Protecting Your Portfolio from Inflation – Index Linked Gilts (Linkers)

As a person who is not in debt and is saving hard for Retirement I am very conscious of the need to protect the purchasing power of my Retirement Investing Today Portfolio from the ravages of inflation.  Once I’ve done this I then need to work out how to get a real (after inflation) return.

If I am a debtor then inflation can help me as the real value of my debt becomes less as every day passes, however the opposite is true if you own assets.  Additionally, in a relatively low inflation environment, like we find ourselves today, it can be easy to ignore it.  In my opinion we just can’t afford to.  Even a small amount of annual inflation will wreak havoc on a non inflation protected portfolio over a relatively short period of time.

NS&I Index Linked Savings Certificates - Changes Announced

National Savings & Investments have announced changes to the way their Index Linked Savings Certificates operate.  These changes take effect on the 20 September 2012.  The link to the NS&I Announcement is here.

The change that hurts me the most is likely to be:
"penalty and loss of index-linking for cashing in early  
The penalty is equivalent to 90 days’ interest on the amount cashed in. And you’ll lose the index-linking on your whole Certificate for the investment year in which you cash in."
 
This is likely to hurt as should house prices resort to a sensible valuation I would likely liquidate all of my NS&I Index Linked Savings Certificates to maximise my deposit and hence minimise my mortgage rate.  Although at the rate we're going I won't have to worry about that for a long time.

Early Retirement Extreme vs Early Retirement vs Typical Retirement vs Late Retirement

There are a lot of Investment and Pension Calculators available online today.  They get you to plug in a number of pieces of data, make some assumptions and then tell you an answer.  This might be your total projected pension fund, your projected income or even the probability or reaching a financial goal.  I find these a useful tool and use them regularly except I find they have one failing.  They only ever give you a single answer based on the data you enter and don’t show you a helicopter view of how the various factors that Mr Market throws at you combined with the decisions made by the Average Investor interact.  I therefore decided to build a simple Retirement Investing Today model in Microsoft Excel and have found it informative.  I hope you do to and as always would welcome your feedback.

Before we look at the model let’s first look at why I decided to run this analysis in the first place.  In the circles that I move (both in the flesh and online) there seem to be broadly four types of Retirement at play.  Some people have planned for one type and achieved their goal but in many other instances people have planned for one and failed miserably.  How many times have your read or heard people say that I was on target to Retire by 50 (or some other random number) but then the market crashed and so now I’ll have to work a lot longer than planned.  Why do people get it so wrong?  I want to know so that I can avoid the same mistakes.

The FTSE 100 Cyclically Adjusted PE Ratio (FTSE 100 CAPE or PE10) – August 2012 Update

This is the Retirement Investing Today monthly update for the FTSE 100 Cyclically Adjusted PE (FTSE 100 CAPE).  Last month’s update can be found here.

As always before we look at the CAPE let us first look at other key FTSE 100 metrics:

• The FTSE 100 Price is currently 5,835 which is a 3.4% above the 01 July 2012 Price of 5,641 and 13.7% above the 01 August 2011 Price of 5,130.
• The FTSE 100 Dividend Yield is currently 3.69% having fallen back from 3.75% on the 01 July 2012.
• The FTSE 100 Price to Earnings (P/E) Ratio is currently 11.23 which is up 10.7% since the 01 July 2012 and 19.3% since the 01 August 2011.
• The Price and the P/E Ratio allows us to calculate the FTSE 100 As Reported Earnings (which are the last reported year’s earnings and are made up of the sum of the latest two half years earnings) as 520.  Of concern is that Earnings in nominal terms now seem to be falling with them down 6.6% since the 01 July 2012 and down 4.7% since the 01 August 2011.

The S&P 500 Cyclically Adjusted PE (aka S&P 500 or Shiller PE10 or CAPE) – August 2012 Update

This is the Retirement Investing Today monthly update for the S&P500 Cyclically Adjusted PE (S&P 500 CAPE).  Last month’s update can be found here.

Before we look at the CAPE let us first look at other key S&P 500 metrics:

• The S&P 500 Price is currently 1,406 which is 3.4% above last month’s Price of 1,360 and 18.6% above this time last year’s Price of 1,185.
• The S&P 500 Dividend Yield is currently 2.01%.
• The S&P As Reported Earnings (using a combination of actual and estimated earnings) are currently $90.02.
• The S&P 500 P/E Ratio is currently 15.6 which is up from last month’s 15.2.