Merry Christmas

The organisation I up until recently worked for closes its year at the end of December.  With shutdowns between Christmas and New Year it meant that the run in to the Christmas bank holidays were always absolutely manic.  It meant long hours and little time to soak up the Christmas spirit until the physical bank holidays were upon us.

Christmas 2018 is my first FIRE Christmas and things have changed somewhat.  We’re already reasonably settled in the Med with our rental home for the next 6-12 months.  All our possessions have now arrived so there was only one thing for it.  We put up the Christmas tree and spent a couple of hours decorating it.  Then I felt inspired...

In years gone past we’ve always bought a Christmas Cake and / or Christmas Pudding from the supermarket.  Not so this year.  I attempted to make a Christmas fruit cake from scratch.

Click to enlarge, One dodgy looking fruit cake

Moving to Cyprus from the UK (Part 1)

It hasn't been all bureaucracy

It’s been 3 weeks since I FIRE’d (financially independent and retired early) and we are now logistically pretty much settled in Cyprus.  I thought it might be worthwhile to capture some learnings for those that might want to someday follow in our footsteps as well as showing a little of how it’s all fitting into the principles that I’ve been espousing on this site over the years.

Prior to moving we made a few preparations. About a year prior I joined a number of Cyprus forums, initially just lurked and then started to participate as our move date approached.  There are some really helpful people on these (you very quickly learn who) and they certainly helped simplify the process we have just been through.  Two notable ones were Paphos Life which is relevant for the Paphos side of the island and the Cyprus Eastern Forum which is relevant for the Famagusta side of the island.  There are some common themes so both were worthwhile pursuits.

I also started the process of gaining us private medical cover.  The company we went with were thorough in the screening process but I’m told by those that have made claims that they don’t quibble when you need care.  It included questionnaires as well as physical check-ups which had to be done in Cyprus for those aged over 40.  This was not a quick process taking us a little over 3 weeks from advising we’d like to proceed to being fully insured.  I’m therefore glad that I did as much as possible from the UK as it minimised our non-cover period in Cyprus.

From the UK we also booked ourselves 2 weeks in a serviced apartment as well as a hire car for the same period.  In hindsight we probably put ourselves under stress that we really didn’t need to by doing this for such a short time.  The removal company shipping time turned out to be 3 weeks which means we actually did the move in two shipments effectively camping in our UK flat for a week so that our belongings would arrive in a timely fashion.  It also meant we had to find somewhere to live quickly.  Having done plenty of online rental research I thought this would be easy but once on the ground it became apparent that a lot of the online inventory was already rented / ‘didn’t exist’, had been taken by very good photographers or were ‘winter lets’ which I guess are then put on Airbnb (or similar) over the summer.  Finding a place therefore took some time and caused some short term stress.  While costing a little more, if I had my time over I would have booked temporary accommodation for at least 3 weeks and probably 4 weeks as this was the main problem area for us so far.

Is the visible FIRE movement changing for the worse

When I started my journey to FIRE (financially independent, retired early) in late 2007 there wasn’t much on the topic in the public domain.  To my knowledge at that time the term FIRE hadn’t even been coined and the US based Jacob at Early Retirement Extreme was just getting going with his blog.

When I started this blog in late 2009, which was predominantly aimed at holding me accountable, learning from others and sharing my journey to early retirement in the small hope it might help some others, even Mr Money Mustache hadn’t yet arrived on the scene.  To my knowledge that didn’t occur until 2011.

Even at that point the UK FIRE blogger scene was still pretty quiet.  Of course the great Monevator was running full steam ahead but at that time my feeling was that his site was more investing focused for which I must once again tip my hat and say a massive thanks for everything he has taught me.  To my knowledge the UK FIRE blogs didn’t really start to ramp until around 2013 after which blogs like The FIRE Starter and Quietly Saving appeared who each continue to put their own unique and interesting spin on things.  This has continued to the present day with new unique blogs like Young FI Guy, Ms Ziyou, Gentleman’s Family Finances and Fire v London all sharing something new regularly.

FIRE day!

