As I sit here writing this post the Excel spreadsheet that I use to track my wealth and portfolio performance tells me that I have accrued 76.1% of the wealth that I require for Financial Independence (and Early Retirement if I should choose to retire from work). If there is one thing I've learnt over the 7 and a bit years that I've been accruing that wealth it is that if you want to be the person who retires by 40, who makes early retirement extreme work or who reaches financial independence in 10 years and not the one who retires when the government tells you to then you need to not only be tenacious and not blow with the wind but also rigorously PDCA (Plan, Do, Check, Act).
When I say this I'm not saying to continually alter your investment strategy to today’s new fad. That’s just going to lead you astray and hinder your wealth creation. Instead it’s going to have to be far more subtle and purposeful than that but it’s important because I can guarantee, if my example is anything to go, that a large portion of both your life and investments are going to be different from what you originally planned. Therefore to reach your goal some course correction is going to be required. Let me maybe demonstrate the principle with some personal examples:
So while a lot of change my PDCA approach has allowed my top level plan to stay very firmly on track. This is very much a fact based site so let me now demonstrate the change in my wealth within my portfolio as all that investment and life change has occurred.
A rollercoaster ride yet an intact plan thanks to PDCA.
As always DYOR.
When I say this I'm not saying to continually alter your investment strategy to today’s new fad. That’s just going to lead you astray and hinder your wealth creation. Instead it’s going to have to be far more subtle and purposeful than that but it’s important because I can guarantee, if my example is anything to go, that a large portion of both your life and investments are going to be different from what you originally planned. Therefore to reach your goal some course correction is going to be required. Let me maybe demonstrate the principle with some personal examples:
- When I first went DIY in 2007 I was naive and really in a state of investment strategy flux as I learnt. By 2009 the foundation of my strategy was built but it actually took until late 2011 to reach maturity with the addition of a High Yield Portfolio (HYP) portion. As I move quickly forward to Financial Independence then I can see some more subtle change as I work to build regular income streams from areas like extending the HYP portion of my portfolio.
- When I started out Vanguard didn't exist in the UK. They were of course big in the US but didn't actually come to the UK until 2009. Vanguard funds and ETF’s now form a cornerstone of my portfolio lowering my investment costs.
- By 2010 I had cottoned onto the need to save hard, by both maximising income and minimising spend, and was regularly saving 60% of my gross earnings plus employee pension contributions. That quickly moved to 2011 when I was without work. Onto today and my family life has changed such that to maximise the benefit to the family I am paying all the family bills meaning over the last 15 months my savings rate has now fallen to an average of 50%. Within this 50% I'm also making significant contributions to help my better half’s wealth (not detailed on Retirement Investing Today) to grow as quickly as my own meaning my wealth growth rate will also slow from what was planned. To keep to plan I've had to work hard to continually increase earnings but also reduce costs through these changes.
- In recent times we've seen and are seeing a lot of post Retail Distribution Review (RDR) change within the investment world. It looks to now be stabilising and while I've generally not come out of it all too badly I am considering a shift away from Youinvest for my SIPP to again lower investment costs.
- The market moves and I respond with rebalancing according to my strategy as well as continually buying the most under performing asset class with new money.
So while a lot of change my PDCA approach has allowed my top level plan to stay very firmly on track. This is very much a fact based site so let me now demonstrate the change in my wealth within my portfolio as all that investment and life change has occurred.
Click to enlarge
A rollercoaster ride yet an intact plan thanks to PDCA.
As always DYOR.
I'm looking at this thinking you didn't start out with much in 2008, otherwise the effect of investing would be much less than the effect of saving with the asset allocation you seem to be running
ReplyDeleteIf so are you sure your results aren't just flattered by being part of the 2009-2014 bull market which is the 5/6th longest depending how you measure it?
I like your blog and I'm glad your posting again, but I think this bull market is making us all think we are smarter than we actually are
Hi Anonymous
DeleteYou're right that I didn't start out with much. in 2007 when I went DIY I was like most Average Joe's out there and was on target for a retirement in my late 60's where I would have been partially dependent on the State Pension.
Looking back at my records by the start of 2008 I had amassed 13% of the wealth I now believe I need for financial independence. That had taken me 12 years. So a little more than 1% per annum. At that rate Financial Independence would have arrived in 87 years! (Of course that's not quite right because compound interest would have eventually started to help my journey although expenses/taxes would have also been working against me.)
I'm not sure if the bull market has actually helped me. I'd need to crunch the numbers. This is because as a person who is saving large amounts of salary every month low asset prices would be preferred as I'd be buying at better value.
Cheers
RIT
Thanks for the chart - interesting. This made me realise that I don't have the data to do this for my own situation. I keep detailed investment return records and analysis but am not so good on the spending side. A quick question: what happened to pull down your investment returns in 2011? Didn't the main indexes grow a bit faster than the rate implied on your chart? Thanks
ReplyDeleteHi TEA
DeleteMy financial year is a little different to most because I update my financial spreadsheet every week on a Saturday. Therefore my 2011 financial year ran from the 01 January 2011 to the 07 January 2012. I benchmark myself against a simple portfolio that consists of:
- the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which my records tell me returned 5.9% over that period.
- the FTSE 100 Total Return (Capital & Income) Index which returned -0.8%.
The portfolio is then (my age in bonds minus 10)% x Bonds + (100 minus my age in bonds plus 10)% x Equities. The benchmark return was therefore 1.2%.
In contrast my portfolio returned 2.6% (including some withholding and savings taxes) meaning I beat my benchmark significantly in 2011. That's not always the case of course :-)
Cheers
RIT
Welcome back. Your long hiatus included this year's budget: do the new rules on pensions and NISAs alter anything much for you?
ReplyDeleteHi dearieme
DeleteThanks I must say it feels good to be back discussing personal finance.
The £15k ISA allowance was definitely welcome and will certainly help me to minimise taxes. Hopefully it stays for many years to come. Between my better half and myself that's £30k this year that will be removed from the clutches of the tax man.
I haven't thought too much about the pension changes yet as even if the rules still allow me to start taking my personal pension at age 55 I am still some 13 years away from access. There's plenty of time for government fiddling to get in the way. If the rules were the same as today the removal of the GAD table requirement would I think help me. Even if it was to just get more money away from the government play thing that is pensions.
The way I'd probably play it would be to remove as much from the pension so that non-ISA/pension interest/dividends plus the pension withdrawal summed to the point between the basic and higher tax rate. The difference between this amount and my annual spending would then be invested into my ISA.
Did the changes help you much?
Cheers
RIT
(i) The "small pots" rule for pensions has proved useful, and I expect it to prove useful again later this tax year.
Delete(ii) For NISAs I assume that the extra flexibility to move to and fro between Cash and S&S may prove helpful at some time in the future.
(iii) The larger annual allowance for NISAs has proved useful in an indirect way: the ability to put more cash in when we want to in future has let us happily draw cash out now to hold at higher interest rates in interest-bearing current accounts. There's 5% (gross) on offer at the mo': never look a loss leader in the mouth.
Interesting how we have benefited differently. I can't take advantage of the "small pots" rule as I've always made sure to consolidate any old pensions into my SIPP.
DeleteIt's really great that you are sharing your performance with us. Form what I gather you are definitely headed in the right direction and I like your attitude of achieving "financial independence in 10 years and not the one who retires when the government tells you to." Is there a page or post with your investment holdings? I am curious to see what you hold. Keep up the good work.
ReplyDelete