RIT Reader EBook Plug – Slow and Steady Steps from Debt to Wealth

A Retirement Investment Reader, John Edwards, yesterday kindly sent me a copy of his EBook Slow & Steady Steps from Debt to Wealth. It’s a very easy read and at a little over 7,000 words can be devoured for the first time with a cup of tea. That said, doing something with the common sense approach will certainly take a little more time... I’ve been on a similar journey to the one described and I’m now 5 years in and still learning.

I’m plugging it because there is lot of commonality with the message I try and promote on Retirement Investing Today. The difference is that I fear that I sometimes over complicate the problem where John lays out a series of steps that go from debt (this site doesn’t really cover debt and instead starts with someone possessing £0) to a healthy investment portfolio.

Let’s look briefly at each of the Chapters in turn:
1. Avoid Debt. One sentence rams it home – “The first step to financial freedom is to avoid debt in the first place”. I couldn’t agree more.

2. Over Consumption. We are encouraged to answer two questions – “Do I really need this?” and “Do I really want this?” I probably push this concept more than most people could tolerate but it’s one of the ways I can regularly save 60% of my earnings.

3. Start Saving. This was the starting point in my KISS Investing for Retirement post.

4. Pension. “I had a variety of pension pots ... none were performing all that well and one reason for this was the high charges being levied every year.” I also believe that it is critical to minimise those charges and have it as one of the fundamentals of my Low Charge Strategy. I don’t understand how people can be so blasé and just accept say a 1% charge without question. Given that a reasonably balanced portfolio might only on average return 4% after inflation you could be giving 25% of your return away. John also makes another good point with the statement people “often don’t fully appreciate how much they need to save”. My belief is that you are not going to reach true financial independence early by saving 10% a year.

Allocation to UK Equities

My Low Charge Investment Strategy requires a strategic nominal asset allocation to UK Equities of 20% of total portfolio value.  I then add my tactical asset allocation spin which given the current valuation of the FTSE100 requires that allocation be lowered slightly to 19.6%.  My current allocation is spot on 19.6% with allocations to all asset classes shown in the chart below.

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Over the past couple of years I have been able to move my UK Equities investments into a position where I feel they are now relatively low expense and tax efficient.  Let’s look in a little more detail.

My UK Equities are now divided into two simple pots.  The first pot is 16.4% of the allocation.  This is all located within the Vanguard FTSE UK Equity Index Fund which is located within a Sippdeal SIPP wrapper.  I chose the Vanguard fund as it has good tracking of the performance of the FTSE All Share Index, which contains household names like HSBC, BP, Vodafone, Shell, GlaxoSmithKline, British American Tobacco, Diageo, BHP and Rio Tinto, while having a Total Expense Ratio (TER) of only 0.15%.  Note that on initial purchase you are subjected to a Preset Dilution Levy (SDRT) of 0.5% however this was not a major factor for me as I intend to hold the majority of this fund forever meaning this charge will become insignificant. 

The Sippdeal SIPP wrapper also subjects me to some extra expenses which are online dealing fees of £9.95 per purchase and a quarterly custody charge of £12.50, which covers all the funds within my Sippdeal pension.  For me Sippdeal was the cheapest pension wrapper for the asset types held with these fixed charges, as opposed to a percentage of asset value, helping as my SIPP pot is now relatively large.  Vanguard plus the Sippdeal wrapper have helped me reduce my costs significantly as the funds came from two old work Group Personal Pensions (GPP) which were both held with Aviva and were incurring high expenses of 0.85% and 1%.

The RIT High Yield Portfolio (HYP) – Adding VOD plus the New Contenders

The full detail on what a High Yield Portfolio (HYP) is, why I decided to build one and full detail on my initial selection can be found in my original post on the topic.  This post builds on that original HYP post and so is important reading for any newcomers to Retirement Investing Today.

Wealth Warning: As I said in the original post I don’t know if long term this HYP strategy will work.  There is every chance that a simple diversified portfolio of lowest expense index trackers that are invested tax effectively will in the long term outperform this strategy.  Only time will tell.

In November 2011 I added my first 3 HYP companies.  These were AstraZeneca (LSE ticker: AZN), Sainsbury’s (LSE ticker: SBRY) and SSE (LSE ticker: SSE).  I’m writing this post as late last week I added my 4th company, Vodafone (LSE ticker: VOD), for which I had to pay £1.552 per share.  This purchase was funded by moving 0.8% of my Low Charge Investment Portfolio assets from cash.  It takes the HYP portion of my Portfolio to 3.2% of total assets.

It’s been over a year between purchases.  The HYP is counted as part of the UK Equities allocation within my non-emotional mechanical investment strategy.  With the majority of that currently being FTSE All Share Trackers, which have risen nicely over that period, I have been given no opportunity to buy with either new money or rebalancing.

