Sunday 30 September 2012

The Retirement Investing Today Low Charge Strategy and Portfolio

This blog is fast approaching its third anniversary.  In my first naive post I laid out in very brief terms “what” some of my investing strategy was about having developed it from the decision to go DIY in 2007.  This post also briefly described “why” I was taking the road I had chosen.  Soon after I laid out in detail the construction of what I called My Low Charge Investment Portfolio.  To this day I have continued to improve on the original portfolio methodology ever so slightly while holding true to the fundamentals of the strategy.  Since October 2009 that strategy and portfolio has seen my net worth increase by 73% in nominal terms.  Additionally, since October 2007 my net worth has increased by 306%.

Since that first post I have made 239 posts covering many topics.  If you’re interested some of the latest or most popular can be found in the sidebar.  Every post can also be found in the blog archive also found in the side bar.  While it’s all there as a fully accountable record I’m going to use today’s post to bring a number of my key fundamentals which cover strategy, portfolio and portfolio rebalancing into one single aide memoir.

Retirement Investing Today Strategy

The strategy is set around a decision to retire as early as possible.  It’s important to note that retirement for me does not mean a life of leisure.  It simply means that work becomes optional.  I may choose to stay in my current career, may start a new career which could involve voluntary work or it could be a life of leisure.  I don’t intend to make that decision today as anything can happen between now and retirement.  At the time of writing this post my portfolio models show my early retirement window appearing in around 3.5 years when I will be in my early 40’s.

Thursday 27 September 2012

A win win for all

I started Retirement Investing Today with a vision of both holding myself accountable and developing a small community of like minded individuals.  This has been achieved however in the last couple of months as readership has risen by some 60% from the previous peak it has brought with it a lot of new Comments from readers.  These are from people who both share experiences along similar lines to the road that I am travelling and importantly also bring alternative views for consideration.  These Comments are clearly bringing great benefits including:
  • I get to read about different ideas and thoughts, which then encourages me to read and understand more, which then helps me with my own strategy.  If that strategy works then I can share it with you and even if it doesn’t I can share that also.
  • You get to read about ideas and thoughts which hopefully encourage you to do more research on various topics resulting in new learning.
  • By getting differing opinions we all avoid confirmation bias.
  • One that I never even considered is that we are even starting to get some debate between readers within the comments which brings even more knowledge to the table.

Sunday 23 September 2012

The Dow has not reached 5 year highs (Severe Real S&P500 Bear Markets) – September 2012

I admit that over the past few weeks the US stock market has been a little bullish and has put on some good short term gains.  I however have not been excited by what I have been seeing.  The press however seem to be exactly the opposite.  We’ve seen headlines like Dow Closes at 5-year high, Market milestone: Stocks return to late 2007 level and even the US version of The Motley Fool telling us How the Dow reached a 5-year high.

It really is unfortunate that we live in an era where not even the press feel the need to report facts and can get away with such sloppy journalism.  Firstly, in nominal terms the Dow Jones Industrial Average (DJIA) has not reached a 5 year high.  According to Google Finance within the last 5 years in nominal terms the best DJIA close we have seen has been 14,164 on the 09 October 2007.  In comparison in this recent bull market the best close we have seen has been 13,596 on the 20 September 2012.  I make that a gap of 4.0% so not what I would call a high.  The full 5 year story can be seen in my first chart which comes from Yahoo Finance.

 5 Year Nominal DJIA Chart (Click to enlarge)

Thursday 20 September 2012

UK House Value vs UK House Affordability – September 2012

Over the past few months I have been exploring what actually drives UK House Prices.  In developing some mechanical non-emotional datasets I’ve come to the conclusion that the driver is actually UK House Affordability.  That said while Affordability drives the housing market I personally only want to buy a house when it is at a sensible Valuation.  Therefore from here on in I intend to monthly monitor two key UK House metrics:
  • I will monitor UK House Affordability which will hopefully give me some insight into whether house prices will be increasing or decreasing in the foreseeable future.
  • As I remain in rented accommodation and intend to buy when prices are fairly valued I will also monitor UK House Value.  This will hopefully give me a sensible buy point to ensure I don’t lose money on the purchase.

Before we look at the metrics let’s first look at the key pieces of data I am using to assess both Value and Affordability:
  • UK Nominal House Prices.  I have consistently been using the Nationwide Historical House Price dataset for a lot of previous analysis and so will stick with it.  August 2012 house prices were reported as £164,729.  Month on month that is an increase of £339 (0.21%).  Year on year sees a decrease of £1,185 (-0.72%).
  • UK Real House Prices.  If we account for the devaluation of the £ through inflation (the Retail Prices Index) we see a very different story.  Month on month that nominal increase turns into a decrease of £263 (-0.16%) and year on year that decrease grows to a larger £6,031 (-3.66%).  In real terms prices are now back to those seen in March 2003. 
  • 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.  July 2012 see earnings at £471.  Month on month that is an increase of exactly £0.  Year on year the picture is not much better with an increase of £6 (1.27%).  With inflation (the Retail Prices Index) running at 3.2% over the same yearly period 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).  August 2012 saw this reach 4.26% which month on month is an increase of 0.02% and year on year is an increase of 0.16%.  So while the Bank of England holds the Bank Rate at 0.5% out in the real world we are seeing mortgages start to cost more, even if it is happening very slowly. 