“Retirement is the withdrawal from one's position or occupation or from one's active working life. ...  Retirement is generally considered to be "early" if it occurs before the age (or tenure) needed for eligibility for support and funds from government or employer-provided sources. Early retirees typically rely on their own savings and investments to be self-supporting, either indefinitely or until they begin receiving external support.” Source

It’s an exciting time in the RIT household as I’m now calling myself FIRE, Financial Independence Retire Early.  I’ve worked my notice period, completed a professional handover of responsibilities, was given a fabulous send off by the company I worked for, surrendered my identification card and then walked out the door.

I guess that confirms I’m now jobless but am I really FIRE?  Do I really have enough savings and investments to be self supporting ‘indefinitely’?  Let’s start with the level of wealth that I go into the next stage of my life with:

Click to enlarge, RIT progress towards FIRE

That’s just a whisker over £1.3 million.

NS&I loses some lustre

In recent weeks there appeared to be a glimmer of hope appearing that I might be able to get a little more interest on my cash and cash-like (NS&I Index Linked Savings Certificates) holdings.  This was of interest to me as I currently have in excess of £300,000 in these products in readiness for a home purchase and to help me live off dividends only in my soon to be early retirement.

It started with Goldman Sachs entering the UK savings account market with their Marcus account paying an annualised 1.5%.  Nothing to get excited about given, that after I pay my additional rate tax of 45%, that reduces to 0.83% meaning in inflation adjusted terms I’m still going backwards at a rate of knots with the RPI currently sitting at 3.3%.  Even for those with a basic rate tax of 20% this account still sees you going backwards in real terms, both before or after you've used your £1,000 basic rate tax free personal savings allowance, as you’ll only end up with 1.5% (within the tax free personal savings allowance) or 1.2%  (post the tax free savings allowance) in your pocket.  Still better than a poke in the eye with a pointy stick as it puts an extra £222 into my pocket annually when compared to the savings product I ditched.

Then Charter Savings Bank popped in with a slightly lower annualised 1.4%.  Again, nothing to write home about, but better than what I did have meaning an extra £153 in my pocket annually.

2018 Quarter 3 Review, Readying for FIRE

Latchi, Cyprus at dusk

With my work notice period now nearing completion I’m actually a little surprised at the calm in the RIT household.  Hopefully this means we believe we are reasonably well prepared and probably more importantly means that we still believe we are doing the right thing.

At work we’re just completing 2019 plans and I’m not excited by any of it which is a new feeling for me.  I’ve put this down to a couple of things.  One of the main objectives is something I’ve personally done on a larger scale twice previously so I would expect few challenges if I was leading the activity.  This might be a contributor but I suspect the real reason is that FIRE now just feels 100% like the right next step combined with feeling well prepared for what we’re walking into.  Not even Mr Market taking £72,000 from my wealth since its peak in mid-August and £58,000 in the last 3 weeks has made my think twice.  I guess that means I’m ready.

Our readiness for our Med move is also calmly progressing.  We have the removal company booked with them moving us in 2 stages for only an additional 5% cost.  This was our suggestion and I was surprised at the small delta cost meaning it was the lowest total move cost option we came up with.  The rationale is that the shipping time to Cyprus is about 4 weeks so what we’ll do is split our stuff in half meaning we’ll be able to stay in our current UK rental flat right up until the night before our flight and then in Cyprus we’ll only book a short term rental for 2 weeks which should be time enough to find a long term rental.

On the financial side we’ve also taken some precautions like opening additional current accounts with new banks as that will be almost impossible to do once we’re non-resident and banks have form of closing non-resident accounts when they decide it’s best for them.  For example Barclays has form with residents of Cyprus being specifically targeted for closures.  We’ve also opened up new UK savings accounts for a fresh 12 months bonus interest by which time we should hopefully be putting those cash funds to work on a home purchase.  The best I came up with here was the new Goldman Sachs Marcus account which is giving me 1.5% annualised.

We’re also starting to think about what we’re going to need to purchase in Cyprus for our new lives and making sure we can get access to that cash quickly.  We’ve therefore opened up a competitive international currency transfer account as well.  One of the things I’ve decided I’ll ‘need’ very early on is a new road bike.  Requirements are a relatively good price vs weight bang for buck, suitable for plenty of miles in the saddle, suitable for hill/mountain ascending/descending plus the flats and good enough that when I get dropped on club rides it’s because I’m a ‘fat unfit b*stard’ not because I’m riding something that weights 30kg.  The best I’ve come up with is this:

Click to enlarge, Canyon Endurace CF SL Disc 7.0

Do any readers have any better road bike ideas?

