A Retirement Investing Today Review of Quarter 1 2013

For all UK based readers a Happy New Financial Year to you.  I wasn't sure if I should have put the Happy in front because for me a new financial year carries both a positives and a negatives.  The positive is that a new ISA year is upon us meaning I can again begin working hard to fill my full Stocks and Shares ISA allowance which for this year is £11,520.  The negative is that HM Revenue & Customs (HMRC) will soon send me a request to complete a tax return where as always I will be sent a bill because of my now considerable investment sum.  This however is not as bad as it could be as I continue to push hard to minimise taxes paid through tax avoidance schemes such as ISA’s, Pensions and NS&I Index Linked Savings Certificates (ILSC’s).  Over time continual energy to take advantage of these when possible (remember ISA’s are an annual use it or lose it allowance, NS&I ILSC’s come and go on an ad hoc basis and for this financial year the pension contribution limit is for me a very large lower of 100% of earnings or £50,000 which is called the annual allowance) really add up and mean this year I will only be taxed on around one third of my total investment portfolio.  Therefore on the whole I’ll call it a Happy New Financial Year.

In the past I have only tended to publish my own personal financial position on an annual basis even though I track value weekly and performance monthly.  I now intend to publish my own situation on a quarterly basis for 2 reasons:

• My 2012 annual review showed that in the metrics that I measure myself against I had one conceded pass and one fail.  By publishing more regularly I hope that it will force me to hold myself more accountable to my objectives plus also allow more time for recovery should I fall off the rails.
• The 2012 annual review sparked some good discussion so was clearly worthwhile to both myself and some readers. 

My own personal situation follows everything I talk about on this Site to the letter.  The site is all about Save Hard, Invest Wisely, Retire Early so as with the 2012 Review let’s continue to use those 6 words as a theme.

SAVE HARD

I am now into a fifth year of aiming to save 60% of my earnings, which I define as my gross (ie before tax) earnings plus any employee pension contributions.  This is a very tough target particularly in the current age where we have increased taxes and prices going up due to unrelenting inflation while at the same time my salary is not moving in nominal terms.  My company is currently at the point of annual “salary reviews” but even though I have worked hard over the past year and delivered a lot I expect the same increase as last year which was a large 0%.  I did however manage to this year secure a bonus so I can’t really complain as many of my fellow UK residents I'm sure received nothing.


In addition to hard work Saving Hard has also required me to live frugally and opt out of consumerism. This on the whole has been a very positive experience however every now and then I come close to straying from the path. For example I don’t own an Apple iPhone, Nokia Lumia or Samsung Galaxy mobile phone which I'm told are the current must haves. Instead my personal phone is on a Pay As You Go contract which does not include data and is carried for emergencies only. To be honest I don’t covet a modern smart phone but I would love one of these to simplify reading when on the go and to make staying in touch with the world a little easier. Instead I stick with good old fashioned books and an old laptop which seems to get slower and slower every day.


What keeps me on the path is when I look at my increase in net worth on a weekly basis plus take a step back and look at my world from 30,000 feet and realise how much happier and healthier I am since I starting down this path.  This combined with the knowledge that every day that passes I get closer to early retirement which will mean a big reduction in stress as I’ll now that every week that passes from there on in I will not be forced to work to survive.  Instead I will be able to work when I want and because I enjoy it.

For the quarter I actually saved 67% of earnings meaning I have exceeded my target by a long way.  Before you start calling me a liar and saying it can’t be done I have to say that part of this came from a stroke of luck.  HMRC for some reason that only they know changed my tax code even though my circumstances hadn't changed, resulting in a massive underpayment of tax.  They then sent me a letter a few months later saying I am not paying enough tax and that they will collect it from me over the next financial year.  Effectively they have just given me a large interest free loan which instead of being spent, as I'm sure many would have with the subsequent follow up letter resulting in panic, I am smiling as it’s all been invested for the long term.  With HMRC efficiency like this is it any wonder there is so much unpaid tax in the UK.  If I filter out this effect and work on the tax I believed I should have paid I end up with a savings rate of pretty close to 60%.

So where did the money go:

• 17% was invested into Pension Wrappers
• 39% was invested into ISA’s and non tax efficient locations 
• 11% was used by my better half to ensure both our early retirement ambitions stay in synchronisation.

Saving hard quarter end score: I therefore move from a 2012 Conceded Pass to a full Pass.

