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.