9 months into 2016 – The plans they are a-changin’

With the back of 2016 now largely broken this year is fast shaping up as one of the most memorable of my FIRE journey thus far.  Personal finance wise it’s been great.  My wealth passed 7 figures, I became financially independent (FI) and the rate of change in my wealth has been like nothing I’ve ever seen before or could have imagined when I started on this journey.  To put that last point into perspective by the end of quarter 1 I had added £55,000 to my wealth, by the half year mark that had become £142,000 and by the end of quarter 3 it had become an almost unbelievable £220,000.

However, this is not what is making things memorable.  That’s coming from me slowly realising that because my FIRE strategy makes me an outlier it also makes me vulnerable and exposed rather than invincible.  This was nicely demonstrated by the Brexit vote.  As a ‘young’ retiree looking to head to The Mediterranean within a year I’m sure it doesn’t take a genius to guess that I voted Remain in the Brexit referendum.  If everyone else had have been on my trajectory that would have been the result.  Instead my demographic had no influence, as the numbers of people looking to FIRE to The Med are probably not much more than one, so democracy took over and we ended up with Leave for many other reasons.  So far that result has resulted in pound devaluation (which on its own I could have coped with) but also discussions of Hard Brexit which has turned my plans from 95% The Med to 50%.  I’m a minority affected by politics and populism and because I’m not part of a significant demographic my vote just won’t make a difference.  What if the next populist democratic step is to start taxing capital and providing relief to the indebted...  We’re almost there via interest rates anyway but what if it becomes an overt policy...

All of that said I’m not going to grumble or play the victim card as no matter what plays out from here I’m very conscious of the fact that 9 years in to my FIRE journey I still find myself in an incredibly fortunate financial position and still have plenty of options.  Let’s look at the current financial details.

SAVE HARD

I continue to define Saving Hard differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employee Pension Contributions minus Spending minus Taxes.  Earn more and one is winning.  Spend less or pay less taxes and you’re also winning.  Savings Rate is then Saving Hard divided by Gross Earnings plus Employee Pension Contributions.  To make it a little more conservative Taxes include any taxes on investments but Earnings include no investment returns.  This encourages me to continually look for the most tax efficient investment methods.  I finished the quarter with a Savings Rate of 53.0% against a plan of 55.0%.

Click to enlarge, RIT Savings Rate

Saving Hard score: Conceeded Pass.  Back below plan however I’m not going to beat myself up about it.  The reason is that if I change Gross Earnings to Net Earnings in the formula, so remove tax and National Insurance both of which I can do little about, that Savings Rate leaps to 91.0%.  That even trumps Jacob’s (of Early Retirement Extreme fame) 75%.

INVEST WISELY

2016 year to date (02 January 16 to 01 October 16) investment return is now a healthy 14.9%.  My investing strategy is now transitioning from one focused on accumulation to one preparing me for drawdown.

Additionally, I’m still trying to build cash and cash like holdings (NS&I Index Linked Savings Certificates predominantly) quickly for a non-mortgaged home purchase.  In the quarter this has gone from £249,000 at the end of half 1 2016 to £260,000 today.  If I want to both stay in the UK and still FIRE mid-2017 that rate is just not good enough.  One option, as I’ve mused about recently, is to extend my time working.  I’d like to think I can be more creative than that though so have some more work to do here.

I’m also trying to ‘ensure’ I can live off dividends alone in FIRE.  2016 total dividends look like being a smidgen over £20,000 against a UK FIRE spend budget of around £21,000.  It’s not actually as bad as that and would be closer to £22,000 if I hadn’t part way through 2016 switched from an OEIC’s that pay dividends annually to ETF’s that pay quarterly which will self correct in 2017.  I’d actually like a bit more hedge than that which would allow some dividend reinvestment during the good times and cover off a fall in dividends during the bad times but I still have at least a few months to FIRE so there is still time to get that sorted.

Click to enlarge, RIT Annual Dividends

This is what my asset allocation looks like today.

Click to enlarge, Current RIT Asset Allocations

I continue to invest as tax efficiently as possible with my tax efficient holdings now consisting of:

• 44.8% held within SIPP's
• 9.7%% held within the no longer available NS&I Index Linked Savings Certificates (ILSC’s)
• 11.5% held within a Stocks and Shares ISA.  

