Tuesday 29 December 2015

Giving my bonus to those better able to spend it

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

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

Thursday 24 December 2015

Happy Christmas to all readers

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

Saturday 19 December 2015

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

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

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

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

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

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

Saturday 12 December 2015

US vs UK vs Aus Equity Valuations

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

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

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

Now the UK FTSE100:
FTSE100 Price Performance
Click to enlarge, FTSE100 Price Performance, Source: Yahoo Finance

And finally the Australian ASX200:
ASX200 Price Performance
Click to enlarge, ASX200 Price Performance, Source: Yahoo Finance

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

Saturday 5 December 2015

Monthly Financial Decisions

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

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

RIT November 2015 Spending
Click to enlarge, RIT November 2015 Spending

My wealth is currently spread as follows:

RIT Low Charge Investment Portfolio
Click to enlarge, RIT Low Charge Investment Portfolio

My Wealth spreadsheet tells me that against plan my Equities are positioned as follows:
  • International Equities are 20.4% underweight
  • UK Equities are 14.6% underweight
  • Emerging Markets are 10.2% underweight; and
  • Australian Equities are well overweight as in hindsight this was a mistake that I now can’t correct so will just let sit and spin off dividends ‘forever’.

Saturday 28 November 2015

Consumer for a day

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

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

Source: Wikipedia.org

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

Saturday 14 November 2015

Raise the Private Pension Access Age & My Global Exposure

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

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

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

As of this morning my Asset Allocation looks like this:

Retirement Investing Today Low Charge Investment Portfolio
Click to enlarge, Retirement Investing Today Low Charge Investment Portfolio

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

Saturday 7 November 2015

Further UK Equity Diversification

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

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

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

Saturday 31 October 2015

FIRE takes Determination

So that’s October 2015 pretty much done.  Another month where spending has been kept firmly in check with spending excluding rent and work costs weighing in at a hefty £529.

RIT October 2015 Spending
Click to enlarge, RIT October 2015 Spending

This week has been a killer work wise.  One where I'm not even brave enough to add up the hours worked and energy expended for fear of even embarrassing myself.  This week has also reminded me of one of the key unspoken elements required to FIRE (financially independence retired early) – DETERMINATION.  Let me explain.  Most of the themes that I'm using to FIRE are quite formulistic – Earn more, Live below your means to spend less, Invest tax efficiently, Minimise investment expenses, A diversified investment portfolio, Rebalance etc.  The one formula that I'm not using is that of an easy get rich quick scheme.  Instead my path requires commitment and dedication every day, every week, every month and every year until FIRE is reached.  For me that’s likely to be a bit less than 10 years.  For others it could of course be more or less time but still a relatively short time compared to those who intend to retire at State Pension Age.