With the move now just weeks away this makes this quarterly update the last that shows how I’ve accumulated my wealth.  The next update will switch to how I’m managing drawdown.  Accumulated wealth is quite a loose term in this case given since the start of the year my wealth has actually reduced by £14,000 or -1.1%.  Let’s look at the details.

The Wealthsimple Experiment

It’s no secret that Personal Finance is a hobby of mine (498 blog posts help reinforce that) and within that hobby I’ve done a reasonable job of DIY investing myself to FIRE using the knowledge I’ve gained to focus on a few mechanical principles.  I would suggest that this has also been helped by having a “head vs heart” approach to life, a reasonable grasp of maths, gaining a sense of achievement by reading personal finance books/blogs and an enjoyment of spreadsheets.

Mrs RIT on the other hand is the very opposite of me which makes our non-financial relationship great as we balance each other well.  She would never take on personal finance as a hobby, is more “heart vs head”, is more arts than maths and most definitely doesn’t enjoy spreadsheets.  She does however very much see the benefits of wealth creation and FIRE having been a willing participant in the journey to FIRE.

With this in mind, over a reasonable period now, I’ve been teaching Mrs RIT DIY investing.  The reason I’m not just doing this 100% for her is that someday there is of course a risk that I won’t be able to for a number of reasons.  We therefore want her to be able to stand on her own investment feet.  We are making progress but I’m still answering plenty of questions.  Then a couple of weeks ago it went a little pear shaped.  Mrs RIT was about to buy an investment with some new money.  The night before we agreed what the ETF purchase should be to move her current asset allocation closer to plan and she was to then buy the ETF the next morning.  That afternoon I asked how the purchase went and would she like me to answer any questions.  The response was “Oh I didn’t buy the one we agreed because when I logged on to buy I saw that it had been going down so I bought this other one which has been going up”.  This started me thinking about whether DIY investing is for her and what other options we might have as a risk mitigation to me being unable to help with her (and maybe inherited from me) investments in the future.

One-way flights booked to Aphrodite’s birthplace

Even if you’re not into your Greek mythology then you’ve probably heard of Aphrodite, the Ancient Greek Goddess of love and beauty.  The legend goes that she was born from the sea foam here:

Click to enlarge, Happy snap of Petra tou Romiou

Aphrodite apparently rose from the waves and was escorted on a shell to this beach.  That beach and those rock formations are in the Paphos district of Cyprus – our soon to be new home.  In the end our choice of new homes came down to Spain vs Cyprus and specifically the Costa del Sol vs Paphos.  Now not for a second am I saying that we couldn’t have found somewhere more suitable in Spain or Cyprus or elsewhere for that matter but what I am saying is that eventually it gets to the point where you have to make a decision with the data you have and strap yourself in for the ride.  We did that this week as we made our first irreversible commitment – we’ve booked our one-way flights.

So how did we arrive at Paphos (Pafos), Cyprus?  The process was:

• We firstly scoured the internet, which included numerous forums, to shortlist possible locations.  
• With that information we tried to build a ‘head’ matrix where we scored many topics including ease of visiting friends/family, ease of travel, cost of living, financials including taxes, economic stability, language, demographics, desired lifestyle compatibility, crime, security, noise, weather and healthcare (short term and long term) to name a few.
• If that showed promise we then visited the location and if we liked it we tried to visit again in the opposite season.  During our visit we then tuned up the ‘head matrix’ for comparison against other locations.  For a location to qualify we had to have visited it at least once for more than a holiday.

The secondary benefits of minimalism

During the week I was asked by a family member how much we’re paying for our contents insurance annually.  I replied that we don’t have contents insurance to which I was asked but what would you do if you were robbed or the house burnt down.  I replied with as you know we don’t have much stuff so I’d just buy replacements.  I was looked at like I had two heads and the topic of conversation was moved on.

Afterwards though I thought about this a little more.  As a family we don’t live out of suitcases but at the same time of all the people I know I’d say we have the least amount of possessions.  This hasn’t really been planned but is more the output of our intentional focus on quality of life which has led us more to a life based on security (one of the drivers behind FIRE), experiences and relationships.  So in our case the primary benefit of not coveting stuff is that it has accelerated our quality of life journey.

