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.

PF101

Personal Finance is a major hobby of mine.  I’ve now been absorbing everything I can about saving, investing and financial independence since late 2007.  In November this year I will have also been blogging about it for 10 years!  When I go on holidays I’m also the one reading Wall Street Revalued  and not that latest John Grisham novel

In my last post I mentioned the Ikigai model and if I apply that to personal finance I get the following...

Click to enlarge, Source

What you LOVE:

• Sad I know, but I never have to force myself to read a personal finance book, read the latest post from great blogs like Monevator or fire up Excel on my steam driven laptop.  In fact it’s the opposite for me.  I gravitate to this stuff so yes I’d say I love it.
• If I think about my previous (and even current to some extent) work/job I also used to love enabling others with training, coaching, process improvement and then with light touch sitting back watching them succeed.  I always took little satisfaction out of my own success but I took a huge amount of satisfaction out of watching my team succeed over and over.  I think this is why I’ve also stayed blogging for so long.

What you are GOOD AT:

• I am reasonably good at maths and now have more than 10 years of personal finance knowledge under my belt.  Sure, I’ve made mistakes and I’m sure will continue to do so but on the whole I think I’ve managed to get more things right than wrong.  I don’t think I would have achieved financial independence in 8.7 years if that wasn’t the case.  So yes, I’d say I’m good at it.
• In my previous day job I was also pretty good at teaching and developing others to succeed.  In some of my later roles it would have been impossible for me to do my job well if that wasn’t the case.
• While not being a fantastic motivational speaker I am pretty confident in smaller training / workshop environments where on many occasions I’ve been successful in getting the message across.

Back to powerful FI

6 months after taking the FIRE (financially independent retired early) leap I can confirm that (for now) I’ve reverted back to FI (financially independent) mode.  That’s right, we’ve left Cyprus, are back in the UK and I’m working and/or have a job.  More on that in a minute.

It’s been a long time between posts and a lot has happened so to try and get the story out in a succinct manner I’ll post some questions to myself.  I’ll then likely follow up with more detail in subsequent posts if people are interested.  So here goes...

Did Cyprus not agree with you and Mrs RIT?

We didn’t leave Cyprus because of Cyprus.  In fact quite the opposite.  Cyprus was absolutely brilliant and we saw it at its worst as we were there during one of the wettest / coldest winters on record.

There was so much relatively unspoilt nature with the picture above hopefully being a nice example of linking human occupation with nature.  Just around the corner from there is where turtles actually nest.  It was a walkers / hikers / cyclists paradise.  So much so that I managed to lose 10kg in relatively quick time.

The people and the way of doing things were also incredible.  On various forums I’d heard the term for Cyprus being siga siga which means slowly slowly.  I didn’t find that at all.  What I found was that things were done differently but in a good way.  For example to buy car insurance I went to the insurance company and sat across from the person who was going to sell it to me.  Over a good coffee and with no pressure the forms were duly completed and a quote was generated.  Hands were shaken, the forms were signed and I was done.  All over in about 30 minutes.  Give me that over automated menus that can’t understand me and a call centre if I press the right buttons correctly any day.