A Retirement Investing Today Review of Quarter 1 2013

For all UK based readers a Happy New Financial Year to you.  I wasn't sure if I should have put the Happy in front because for me a new financial year carries both a positives and a negatives.  The positive is that a new ISA year is upon us meaning I can again begin working hard to fill my full Stocks and Shares ISA allowance which for this year is £11,520.  The negative is that HM Revenue & Customs (HMRC) will soon send me a request to complete a tax return where as always I will be sent a bill because of my now considerable investment sum.  This however is not as bad as it could be as I continue to push hard to minimise taxes paid through tax avoidance schemes such as ISA’s, Pensions and NS&I Index Linked Savings Certificates (ILSC’s).  Over time continual energy to take advantage of these when possible (remember ISA’s are an annual use it or lose it allowance, NS&I ILSC’s come and go on an ad hoc basis and for this financial year the pension contribution limit is for me a very large lower of 100% of earnings or £50,000 which is called the annual allowance) really add up and mean this year I will only be taxed on around one third of my total investment portfolio.  Therefore on the whole I’ll call it a Happy New Financial Year.

In the past I have only tended to publish my own personal financial position on an annual basis even though I track value weekly and performance monthly.  I now intend to publish my own situation on a quarterly basis for 2 reasons:

• My 2012 annual review showed that in the metrics that I measure myself against I had one conceded pass and one fail.  By publishing more regularly I hope that it will force me to hold myself more accountable to my objectives plus also allow more time for recovery should I fall off the rails.
• The 2012 annual review sparked some good discussion so was clearly worthwhile to both myself and some readers. 

My own personal situation follows everything I talk about on this Site to the letter.  The site is all about Save Hard, Invest Wisely, Retire Early so as with the 2012 Review let’s continue to use those 6 words as a theme.

SAVE HARD

I am now into a fifth year of aiming to save 60% of my earnings, which I define as my gross (ie before tax) earnings plus any employee pension contributions.  This is a very tough target particularly in the current age where we have increased taxes and prices going up due to unrelenting inflation while at the same time my salary is not moving in nominal terms.  My company is currently at the point of annual “salary reviews” but even though I have worked hard over the past year and delivered a lot I expect the same increase as last year which was a large 0%.  I did however manage to this year secure a bonus so I can’t really complain as many of my fellow UK residents I'm sure received nothing.


In addition to hard work Saving Hard has also required me to live frugally and opt out of consumerism. This on the whole has been a very positive experience however every now and then I come close to straying from the path. For example I don’t own an Apple iPhone, Nokia Lumia or Samsung Galaxy mobile phone which I'm told are the current must haves. Instead my personal phone is on a Pay As You Go contract which does not include data and is carried for emergencies only. To be honest I don’t covet a modern smart phone but I would love one of these to simplify reading when on the go and to make staying in touch with the world a little easier. Instead I stick with good old fashioned books and an old laptop which seems to get slower and slower every day.

UK House Value vs UK House Affordability – March 2013

This is the monthly UK House Affordability update, which is the metric that I believe is the key driver of UK House Prices.  It also updates UK House Value which is the metric I am using to assess when it is time to buy a UK home and Sales Volumes.  The last update can be found here.

Let’s first update the key data being used to calculate both UK House Value and UK House Affordability plus report on Volumes:

• UK Nominal House Prices.  There are numerous UK House Price Indices which each measure something different.  This analysis has always used the Nationwide Historical House Price dataset which measures the price of a Standard House and so this month we stay with that for consistency.  March 2013 house prices were reported as £164,630.  Month on month that is a rise of £1,992 (+1.2%).  Year on year also sees an increase of £1,303 (+0.8%).
• UK Real House Prices.  If we account for the devaluation of the £ through inflation (the Retail Prices Index) we see a different picture.  Month on month that increase of £1,992 turns into an increase of £810 (+0.5%).  Year on year that £1,303 increase turns into a decrease of £4,525 (-2.8%).  In real terms prices are now back to those around January 2003.
• UK House Sales Volume.  Sales volumes according to the Land Registry were 53,860 in December 2012.  Month on month that is a fall of 14.0% and year on year a fall of 15.3%.  Volumes are now 40% of peak sales in May 2002 and 66% of the dataset average volume.  
• UK Nominal Earnings.  I choose to use the Office for National Statistics (ONS) Average Weekly Earnings KAB9 dataset which is the seasonally adjusted average weekly earnings of both the public and private sector including bonuses.  January 2013 sees earnings at £470.  Month on month that is a nominal decrease of £2 (-0.4%).  Year on year sees a nominal increase of £5 (+1.1%).  With inflation (the Retail Prices Index) running at 3.3% over the same yearly period the purchasing power of those that work continues to be eroded.
• UK Mortgage Rates.  The proxy I use to monitor mortgage interest rates is the Bank of England dataset IUMTLMV which is the monthly interest rate of UK resident banks and building societies sterling Standard Variable Rate (SVR) mortgage to households (not seasonally adjusted).  February 2013 sees a mortgage rate of 4.4% which is flat month on month and year on year is an increase of 0.26%.  While this metric sees mortgage rates increasing a number of mortgages are seeing falls largely because of the Funding for Lending Scheme (FLS).  2, 3 and 5 Year Fixed Rate Mortgages with high 25% Loan to Value Ratios (LTV) requirements have seen year on year falls of between 0.5% and 0.59% and at 2.87% for a 2 year effectively mean negative real interest rates.  

