had Its House Price Crash?

Every month I run an analysis which looks at the Affordability and Value of UK Property.  This analysis uses the Nationwide House Price Index which measures the price of a standard house priced in Pound Sterling (£’s). 

In the current world we live there is one big problem with this Index and in fact all the other UK House Price Indices.  All of them are priced in Pound Sterling which is not a fixed peg in the ground for many reasons some of which include:

• We live in a globalised world however only 0.9% of the World’s population use the £ as their currency;
• The UK Government, Bank of England, Banks and many other vested interests have done everything in their power to keep asset prices in the UK high at the expense of just about everything else.  They’ve been relatively successful so far using methods such £375 billion of Quantitative Easing, 0.5% Official Bank Rates and the Funding for Lending Scheme.  This has allowed inflation to run a little at the expense of an official remit and led to negative real interest rates which among other things has resulted in Sterling falling in value against the currencies that 99.1% of the world use; and
• The UK for all its problems is compared to the rest of the World a very attractive place to live and unlike a lot of countries actually has a Rule of Law.  It’s not perfect but as a person who has travelled the world for my work I ask where is.  This means a lot of people want to migrate and live here.

My first chart reminds us of the price of housing priced in Sterling.  If you’re a UK resident earning in Sterling, saving in Sterling and investing in Sterling this is what you’ll see.  Since the peak prices in nominal terms have fallen 12.8%.  Hardly a House Price Crash, more a small adjustment.

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What about Prices measured in the most widely held Reserve Currency, the US Dollar?  Measured in this currency we see UK house prices down 33.7%.

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UK Average Weekly Earnings – February 2013 Update

Over the past couple of weeks the mainstream media seem to finally have discovered that in real inflation adjusted terms average earnings are falling and that this is putting a squeeze on household finances.  They’re a little behind the curve given we’ve been talking about it here since April 2010 with the last regular update here.  This doesn’t really surprise me given that the Press today rarely published any investigative journalism instead choosing to publish whatever press release a political party or corporation is trying to push that day.  I guess it keeps running costs down but I digress...  Let’s not follow the same path and instead run some analysis to understand what is really going on.

Let’s firstly look at the nominal data. The Office for National Statistics reports that the Average Weekly Earnings for:

• The Whole Economy including bonuses and allowing for seasonal adjustment is £472.  This is stagnant against last month and up £6 (1.3%) year on year.
• The Private Sector earns less than the average Whole Economy at £468 per week.  Private Sector Earnings have also gone nowhere since last month and are also up £6 (1.3%) year on year.
• The Public Sector earns more than the Private Sector at £489 per week and is also doing better when it comes to securing pay rises.  Month on month we see an increase of £1 (0.2%) and year on year an increase of £10 (2.1%).  Given that we are supposedly living in times of austerity, albeit a version where the government spends more than they did in the prior year, I’m amazed that the Public Sector is seeing year on year increases that are more than 50% higher than that of the Private Sector.

Unfortunately, while we were seeing those nominal annual increases of 1.3%, 1.3% and 2.1% respectively inflation according to the Retail Prices Index (RPI) was 3.1% during the same period.  This means that whether you are working in the Private or Public Sector it is likely you are taking a real terms pay cut. I know I am.  At my company’s last pay review I received a grand total increase of £0.  Meanwhile I know that essential items that I buy are increasing in price.  I’m continuing to learn frugal habits but I’m also sure that prices rising combined with stagnant earnings is putting pressure on my savings rate which at last check was only 55% of gross earnings against a target of 60%.  I’m working hard to find spending savings to get that back on track but given I’ve been at it since 2007 there is not a lot more to find. 

The long term erosion of spending power can be best seen with a couple of charts.  The first chart takes the RPI and Average Weekly Earnings and then converts them into an Index that starts in 2000 with a value of 100.  Whenever the gap between Earnings and the RPI is increasing earnings power is increasing.  The chart shows this stopped happening around 2008 meaning we have been seeing spending power erosion since then.  Today the spending power of the whole economy is back to levels last seen in May 2001.

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Blogging for Money

Retirement Investing Today had humble 2009 beginnings when I began writing with a free .blogspot.com domain.  Since then I believe the site has grown into a unique fact based data source covering both the general economy and personal finance ultimately aimed at helping you maximise your wealth creation and for those that choose the path early retirement.  I don’t say that because I’m arrogant but because the non-emotional fact based data tells me this is so.  This includes the site now having a Google PageRank of 3, a mozRank of 4.46, an Alexa ranking which puts the site in the top 12,500 sites read by people located in Great Britain according to Alexa and finally because readership continues to rise rapidly with visits up 32% in the last month alone.

Retirement Investing Today is also meeting the Objectives personally set which includes:

1. Holding myself accountable.  By publishing my philosophy, strategy and progress measured against these I have to stay the course and can’t stray from the path.  This reduces the risk of my failing to achieve early retirement.
2. Continuous learning about economics and personal finance.  To be able to publish unique up to date content regularly I am “forced” to continually data mine and expand my knowledge base.
3. Share what I have learnt over the years, including my mistakes, so that you can conduct your own research and learn about unfamiliar topics which might affect your wealth creation.  The emails and comments I receive tell me this is occurring.
4. The reciprocal of point 3 which is to gain information from you that force me to go off and do more research about a topic I clearly don’t know enough about.  I can definitely confirm that this is occurring.

To achieve the site you see and meet my objectives I typically invest 12 to 15 hours per week.  This covers data analysis, writing the posts, publishing the posts and keeping the site free from the continual spam attacks which you hopefully don’t see.  My daily commute plus day job currently then fills around 60 hours per week.  The two combined leave me with little time for further published content if I am to keep my current day job pace (which is necessary as it forms part of the Save Hard portion of my philosophy) and also allow some time to spend with my family.

Which brings me to the point of this post – Blogging for Money.  I already earn a very small amount of revenue which covers the costs of running the site but it’s not enough to give me a “salary” of any description.  It doesn’t cost you the reader anything but is achieved via:

• Adsense.  If you click on any of the AdChoices in the right hand side bar I receive a small amount of revenue.
• Amazon.  If you click on any of the links within The Books That Helped Me tab below the main site banner and then go on to buy something with Amazon I receive a small amount of revenue.
• Sponsored Posts.  I post a very occasional Sponsored Post which has been written by a Freelance Writer working with an Agency.  Unlike most sites I clearly label these as a Sponsored Post so that you the reader know what you are looking at.