The insurance question did however make me think of a number of secondary benefits.  Firstly, to the insurance question itself.  As a collective group those that take out insurance have to lose out financially when compared to those that don’t.  This is because insurance companies need to pay wages, other operating costs and satisfy shareholders meaning what is paid out in claims must be less than what is taken in via premiums.  As an individual though you could win or lose.  Don’t take out home insurance for 40 years and never make a claim and you’re ahead.  Have your home burn down in year 2 under the same scenario and you’re definitely a loser which might include ending up under a railway arch in a worst case scenario.

Sobering retirement income drawdown demonstrations – 11.5 years in

As I write this post the S&P500 cyclically adjusted price earnings ratio sits at 32.0 against a long run average of 16.9, Donald Trump is starting trade wars, the US market has been in a bull cycle for well over 9 years and closer to home we have a Brexit shambles playing out in slow motion that might just ruin the economy for a long time.  Then on a personal front I’m just about to ride off into the FIRE sunset.

S&P500 cyclically adjusted price earnings ratio, click to enlarge

Against this backdrop it feels right to reinvigorate and update the UK retirement income drawdown series, which I last posted about 2 years ago, to see how things are playing out.  I hope it’s not relevant to my situation but you just never know.

Unless you’re one of the lucky ones sitting on a defined benefit pension (although it’s likely you’ll also need some other income source in the early years if you’re going to FIRE) or you intend to buy an annuity (again, not likely for the early years of FIRE) or you’re just planning on living off the State Pension then income drawdown in FIRE (or even just plain old retirement) is relevant.

This update of the drawdown demonstrations now has our retiree some 11.5 years in to retirement.  We are now just over one third of the way through the period that the 4% rule is based upon and this simulation assumes retirement was taken on the 31 December 2006.  If this date sounds convenient then you’re right.  The date was deliberately chosen as it is the year prior to the commencement of the global financial crisis and so hopefully represents a modern worst case.  Someday it may even go down in history as one of the time periods which saw a poor sequence of returns however of course that will only become clear when we are firmly looking in the rear view mirror many years hence.

2018 Half 1 Review, The penultimate accumulation post

A little over ten and a half years ago I started to accumulate wealth with a vague notion of work becoming optional in a relatively short time.  At the time I was calling this Early Retirement.  It was a time when the more famous sites like Mr Money Mustache or Early Retirement Extreme didn’t even exist.  It was also a time when terms like FIRE also didn’t exist.  It was a time of self discovery vs being able to learn from those that had walked the path.

With my resignation now in and FIRE now just over the horizon this post series about accumulating wealth is fast drawing to a close.  This is the penultimate one.  The second last post where I ramble on about how I’m try to accrue wealth quickly.  It will soon become all about managing drawdown to protect my wealth.  I’m looking forward to it.

To stay on the subject of accumulation, in the first half of 2018 wealth growth was a modest 2.8% or £36,000.  If I was at the start of my journey the word modest would not be one I would be using to describe wealth growth of £36,000 in 6 months but as someone looking back at a journey that has managed annualised wealth growth of 21.4% it is modest.  Let’s look at the details.

SAVE HARD

I unapologetically continue to define Saving Hard differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employer 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 Employer 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 an uninspiring Savings Rate of 42.3% against a plan of 55.0%.

Click to enlarge, RIT Savings Rate

Resignation in

Recently I’ve been having doubts about taking early retirement.  What I’ve found particularly interesting is that since becoming financially independent back in July 2016 I just haven’t had the same level of hunger for it.  In the past few weeks I’ve been really trying to figure out why.  I definitely knew there was an element of institutionalisation in there but it was more than that.  There was also fear and plenty of it.

Fear of leaving a career that has plenty of negatives but also plenty of positives.  Fear of the unknown.  Fear of losing purpose.  Fear we’re making a mistake.  Fear of not having enough.  Fear of our move to the Mediterranean being a mistake and us returning with our tail between our legs.  Fear of...