Tax efficiency score: Conceeded Pass.  At the end of 2015 this was 67.0% and it’s now 66.0%.  At this stage of my journey this is now largely what it is and not really able to be influenced.  I’m still planning on maximising my ISA contributions with the full £15,240 planned to go in for tax year 2016/17.  It will also be maximised in 2017/18 when the ISA allowance increases to £20,000.  This is one of the reasons I’m struggling to build cash but for me every annual ISA allowance is seen as a once in a lifetime opportunity that I am not prepared to lose out on.  I’m also still hitting the pension fairly hard but am starting to explore backing this off as I think on balance I nearly have enough there, it’s at a level where Lifetime Allowances are starting to become a consideration and I need more cash if I don’t want a small home mortgage.  More to come on that in the coming months.

Investment expenses also continue to be treated like the enemy.  Going into the quarter they were at 0.276%.  By completing a partial pension transfer and by rearranging investments in a SIPP I’ve been able to reduce that to 0.246%.

Minimise expenses score: Pass.  Some conscious decisions made in the quarter which have yielded good results.  An investment expense saving of 0.03% might not sound like much but for me that’s currently equivalent to £325 per annum which I’d prefer in my pocket than the financial services industries.

If I’m Investing Wisely I should be able to also at least match a benchmark.  My benchmarks are continually challenged by readers but at least for now my Benchmark here 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 is 66% UK Equities and 34% UK Bonds. The 2 indices I use to replicate that benchmark are the FTSE 100 Total Return (Capital & Income) Index which in H1 returned 14.1% and the iBoxx® Sterling Liquid Corporate Long-Dated Bond Total Return (Capital & Income) Index which has returned 16.9%.  The total return of my benchmark is therefore 15.1%.  In comparison my portfolio has returned 14.9% which is a slight miss against my benchmark.  In my defence I’m now sitting on £157,000 of home purchase cash which will certainly have placed drag on my portfolio in the bull market we have just been through.  Interestingly, if I was to split the UK Equities portion 50% to the FTSE100 and 50% to the FTSE250 that benchmark would become 12.0% resulting in a beat.

Investment return score: Conceeded Pass.  A slight miss compared to my primary benchmark but my portfolio now has a lot of cash and for completeness it’s also important to note that my benchmark doesn’t carry any investment costs where my portfolio sees expenses including fund and wrapper expenses, investment spreads, trading commissions, withholding tax on some investments and deducted at source tax on savings interest.

In the scheme of a lifetime of investing this quarter is still insignificant.  I’m all about time in the market and not timing the market so as always let’s zoom out and look at my performance since I started down this DIY road.  This still looks excellent when compared to my benchmark with the chart below tracking the performance of my portfolio against my Benchmark and inflation (RPI).  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.

Click to enlarge, RIT Portfolio Performance vs Benchmark vs Inflation

Since the end of 2007 the benchmark continues to beat inflation with Inflation growing at a Compound Annual Growth Rate (CAGR) of 2.7% compared with the benchmark at 5.4%.  In contrast my portfolio has increased at a CAGR of 6.9% (up from 6.4% at the end of H1 2016 showing nicely why you don’t want to be out of the market as it can make great strides over short periods of time).  In real inflation adjusted terms that’s therefore now 4.2%.  My whole investment strategy since 2007 has been to generate a long term Real Return of 4% and throughout most of my journey I’ve always been well behind but as I now move ahead of plan it seems it might not have been a fetched target after all.

Long term investment return score: Pass.  With my long run real investment return now at 4.2% I’m finally ahead of plan.

RETIRE EARLY

I’ve proven that combining Saving Hard and Investing Wisely gives Early Financial Independence and the option of Retiring Early.  I’m now just making some final considerations and possibly being a little greedy but it’s so great to have choices.  This is the contribution I’ve personally seen from each element.

Click to enlarge, RIT Contributions from Saving Hard and Investing Wisely

I’ve now been on this journey for 9 years and all that Saving Hard and Investing Wisely adds up.  My progress to FIRE looks like this:

Click to enlarge, RIT Progress Towards Retirement

That’s £1,090,000 of wealth that has come from nothing more than hard graft, considered spending and taking some time to focus on some selected investment fundamentals.

As always please do your own research.