Dividend Reinvestment is a must to Maximise Wealth Building

There are almost as many investment strategies as there are financial websites.  These might include everything from you must buy this share as it’s a guaranteed ten bagger through to a fund that looks like it will protect you no matter the economic weather.  Of course the strategies discussed will also likely be dependent on whether the person writing the strategy has a vested interest of some description.

I’ve laid out my strategy for all to see however it glossed over an exceptionally important element.  That element is share dividends and specifically how crucial it is to reinvest them while you are building your portfolio.  If you are a UK Investor Monevator touched on this topic back when I was first starting on my Retirement Investing Today journey and more recently DIY Investor has also reinforced their importance but it’s the must have Investing Bible for UK Investors that really reinforces the point with the section entitled “Spend dividends at your peril”.  Dividend reinvestment is important because it is likely they make up a significant proportion of the total return that comes from your individual share holdings, High Yield Portfolio (HYP) or Index Tracking Fund to name but three.  By reinvesting you both get that extra cash into your portfolio, instead of being tempted to buy something you likely don’t really need, but additionally you also then get those dividends compounding year on year.

Let’s look at whether reinvesting dividends is still important in more recent times using my recently built FTSE100, FTSE250, FTSE Small Cap and FTSE All Share data sets.  For today’s analysis I am using the period 18 March 2008 (the first date I was able to source all data required) to the recent market close of the 28 March 2013.  The annualised return or compound annual growth rate (CAGR) for capital growth only and dividend reinvestment for these four datasets is shown below.

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Building FTSE100, FTSE250, FTSE Small Cap and FTSE All Share Data Sets

There are many UK stock market Indices, each of which is trying to measure something different.  The one mostly reported by the mainstream media is the FTSE 100 which is also the Index we regularly use to value the UK stock market.

This week I was looking to dive a bit deeper into some of these other UK Indices to conduct some more detailed analysis.  I trawled the internet for datasets but surprisingly, given the sheer amount of financial data freely available online, I came up blank for sensible datasets.  I therefore had to put my more detailed analysis on hold and spend a number of hours reconstructing a number of FTSE UK indices.  While I haven’t conducted a large amount of analysis yet I thought it was worth sharing the data as it will form a basis for a number of pieces of analysis I intend to do going forward.

The FTSE indices I’ve chosen to reconstruct are:

• The FTSE100 Index which consists of the 100 largest UK public companies.  These 100 companies make up about 81% of the UK market. 
• The FTSE250 Index which is the next 250 largest companies after the FTSE100.  These 250 companies make up about 15% of the UK market.    
• The FTSE Small Cap Index contains smaller companies outside of the FTSE100 and FTSE250. These companies make up about 2% of the UK market.    
• The FTSE All Share Index which is a combination of the FTSE100, FTSE250 and FTSE Small Cap Indices.  It therefore contains about 98% of the UK market.

Each of these Indices has two variants.  The first is the Price version of the Index which is the weighted market capitalisation of the companies within the Index on the day of interest.  These are the Indices you usually see on television or in the papers.  The second is the Total Return Index which assumes that all dividends (or other cash distributions) are reinvested back into the Index.  By looking at the change in both of these Index values between any two dates you can calculate a lot of interesting information which includes:

• The Price Index will allow you to calculate the annualised Capital Gains that you could have achieved, after expenses, if you had bought a tracker fund or ETF and it tracked the index well.
• By then calculating the annualised gain from the Total Return Index and subtracting the Price Index annualised Capital Gain we can then calculate the additional annual return that could have been gained by that same fund or ETF through reinvested dividends.  I intend to run this analysis in an upcoming post as this is one reason why I was looking for the data in the first instance.

Charts for the FTSE100, FTSE250, FTSE Small Cap and FTSE All Share Price and Total Return Indices can be seen below.  These take the value of the respective Index on the first possible investment day of each month.

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Gold Priced in British Pounds (GBP or £’s) – March 2013 Update

As I’m writing this post the mainstream media is telling me that Gold, when priced in its globally quoted, currency is trading at $1589.50 an ounce.  In recent times when priced in US Dollars Gold has been tarnishing somewhat (and I used to think that it was only Silver that tarnished).  Compared with the February 2013 average it has fallen in price by 2.3% and compared with the March 2012 average it has fallen by 5.0%.  If you’re an Investor paid or spending in US Dollars then these are probably relevant numbers however as a UK Investor the numbers are bordering on being meaningless.  Let’s therefore have a look at what is happening to Gold when priced in Pound Sterling.  If you’re interested in history the last update of this metric was in January 2013.

The chart below shows the Nominal Monthly Gold Price in £’s since 1979.  The key Nominal Gold metrics are:

• The Nominal Gold Price is currently £1,054.16 which is 0.3% above the January 2013 Price of £1,051.35.
• Year on Year Nominal Gold Prices are only 0.4% below the March 2012 Price of £1,057.94. 

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In contrast with US Dollar Investors we can see that UK Investors are just not seeing price falls.  This is caused by Sterling devaluing against the Dollar at a rate pretty close to the fall in Gold Prices when measured in its globally quoted currency.