Another pension partial transfer and the elephant in the room

By now it’s no secret that I dislike investment expenses and continually work to minimise them in the most cost effective manner.  I’ve also written previously about how my work defined contribution (DC) pension scheme gives no special benefits but does extract at least 0.6% in annual expenses.  I’ve also previously written about how I take advantage of the pension partial transfer rules by transferring to either of my SIPP providers when they have some sort of special offer and I have a sensible amount of funds in my work DC pension.

Well Hargreaves Lansdown currently have a cash back offer running:

Click to enlarge, Cash back of between £20 and £500 available

I also had a little over £10,000 in my work DC pension so again the used Hargreaves Lansdown electronic transfer service.  It was another good experience with the online form being completed during last week’s bank holiday, Hargreaves Lansdown acknowledging my instructions on the Tuesday and the transfer being complete by the Friday.  The end result:

• Partial transfer completed in 4 days;
• Expenses reduced from 0.6% to between 0.07% and 0.19%.  I bought Vanguard ETF’s and that is their annual expenses.  On the Hargreaves Lansdown side, other than purchase costs, there are no extra expenses because I only buy shares/ETF’s in this SIPP and already have more than £44,444 which means my expenses are capped at £200;
• £20 will soon appear in my SIPP. 

Too old or a fool and his money are soon parted

At age 45 I’m beginning to think I might just be falling behind all the cool kids.  Let’s use grocery shopping as an example.  Throughout the week as we use up (or get within about a week of using up) items we write that item down on what is usually the back of a piece of junk mail.  As the week progresses that starts to form into a grocery shopping list.  Then before we go on our weekly grocery shop we write a weekly meal plan which may require some additions or subtractions to that list.  Once in the supermarket we know which products we normally buy as we’ve already done the lowest price grocery shop but of course we also quickly scan the shelves to see if there is anything on special that week or whether any prices have changed that might alter our buying habits.  This results in minimal waste and hopefully pretty close to the lowest priced weekly shop for our tastes.

We’ve done this for many years so imagine my surprise when I discover something called a Dash Button which can do my shopping for me.  I don’t have one but as I understand it for £4.99 you get a Wi-Fi connected button (with many varieties available covering Household & Office, Food & Beverages, Health & Personal Care, Beauty, etc), which via your phone you pair with a product that you select from a particular brand tied to the Dash Button.  You then stick the button near to the place of use in your home.  So if for example you’re buying soap you might stick it near to your bathroom soap dispenser.  Then when you’re getting low or have run out just push the dash button and voila a new item magically turns up in your letter box the next day.

The Passive Investing vs Active Investing Debate

A search on Google for passive investing vs active investing yields 1,330,000 results with plenty of support on both sides of the fence.  In brief passive investing is a method where you buy an investment product that simply tracks an index.  They are commonly called index trackers and with this method you expect to do no better than the index it is tracking after expenses.

In contrast active investing is a method where you pay a financial professional higher expenses than those of a passive tracker and in exchange he or she is supposed to beat an index s/he is measured against.

Beating the index is the critical point as research I’ve quoted before shows that somebody entrusting their money to a UK financial advisor or investment manager will be paying an average 2.56% annually for financial planning services and financial product expenses.

Let’s demonstrate the effect these expenses can wreak with a simple example knowing that UK equities have ‘only’ returned a real 5.0% over the last 116 years.  Passive Punter self invests £10,000 into a UK Equity Passive Fund which sees expenses of 0.25% and then promptly forgets about it for 20 years.  Assuming that fund returns a real annualised 5.0% before expenses over that period our Passive Punter ends up with a real £25,298.  So far so good.

It’s starting to get Interesting (Part 2)

A lot of very thoughtful comment last week so I thought it might bring some value to the collective if I expand on my musings a little more.  Wandering Star I think hit the nail on the head – for me this FI (Financial Independence) moving to FIRE (Financially Independent Retired Early) lark is no longer about finances but now about psychology and so that’s where I’ll focus today.

I think The Accumulator also makes a good point with “I admire your willingness to play out your doubts in public. It is helpful on a personal level, while at the same time we, your audience, can't help but cheer, hiss, wince and cover our eyes from the galleries.”  I don’t believe I’ve ever claimed to know what I’m doing but what I have tried to always do is learn, experience and then share both the outcome and the journey.  I hope my tossing and turning proves helpful – the other option is to do that behind the scenes and then just communicate surety but I that doesn’t seem as useful from where I sit.  I guess it goes without saying that not for a second did I ever expect to find myself where I am today.  I honestly thought I’d reach FI, soon after convert that into FIRE and then ride off into the Mediterranean sunset.  So just what is going on...

