Thursday 14 February 2013

Ignore Price Fluctuation - Focus on Yield

I’d like to again welcome back John Hulton.  John claims to not be a financial guru, stockbroker or financial journalist, but just an average bloke who has managed to find a way through the minefields of personal finance and develop a system that works for him and, which could be helpful for other people.  He has already retired from full time work which puts him at the end game of what this Site is about – Save Hard, Invest Wisely, Retire Early.  So while John is not a financial expert his approach has given him what many of us are chasing.  I hope you again enjoy his thoughts.

The FTSE 100 got off to a flying start in 2013, the best January rise since 1989!  The markets rose above 6,300, a price last seen prior to the start of the sovereign debt crisis in 2008.

How long this surge will continue nobody can know.  Is it a temporary spike or is it a sign that the economies around the world are starting to see signs of real recovery?  There will be much speculation in the media and on the discussion boards.

At one time, earlier in my investing career, I would probably have been thinking about selling some of the shares which had risen strongly.  I would be trying to second-guess the market - there is no justification for this rise - all the problems of systemic debt in the major industrialised countries have not suddenly disappeared - the markets will soon fall back towards 5,000 and I will keep my powder dry and pick up a few bargains later in the year.

I say ‘at one time’ but I’m sure there’s still a bit of me that thinks the same way now.  However, the emotional factors which underlie that process are basically twofold - fear and greed.  Fear the markets may suddenly swing down as quickly as they have risen and I will lose all the double digit gains on my portfolio - and the greed of selling high and buying low during the next downturn.  These two bedfellows are always present but need to be understood and neutralised if you wish to invest for the long term.

After many years as a private investor, I am gradually learning to regard these market swings and share price fluctuations with an attitude of mildly detached interest.  I really don’t get over-excited when markets rise and equally, I don’t become wracked with fear when markets are falling.  As an income investor, it will probably suit me when markets are in decline as it will throw up many more opportunities for a decent yield.

On a day to day basis, most investors will probably be following share prices because this is where all the action is.  Profits are made on the markets by buying at a low price and selling at a high price, right?  Wrong!  Over the longer term, up to 90% of the total return on your portfolio will be derived from dividends - growth of dividends and especially the reinvesting of dividends.

Tuesday 12 February 2013

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – February 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 6,338 which is a gain of 5.2% on the 01 January 2013 Price of 6,027 and 9.5% above the 01 February 2012 Price of 5,791.
  • The FTSE 100 Dividend Yield is currently 3.47% which is down against the 01 January 2013 yield of 3.64%.
  • The FTSE 100 Price to Earnings (P/E) Ratio is currently 12.96.  
  • 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 489.  They are down 4.6% month on month and down 11.7% year on year.  The Earnings Yield is therefore 7.7%.

So we find ourselves in an interesting situation.  Nominal Earnings are falling and have been consistently since October 2011’s Earnings of 628 yet Prices are rising.

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.

Chart of the FTSE100 Cyclically Adjusted PE, FTSE100 PE and Real FTSE100
Click to enlarge

Chart of the Real FTSE100 Earnings and Real FTSE100 Dividends
Click to enlarge

Sunday 10 February 2013

UK, US, Australian + the PIGS Government 10 Year Government Bond Yields – February 2012 update

10 Year UK, US and Australian Government Bond Yields 
Click to enlarge

 Click to enlarge

I haven’t published these datasets for 20 months now because as far as the UK is concerned it’s really been status quo.  The UK Government have continued to run a budget deficit that isn’t sustainable.  There isn’t any of the promised austerity because government spending is actually rising.  This combined has resulted in the UK National Debt reaching around £1.13 trillion today.  That’s £18,021 of Debt for every man, woman and child in the UK.  Less than half of the population work in the UK, 29.17 million people working against a population of 62.64 million, so comparing the debt to this group means a debt of £38,699 for every worker. 

Government forecasts project the debt continuing to grow quickly with it reaching £1.5 trillion by 2016.  Meanwhile in parallel the Bank of England has “bought” £375 billion (33%) of that debt through the Quantitative Easing (QE) programme.  This has had the effect of forcing UK bond yields down to historic lows when under the scenario described in the first paragraph yields should have risen which would have forced the government to take action rather than masking the problem.  Now it’s important to remember that for bonds already in circulation that as yields fall prices rise and that’s what we’ve been seeing happening for a number of years now.  It is however important to remember that the opposite can also happen.  Should that happen not only would the cost of borrowing for the Government rise but also other debts like mortgages would also rise.  That would reduce affordability and would in my opinion reduce house prices (and other asset prices) helping the value argument here.  Instead of asset price deflation we’re seeing just about every asset type either holding or increasing in nominal value including housing, shares and hard assets like gold which to me seems to be making the problem we have even worse.  

I’m therefore watching government debt yields closely and what its showing is that since August 2012 those yields have been rising despite the Bank of England announcing another £50 billion of QE in July 2012.  This is not showing in mortgage rates yet because the Treasury and Bank of England are distorting the market independently there with the Funding for Lending Scheme. 