INVEST WISELY

My investing strategy is no secret and I have simply continued with the Retirement Investing Today Low Charge Strategy.  My asset allocations at quarter end are now:

Click to enlarge

As mentioned above I have continued to invest as tax efficiently as possible.  At quarter end my tax efficient holdings are:

• 38.7% (down from 39.2%) held within Pension Wrappers with the majority being within a SIPP
• 15.8% (down from 17.3%) held within NS&I Index Linked Savings Certificates
• 12.4% (down from 12.6%) held within ISA Wrappers.  

Tax efficiency quarter end score: Pass.  Sure I have gone from 69.1% tax efficiently invested to 66.9% but I believe I have maximised the opportunities made available to me in the year while ensuring I maintain my risk profile.  If only the Government would release some ILSC’s...

Investment expenses also continue to be treated as the enemy.  These have remained fairly static on the quarter rising slightly from 0.36% per annum to 0.37%.

Minimise expenses quarter end score: Conceded Pass.  Not an improvement but at the same time simply caused by rises in some of my investments at the expense of others rather than from making wrong choices with new money.  I also refuse to expose myself to unnecessary taxes in the hunt for expense minimisation.  It’s all about minimising expenses and taxes not expenses or taxes.

If I’m Investing Wisely I should be able to beat (or at least match if I was 100% Index Tracking, which IMHO is an admirable pursuit) an Index Benchmark.  For me that Benchmark remains a simple UK Equity and Bond Portfolio aligned in percentage terms with the building blocks of my own portfolio which is then rebalanced once every year.  Today that benchmark allocation remains at 69% UK Equities and 31% UK Bonds. The 2 indices I use to replicate that benchmark are the FTSE 100 Total Return (Capital & Income) Index which this quarter has returned 3.7% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned 3.4%.  The return of my benchmark for the quarter is therefore 3.6%.

In contrast my portfolio has provided an annualised return  of 21.8% and a personal rate of return of 5.0% beating my benchmark by a reasonable margin.  This is a true return which allows for the fact that large levels of contributions are being made continuously so is a fair comparison.

Investment return quarter end score: Pass.  I have beaten my benchmark by a reasonable margin which considering my portfolio sees expenses (fund and wrapper expenses, withholding tax on some investments and savings interest  tax deducted at source) that the benchmark doesn't it’s a result I'm happy with 

As with 2012 I'm happy to have continued to beat my benchmark in Q1 2013 however if I can’t achieve those returns long term then all my efforts aren't worth it and I’d be better off shutting this Site down, buy a Vanguard LifeStrategy Fund and going fishing.  Thankfully it does seem worth it as my chart below which tracks the performance of my portfolio, my benchmark and inflation (RPI) shows.  Note that the chart assumes a starting sum of £10,000 which is not my portfolio balance at that time but is instead simply a nominal chosen sum to demonstrate performance.  As always I never reveal my portfolio values in £ terms as it’s irrelevant to readers as we all have different earnings, investments, risk profiles, savings rates and target retirement amounts.

Click to enlarge

Since then end of 2007 the benchmark is now beginning to beat inflation albeit by a small amount.  In contrast my portfolio has increased at a Compound Annual Growth Rate (CAGR) of 7.3% (up from 6.7% at last review).  In real inflation adjusted terms that’s now 4% (up from 3.4%).  My whole investment strategy since 2007 has been to generate a Real Return of 4% over the long term and I've finally made it.

Long term investment return score: Pass.  Right on my plan of a long term real 4% return.

RETIRE EARLY

This is what all that Saving Hard and Investing Wisely is about.  When I started this site in November 2009 I stated that my aim was to retire (which I define as work becoming optional) in less than 7 years.  Today we are nearly 3.5 years on and I'm assuming I can continue to save at expected rates and achieve average expected investment returns I forecast that early retirement will now come in slightly less than 3 years from today when I’ll be 44 years of age.

This quarter has really given me a big boost with a high savings rates plus exceptional general market performance.  You can see my progress to early retirement in the chart below.  Note that the last point represents a period of only 5 months.  At my end of 2012 review my Progress to early retirement was 65.2%, where Progress is defined as my Current Investment Wealth divided by my Retirement Number.  In 3 short months that has exploded to 70%.

Click to enlarge

Retiring early quarter end score: Pass.  My strategy of Saving Hard and Investing Wisely still has me heading in the right direction.

So all in all a successful Q1 2013.  How did you do?  Are you happy with your achievements?

As always please do your own research.

Assumptions and full disclosure:

• I do have a smart (well a clapped out old Blackberry) phone which is provided by my company for work purposes.
• RPI for March 2013 is estimated.