It might be helpful to start with putting some backstory on the table.  I apologise to those who’ve read my book  as you’ll already know some/most of this.  I genuinely come from pretty humble beginnings which means that if I get this wrong I have nowhere to run.  This also means no top up inheritance to come should it all get a bit lean later in FIRE.  Thinking this through and for me it’s more than just a risk to manage.  I’d go so far to say it’s actually a fear.  I have seen and been part of poverty.  It’s not fun.  This is definitely having an impact despite me knowing I have enough.  Shucks, when I look at my wealth today my withdrawal rate if I went today would be less than 2.5% and that comes with knowing that additionally 47% of my spending could become discretionary if/when we see a very bad bear market.  One of the benefits of a quality of life for me costing very little.

It’s starting to get Interesting

Time since my One More Year call has passed by incredibly quickly.  In fact so quickly that if I’m to stick strictly to it resignation day is now just a few a short weeks away.  At the time of my last post this was looking to be an incredibly 100% easy call with Brexit being just over a year away as well as an employer who had apparently decided I was now Mr Average.

Enter 2 events that have shifted that to 20% work on a bit longer to 80% FIRE to the Med in 2018.

The first is the draft Brexit Withdrawal Agreement which was published on the 19 March 2018.  As somebody moving to the Med keeping my EU rights is a very important consideration.  With that in mind, if I’m reading the Agreement correctly, I now gain no advantage by being in the Med by Brexit day, the 29 March 2019, when compared with setting up my new home during the Transition Period, which is now agreed by both the UK and EU as ending on the 31 December 2020.  Brexit pressure off.

When the Stars Align

It’s not always sunny on The Med

The past few months have seen me pass through my annual work performance review, my annual salary review and a new HR initiative which seems to have been designed to suppress salaries (read suppress the salaries of the highest performers).  The results of all that for me were that despite my strong work ethic (first into the office, last out of the office and 60-70 hour work weeks) and strong results (but which fell short of very ambitious/impossible? objectives) I managed to receive the worst performance review since I entered the world of work which nicely dove tailed into an annual salary increase well below inflation.

This most definitely doesn’t fit into my Saving Hard by Earning More strategy, which in the past has resulted in healthy earnings increases.  I’m not sure what objective the company were trying to achieve but my interpretation is that it’s now time to move on.  Normally, that would have been a new job in a new company for more reward but this time around that’s not necessary as I now have another option – FIRE.  The stars really are aligning nicely.

Click to enlarge, RIT earnings improvement since saving hard by earning more

On the topic of FIRE my One More Year, after a slow and frustrating start that now seems to be passing quickly and without a worry in the world.  Financial plans between now and a summer FIRE are also synchronising nicely:

• collect one more bonus;
• maximise my pension contributions to just below the tapered annual allowance for 2018/19;
• which if my annualised returns continue as they have since starting on this journey should see me nicely just on the underside of the Pension Lifetime Allowance (LTA) by age 55; and
• then use that bonus (plus some salary) to fill my and Mrs RIT’s 2018/19 ISA allowances of £20,000.

Snakes and Ladders

Well it looks like asset prices don’t always go up.  Of course I’m not surprised by this revelation but the mainstream media did seem surprised with headlines such as “Dow loses 7 million points in the session” and “Worst market performance since dinosaurs roamed the earth” but then of course they need sensationalism as they’re attention seeking.  The market action even meant that it made the first news item on the radio for a couple of days.  It could almost be 2008 again.  It would be enough to scare people off investing if they did nothing more than listen to news sound bites.

What has really happened thus far?  I say thus far because the market can of course continue to fall...  Or it might flat line...  Or it might go up again...  By my calculations this week the S&P500 has fallen 5.2%, last week it fell 3.9% and the week before that it actually gained 2.2%.  In contrast the FTSE100 this week fell 4.7%, last week fell 3.9% and the week before that fell 0.8%.