Reviewing the High Yield Portfolio

In my original post I stated that “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.”  The purchase of Vodafone means I am still a long way from a mature HYP with a need to purchase shares in a further 11 to 16 companies.  All 4 companies to date are from different industries and are from the FTSE100.  Year on year all have increased their dividends at or above the rate of inflation – SBRY by 6.6%, AZN by 9.1% (once converted from $’s to £’s), SSE by 6.8% and VOD by 7.0%.

With the first priority met my second priority was “to maximise the capital growth ... of the portfolio” which will “ideally be an outperformance when compared to the UK market.”  To account for purchases at different times, which I need to do if I am to benchmark myself against the FTSE100, I unitise my HYP.  Since purchase my HYP units have risen by 12.3% and calendar year to date they are up 8.1%.  This compares favourably against the FTSE100 which with a Price of 5,951 at the time of writing is up 12.0% and 6.8% respectively. 

All have provided a dividend yield above that of the FTSE100’s current 3.69%.

UK House Value vs UK House Affordability – December 2012

This is the monthly UK House Affordability update which is the metric that I believe is the key driver of UK House Prices.  It is also the update for UK House Value which is the metric I am using to assess when it is time to buy a UK home. 

Let’s first update the key data being used to calculate both UK House Value and UK House Affordability:

• UK Nominal House Prices.  In recent posts we have been comparing the different UK House Price Indices however for this analysis we will stay with the Nationwide Historical House Price dataset.  November 2012 house prices were reported as £163,853.  Month on month that is a fall of £300 (-0.2%).  Year on year sees a decrease of £1,945 (-1.2%).
• 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 £300 decrease stays at £300 as we say no inflation in the last month however year on year that £1,945 decrease grows to £6,879 (-4.2%).  In real terms prices are now back to those around 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.  October 2012 sees earnings at £471.  Month on month that is an increase of precisely £0.  Year on year the increase is £7 (1.5%).  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).  November 2012 sees this reach 4.33% which month on month is a tiny uptick of 0.01% and year on year is an increase of 0.22%.  So while the Bank of England holds the Bank Rate at 0.5% out in the real world we are seeing mortgages creeping up at glacial speeds. 

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – December 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 mid market Price is currently 5,960 which is a gain of 1.7% on the 01 November 2012 Price of 5,862 and 8.6% above the 01 December 2011 Price of 5,489.
• The FTSE 100 Dividend Yield is currently 3.73% which is flat against the 01 November 2012 yield of 3.71%.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 11.46.
• 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 520.  They are up 1.2% month on month and down 7.1% year on year.  The Earnings Yield is therefore 8.7%.

The first chart below provides a historic view of the Real (CPI adjusted) FTSE 100 Price and the Real FTSE 100 P/E.  The second chart provides a historic view of the Real Earnings along with a rolling Real 10 Year Earnings Average for the FTSE 100.

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Save Hard, Invest Wisely, Retire Early

In some of my posts I feel like I’m only one step away from preaching. This is not what the site is all about. Instead I’m trying to sow some seeds which give enough information to encourage readers to go off, do their own research and make some of their own decisions away from the so many vested interests that want your money today. Today I’d like to run a case study on myself to see if I’m practicing what I “preach” and whether the seeds I’ve sown are actually growing.

I’m going to break this down into 3 sections which broadly cover everything that this site is about – Save Hard, Invest Wisely, Retire Early. Before we go there let us first set the scene. I graduate in 1995 with precisely £0 worth of assets. I start living my life like most others – get a job, start consuming, get myself into debt with a car, then get myself into debt with a house and finally save a few percent with the scraps that are leftover both personally and through an employer defined contribution pension. 2007 comes around quickly and I have one of those light bulb moments. While preparing some financial documents I actually calculate how much I’ve earned over those 12 years and looked at how much I had to show for it. It was a scary moment where I realised something had to change.

Not realising I was probably no different to 99% of the population I immediately assumed I was well behind the curve. I thought if I was to catch up I needed some professional help and so I visited a few Independent Financial Advisor’s (IFA) with a view to picking one to help me. After the meetings I sat down and thought a little about what I’d just been through. It all sounded so impressive and clever but working through each point in turn made me feel that they were deliberately trying to make it sound complicated. It was also at about the same time that I saw the book Where Are the Customers' Yachts? I made a decision. I was going to take responsibility for my own actions and control my own destiny. If it worked I could proudly say I’d done it and if it didn’t then I only had myself to blame. 2008 was then the year where I developed the strategy that you largely see me using today. I made some mistakes but it was largely positive. Then in 2009 this site was launched and I’ve been staying the course ever since. So what is that course? Let’s visit those 6 words again - Save Hard, Invest Wisely, Retire Early.

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

This is 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.