Saturday 9 February 2013

UK Savings Account Interest Rates – February 2013 Update

The UK Treasury and Bank of England’s £80 billion (or £1,277 for every man, woman and child in the UK) Funding for Lending Scheme continues to hurt savers.  The banks currently have no need to borrow money from us savers when they can go directly to the Bank of England for a nice low rate of 0.25% per annum providing they meet a few T&C’s.

Money Saving Expert now tells us that if you are in the market for an easy access savings account you can get an interest rate of 2% AER with Derbyshire.  Forget to switch after 31 March 2014 to the next bank or building society offering the highest interest rate at that time and that becomes 0.5%.  Last month you could get 2.35% on accounts offering a bonus for a fixed period of time and back in June 2012 you could get 3.2% AER variable with Santander reducing to 0.5% after 12 months.  So in less than 12 months the best rates being paid have fallen by more than a third.

Choose to go for a no nonsense easy access savings account (always my preferred option) that available interest rate is also 2% today from Virgin.  Last month the best buy was 2.3% AER with West Bromwich Building Society.  Back in June 2012 the best rate was 2.75% AER variable with Aldermore.

I must note that I’ve left the Santander 123 current account out of the analysis even though it’s currently paying 3% AER.  I have no time for this sort of account.  To me it’s made deliberately complicated and I don’t believe the average punter would have a hope of calculating whether this account is the best for them.  It pays the 3% only on balances between £3,000 and £20,000, requires a minimum deposit of £500 per  month, takes a £2 per month fee (remember you’ll pay tax on the 3% but won’t be able to claim against the £2) plus in the circles I move I hear of the poor customer service that Santander offers.  I can’t help but feel somewhere in the small print I’m bound to lose out against a simple no nonsense account.  If somebody is having success with this account please do comment below as I’m sure many readers (I know I certainly would) would like to know if you are seeing success.

Wednesday 6 February 2013

Simplifying the Complex Pension Problem

 Ask anybody at a party or family gathering about personal Pensions, whether that be a now all to rare Defined Benefit Scheme or a Defined Contribution Scheme (such as a Stakeholder Pension, Group Personal Pension, the new National Employment Savings Trust or (NEST) Pension or the ultimate in DIY Pension Provision, a Self Invested Personal Pension (SIPP)) and it’s likely they’ll glaze over.  From my own experiences I feel this occurs for three main reasons – upbringing or culture, mistrust and lack of knowledge.  Let’s look at each of these in turn.

Upbringing or culture

The vast majority or people learn from a young age to spend and save what’s left.  That philosophy is then continually reinforced through a never ending bombardment of advertising which not only encourages us to spend what we earn today but also that it’s ok to spend what you haven’t yet earned today.  It’s a fairly old post now but if only people were taught to pay themselves first.  I’m the first to admit that I fell for it until I was 35 years of age.  The problem is who has an incentive to educate people about this?  The Government / Bank of England don’t, particularly now, as we’re in a spiral where they need us savers to spend.  They are actually trying to do the opposite and educate us to spend by doing all they can to erode our savings through forcing negative real interest rates upon us.  The Corporations of the world certainly don’t want you to gain this knowledge as you wouldn’t be then contributing to revenue today.  The only logical place I can see it coming from is family, friends or in very limited cases somebody stumbling across a site like this and believing what I write.  Unfortunately though it’s a spiral because if family and friends don’t know about it how can they pass that knowledge across.


The simple mention of two words – Equitable Life – is a good place to start.  This however is actually a symptom not the cause of the Mistrust because most Pensions don’t actually operate like this.  The actual cause is the vast majority of the Financial Services sector (which includes the FSA) who fail to educate with the full story but instead only present the side that helps them.  People are in my opinion right to go in to a Pensions transaction sceptical and mistrusting.  Let’s look at a simple example.  The website of most Pension provider’s will probably say something like the government is trying to help us save for our retirement.  If you’re a basic rate tax payer then for every £8 you invest the government will top up your pension with a further £2.  They’ll probably then go on to say if you’re a higher rate taxpayer you may be able to claim even further tax relief.  The bit they always seem to forget to inform us about is that Pensions, excluding the 25% Tax Free Lump Sum (TFLS), are actually just a tax deferral scheme.  You aren’t taxed on the way in but you are taxed on the way out.  If you’re a 40% taxpayer and plan to be a 20% taxpayer in Retirement or if your employer makes a contribution if you do then it’s probably worth it but what about the person who’s a 20% tax payer now, will be a 20% tax payer in retirement and doesn’t take advantage of the TFLS (after all it’s not compulsory and would require some knowledge to understand).  Is it worth it for him or should he just save in an ISA?.

I also feel they seem to make Pension products sound deliberately complicated to ensure that you use them instead of going DIY.  This then also enables them to maximise how much they skim for themselves without you immediately noticing.  How many people out there have and are paying large expenses today and will then find in 30 years that their Pension has delivered nothing like what they thought it would.  It’s short term thinking and self defeating but unfortunately a lot of human nature is based around greed.  Take a fair fee for helping somebody, which I actually believe some providers are doing today, then in 30 years that somebody has seen some success and so they make a recommendation to their children.  Next minute the snowball is rolling and everyone wants a pension.