This is what has happened to a couple of single indices and makes for great news items but how has this impacted a long term investor who buys, holds and rebalances a variety of global asset classes.  I like to think I’m one of those so let’s use my real world portfolio as a comparator.  This week my wealth has decreased by 2.3%, last week it decreased by 1.5% and the week before that it decreased by 0.4%.

2017 In Review, A Year of 2 Halves

This annual review is usually a very quantitative personal finance review and for those readers looking for that please bear with me I’ll get there I promise.  I’m firstly going to go off piste a little because for me (and really for the first time on this journey) the FIRE challenges of 2017 weren’t about quantitative finances but more about qualitative mental FIRE readiness.  You only have to look back at some of my 2017 posts to see the difficulties I’ve had:

• I came into 2017 ready to FIRE.
• Towards the end of the first quarter excitement was starting to build in the RIT household.
• But then early in the third quarter the decision was made to do One More Year.  I blamed Brexit primarily and then secondly further justified it by suggesting it would give us further fun money.  Looking back I honestly can’t tell you if that was the real reason.  I still tell myself it was but I also know that running against the herd and pulling the FIRE pin at age 44 when all those around you will work for many years more is a little scary.  Was that the real reason?  For me Early Retirement has always been defined as work becoming optional rather than I won’t ever work again.  That’s easy to say but right now I’ve also manoeuvred myself into a position where I can build wealth quite quickly and it would take a lot of effort to do that again if I decided that FIRE wasn’t for me in 5 years time.  Was that the real reason? ...
• Whatever the real reason for holding back, I guess it’s not so important in the grand scheme of things as by the end of the third quarter frustration at my faffing was clearly creeping in.
• Then phase 1 of the Brexit negotiations closed out and we again called FIRE readiness.  This time given my thinking around lasts I really do hope it was just a Brexit thing and we really are ready this time.

In contrast to that emotional roller coaster ride the quantitative financial side was a breeze with annual wealth growing by £184,000.  My second best year yet but interestingly at the same time one where performance when compared to other financial bloggers and targets I set myself a long time ago will look a little average.  I’ll make excuses for it but I’d love your views.  After all, it’s one of the reasons I stay at this blogging lark – to hold myself accountable to my plans.  Let’s look at the details.

SAVE HARD

I unapologetically continue to define Saving Hard differently than most personal finance bloggers.  For me it’s Gross Earnings (ie before taxes, a crucial difference) plus Employer 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 an uninspiring Savings Rate of 42.3% against a plan of 55.0%.

Click to enlarge, RIT Savings Rate

2017 HYP Review

Back in late 2011 I started building what is known as a UK High Yield Portfolio (HYP).  It was a much talked about strategy back in the Motley Fool forum days and is still being discussed on the more recent Lemon Fool forums.  One of the aims of a HYP was as a substitute for an annuity in retirement.  This meant that the dividends spun off by the HYP needed to increase at a rate which is equal to or greater than inflation if it was to be called a successful investment strategy.  I unitised my HYP a long time ago so I know in 2017 that goal was easily achieved with dividends increasing by 20.1% which is well above the current inflation rate (RPI) of 3.9%.

The dividend increase was largely helped by the only ad-hoc event to occur in 2017 which was National Grid’s (NG.) special dividend and share consolidation.  If I net that special dividend off as many would argue that was really a return of capital it’s still done its job with a 6.7% dividend increase.

There were no buys (or sells) in 2017 as my overall investment strategy has now moved on to be a mechanically diversified collection of low expense, physical (as opposed to synthetic), income based (as opposed to accumulation) ETFs tracking enough indices to give me diversification across asset classes and countries held within low expense SIPP/ISA/Trading Account wrappers.  This means that the HYP now only forms 5.2% of my wealth but interestingly it still delivers 14.3% of my total dividends.  This is very useful for 2 reasons:

• Along the lines of replacing an annuity its original aim was to help me live off dividends only in FIRE and in that regard it’s still punching above its weight.  In 2017 it spun off £3,929 in dividends.
• When we come to register in our new Med country as self sufficient, unlike the UK and one of the reasons we ended up with the disaster that is Brexit IMHO, we’re going to need to demonstrate sufficient income and/or capital to prove we’re not a potential burden on the state.  Those dividends are a good chunk of income to help with that.