Giving my bonus to those better able to spend it

I believe that I work hard.  In fact I'm now at the point (and have been for a few months) where I'm wondering if I can increase my discretionary energy further or whether doing so will result in burn-out.  I'm therefore for now maintaining status quo while I better understand my long term capability.  Fortunately, that hard work typically transfers into results meaning another year has passed where my personal work objectives have been yet again knocked out of the park.  Great I hear you say, another year of big bonuses, which you’ll save all of, which will pull you even closer to FIRE.  I wish it were true...

Firstly, bonuses at my company are structured in such a way that it considers your objectives as well as the objectives of the company as a whole.  I can sort of understand this as it protects the company in very bad times such as those seen at the bottom of the Global Financial Crisis.  So has company performance been good this year?  Unfortunately the answer to that question is a resounding no.  If I was asked was the company doing well I would of course give a very different answer but hey ho.  The end result of all this is that a large portion of my bonus will not pay out.  Of course the portion not paid out goes straight to the bottom line meaning a large portion of my hard work this year has gone to enriching the owners of the company.

Happy Christmas to all readers

People First. Then Money. Then Things - Suze Orman.

RateSetter Peer-to-Peer Lending – It can no longer be called an experiment

I first dipped my toe into the Peer-to-Peer lending arena back in May 2014.  Research at that time suggested for me there were two viable alternatives – Zopa and RateSetter.  I went with RateSetter and duly deposited £10,000.

Since that first investment I've gradually continued to invest and as of today have a not insignificant £43,769 or 5% of my total wealth invested in RateSetter.  With this amount invested I can no longer say I'm experimenting.  My market of choice is the 3 Year Income market however recently I've started to move some new/repayment money into the 1 Year market and as a home purchase gets even closer I’ll start moving into the Monthly market.  My lending has so far achieved an annualised 4.5%.  A result I'm ok with.

Peer-to-peer lending has a very different risk profile to that of a vanilla savings account and given this is money I have planned for an eventual home purchase I'm sensitive to these risks.  For starters you are not eligible for the Financial Services Compensation Scheme (FSCS) which protects the first £85,000 (£75,000 from 01 January 2016) of savings so your capital is at risk.  RateSetter does offer some protection in the form of a Provision Fund which reimburses lenders (ie us) if a borrowers payment is missed.  I like to keep an eye on defaults and this fund.  When I first started investing the Provision Fund was £6,328,472 which was set against £179,536,557 of loans.  So by value 3.5% of payments would have had to be reneged on before I potentially started to see losses.

Today the Provision Fund has grown to £16,543,201 against loans of £510,819,525 so protection has been diminished to defaults of 3.2% by value.  So far in 2015 the actual default rate has been 0.55% so the Provision Fund is more than covering what’s happening this year.

Of course this year is not a year like 2008 and unfortunately RateSetter was not in business at that time so I can’t check the default rates to compare against the Provision Fund.  Zopa was however in business and they currently have a 2015 actual default rate of 0.13% and back in 2008 saw actual defaults of 4.67%.  So in 2015 it looks like RateSetter’s loan book is riskier than Zopa’s and the Zopa default rate would have more than depleted the RateSetter Provision Fund.  I’ll also make a hypothesis that if/when we have another ‘Global Financial Crisis’ (or equivalent) RateSetter will see actual defaults higher than Zopa.  This is not surprising given a quick check this morning shows Zopa 3 year loans at 3.8% while RateSetter 3 year loans are at 4.8%.  Risk vs Reward and all that.

US vs UK vs Aus Equity Valuations

The largest country equity holding within my portfolio is my home country, the United Kingdom, at 20.4% of total portfolio value.  This is then followed by Australian equities at 10.1% (a mistake I've mentioned numerous times previously) and then US equities at a relatively paltry 4.5%.  The Equity markets of these three countries make one third of my portfolio and so their performance (particularly that of the UK) matters.

My total portfolio year to date is under water by a few percent and since I started my DIY journey to FIRE (financially independent retired early) in late 2007 I've only managed a real (after inflation) annualised 3%.  Looking at the data what is clear is that to date I have backed the wrong horse.  Let’s take a look.

Firstly the US S&P500:

Click to enlarge, S&P500 Price Performance, Source: Yahoo Finance

Now the UK FTSE100:

Click to enlarge, FTSE100 Price Performance, Source: Yahoo Finance

And finally the Australian ASX200:

Click to enlarge, ASX200 Price Performance, Source: Yahoo Finance

Year to date the S&P500 is down 2.3%.  In comparison the FTSE100 is down 9.3% and the ASX200 is down 7.0%.

Monthly Financial Decisions

Here on Retirement Investing Today I talk about a lot of different themes and learnings.  As I learn I also then update some of those themes from time to time.  This might make it sound like my financial life is complicated and full of tinkering.  It’s actually the opposite of that and actually requires very few decisions on a monthly basis.  This is partly because the themes I write about cover the complete spectrum of my past, present and future investing life and partly because 8 years into this FIRE journey I now know (I hope) what I'm doing.  Let me demonstrate using November 2015 as an example.

On the Spending front history tells me that because I'm a lightweight consumer I don’t need to budget.  So I don’t.  For any purchase I do however still mentally ask myself do I really need this, can I buy less of it and is this giving me the best value for money.  Roll that into November and it resulted in 36 purchases with the lowest purchase being £1.70 for a work lunch and the highest being £1,148 for rent.  After rent and work costs (my tracked metric as this is what will be relevant in FIRE) my spending was well in control at £430 for the month.  This reinforces yet again that I don’t need to start budgeting.

Click to enlarge, RIT November 2015 Spending

My wealth is currently spread as follows:

Click to enlarge, RIT Low Charge Investment Portfolio

My Wealth spreadsheet tells me that against plan my Equities are positioned as follows:

• International Equities are 20.4% underweight
• UK Equities are 14.6% underweight
• Emerging Markets are 10.2% underweight; and
• Australian Equities are well overweight as in hindsight this was a mistake that I now can’t correct so will just let sit and spin off dividends ‘forever’.