As usual before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,417 which is a rise of 1.6% on last month’s Price of 1,395 and 14.0% above this time last year’s monthly Price of 1,243.
• The S&P 500 Dividend Yield is currently 2.1%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $87.77 for an Earnings Yield of 6.2%.
• The S&P 500 P/E Ratio is currently 16.1 which is down from last month’s 16.0.

The first chart below provides a historic view of the Real (inflation adjusted) S&P 500 Price and the S&P 500 P/E.  The second chart below provides a historic view of the Real (after inflation) Earnings and Real (after inflation) Dividends for the S&P 500.

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Comparing UK House Prices – December 2012 Update

There are a multitude of UK House Price Indices out there.  The last time we looked at the more common ones was here.  Following some more data analysis work this month I feel as though we now have enough data and understanding to make this a regular feature.  The best starting point is to firstly move away from the popular indices and get a visual look at the raw data as a picture tells a thousand words.  The data is the actual sales of property in England and Wales for the month of October 2012 and comes courtesy of the Land Registry.  I plot this data (shown in blue) as a histogram below.  To help you see the changes that have occurred over the last month I also show last month’s data in red.  

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The distortions caused by the government in the form of Stamp Duty Land Tax (SDLT) thresholds continue to be clearly visible at £125,000, £250,000 and £500,000.  The other key observation is that the number of registered sales has risen from 64,173 in September to 74,934 in October.  Note that the right hand bar is all house sales that are of a value greater than £600,000.

Australian Property Price to Income Ratios*

Looking at real estate price to income ratios can give a good indicator about whether or not now is a good time to buy property in Australia. Although housing prices have remained high throughout the past decade despite a global economic downturn, have incomes followed suit? In looking at prices from 2010-2011, home prices fell slightly while incomes have risen. According to a 2011 press release from realestate.com.au, mortgage payments comprised 34% of average household income in 2010, but this number declined to 32% in 2011. This has made housing slightly more affordable across the nation.

Fluctuations in Price to Earnings Ratios

Interest rates play a role in the affordability of Australian housing, and can experience a variety of ups and downs over the span of a 30-year loan. This is important to remember when you're deciding whether or not to invest. The ratio of house prices to household earnings has increased 2.5 times since 1970, with the biggest increase seen in the early 2000s. The ratio doubled during that period, even with more houses having two income earners. According to figures published by The Motley Fool, the average first home loan has gone up from $75,000 20 years ago to nearly $300,000 today. This doesn't match the corresponding rise in income. The average first home loan was 3.1 times the average income in 1994, but it is now 5.6 times the average household earnings, putting first-time homebuyers further into debt.

Average house prices in many Australian cities have continued to increase over the past several years. According to a survey conducted by Demographia, Sydney is the third-least affordable city in the world when price to earnings ratios are taken into account. Figures from the Australian Bureau of Statistics show that house prices rose in 5 out of 8 of Australia's major cities between September 2011 and September 2012. Prices climbed by 8.2% in Darwin and 4.4% in Perth, while they fell 1.1% in Adelaide. This indicates that now may be a good time to find property in Adelaide with Homesales or other listings services, while it may be better to hold off in Perth.

Gold Priced in British Pounds (GBP or £’s) – December 2012 Update

This is the regular gold priced in Pound Sterling update.  The last update was in August 2012 and can be found here.

The chart below shows the Nominal Monthly Gold Price since 1979.  The key Nominal Gold metrics are:

• The Nominal Gold Price is currently £1,051.97 which is 2.4% below the November 2012 Price of £1,078.37.
• Year on Year Nominal Gold is 0.3% below the December 2012 Price of £1,055.00. 

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So over the past year in nominal terms gold has gone precisely nowhere.  This demonstrates nicely one of the negatives of holding gold compared to equities.  If equities go nowhere price wise for a year you can still sleep easy knowing your equities (ie real world companies) are (hopefully) making profits.  Some of those profits are then (hopefully) spun off as dividends, particularly if your allocation to equities is HYP based, which gold doesn’t give you.  That said I’m not changing my strategy and will continue to hold gold because of its diversification benefits.

Stop acting like a victim

A couple of weeks ago I posted the article KISS Investing for Retirement.  This looked at what I believe was a simple strategy to achieve financial independence.  The first point, which was simply Start, really rang true this week when I read the BBC article Pension Planning ‘Inadequate’ Among Over 50’s.  The article itself wasn’t the kicker for me as it was essentially just an advertisement from the National Association of Pension Funds.  The bit that made me think was reading some of the comments.

If people are to Start down the road towards achieving financial independence then they must first stop acting like victims and must stop blaming others.  Instead they need to start taking responsibility for their own actions.  Of course it’s easy to play the victim because then you don’t have to change your ways and can keep your head buried in the sand.  Let’s briefly look at a couple of the 378 comments that this article received.  (Full disclosure:  I only read the first page of comments by which time I was shouting take some responsibility at my laptop screen so loudly I felt it prudent to stop reading)