Sunday 16 September 2012

It’s Just a Cup of Coffee – More on Compound Interest

To enable me to regularly save around 60% of my earnings I follow three philosophies within my life. 

Firstly live well within my means.  A simple example that has a big impact is the decision to currently rent for a number of reasons including this and this.  Given that my rental is not my forever home I make some compromises and live in a property that is significantly more modest than what I can afford.  This decision then compounds as by choosing to live in a smaller property heating, lighting and Council Tax bills are also a fraction of what they would be were I to have that larger property.  This adds up to significant savings which are then invested.

Secondly I have opted out of consumerism, do not value image and am not swayed by advertising.  In fact I find that I no longer even notice advertising.  Instead I buy only what I need and when buying I spend the minimum that will give me the quality I desire.  This means I have not purchased an Apple iPad as my old laptop is more than sufficient and still working well even though the battery no longer holds charge.  It also means I do not have an expensive iPhone on an expensive monthly contract as I have decided that I don’t need instant internet gratification at any time of the day or night.  Instead I choose to access the internet as much as I like for a lot less than £10 per month whenever I am at home.  It also means that when I go shopping I buy the cheapest grocery items that will meet my quality needs.  If I want to cook myself a Full English Breakfast on a Sunday morning I’m not too proud to use Tesco Everyday Value Baked Beans at £0.26 for a 420g can versus the nicely marketed Heinz Baked Beans at £0.70 for a slightly smaller 415g can.  All of that frees up yet more cash.

Wednesday 12 September 2012

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – September 2012 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 5,782 which is a 1.2% above the 01 August 2012 Price of 5,712 and 6.7% above the 01 September 2011 Price of 5,419.
  • The FTSE 100 Dividend Yield is currently 3.74% which is a slight rise from the 01 August 2012 yield of 3.71%.
  • The FTSE 100 Price to Earnings (P/E) Ratio is currently 11.46 which is up 6.2% since the 01 August 2012 and 32.5% since the 01 September 2011.
  • 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 504.  Earnings are continuing to fall while Prices continue to rise.  They are down 4.7% month on month and down 19.5% year on year.

Sunday 9 September 2012

The Miracle of Compound Interest

The saying goes that “money doesn’t buy happiness”.  I firmly agree with this however I think the saying is also a little misleading and should be extended to say “money doesn’t buy you happiness but without a certain amount it’s going to be very difficult to be happy”.  Thankfully, I am not in the situation where I am heavily indebted or worse am heavily indebted and require the booming pay day loan industry to get by.  I can only imagine the pressure and stress that a life like that would put on both an individual and their family.

It is for this reason that I believe a basic level of personal finance should be taught at school.  What good is English, Mathematics, Sciences and the Arts if the earnings potential that those skills bring cannot be harnessed and maximised.  Within the personal finance module it would be compulsory to teach the miracle of Compound Interest.  I can’t help but feel that we would have less indebted people today in the UK if only more people understood how Compound Interest worked.  The sad thing also is that at its most basic form Compound Interest is such a simple concept.  It is nothing more than if you have an initial balance of money which has interest added to that balance, then provided you don’t withdraw that interest, from that moment on that added interest also earns interest.  It is nothing more and nothing less than that.

Thursday 6 September 2012

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – September 2012 Update

Stock markets today provided big rises after Mario Draghi announced that he plans to buy up the debt of his favourite PIGS.  The German DAX rose 2.9%, France’s CAC 40 rose 3.1%, the UK’s FTSE 100 was up 2.1% and the Spanish IBEX was up a large 4.9%.  Positive market responses were not limited to Europe with the US S&P 500 also up 1.9% as I write this post. 

Given these market moves let’s look at the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

Before we look at the CAPE let us first look at other key S&P 500 metrics:
  • The S&P 500 Price is currently 1,430 which is 1.9% above last month’s Price of 1,403 and 21.8% above this time last year’s Price of 1,174.
  • The S&P 500 Dividend Yield is currently 1.98%.
  • The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $88.59 for an Earnings Yield of 6.2%.
  • The S&P 500 P/E Ratio is currently 16.1 which is up from last month’s 15.9.

Saturday 1 September 2012

The Retirement Investing Today High Yield Portfolio (HYP)

In its purest form a High Yield Portfolio (HYP) is a strategy designed to develop an Income Stream, which then provides an alternative to purchasing an Annuity with your Pension Fund or other investments.  The first priority is to amass 15-20 shares (minimise company risk), from different industries (minimise sector risk), from the FTSE 100 (minimise stability risk) that you believe will spin off dividends that rise at or above the rate of inflation.  If you achieve this then your purchasing power is maintained or increased.

If you achieve the first priority then you can also look to target the second priority which is to maximise the capital growth (what so many fund managers chase) of the portfolio.  This will ideally be an outperformance when compared to the UK market.  Although I think that if one can achieve the first priority there is every chance you will get the necessary amount of the second to meet your Income Stream objectives.