2 Years to Go

Only three weeks ago I was writing about my 75% of the wealth required to retire milestone and now as I sit writing this post, drinking a tasty homemade coffee which is helping me save hard ( ), it’s time to write about yet another.

Today my top level asset allocation looks like this:

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The detail behind this is still very much in line with my strategy that I first published in 2009.  Between the 04 January and 02 August 2014 (funny dates as I record my financial position weekly) this investing wisely portfolio returned 3.9%.  Move forward to today and that year to date return has morphed into 7.0% in around a month.  Should long run history repeat to average this portfolio should return about 4% per annum in real inflation adjusted terms over the long term (it’s returned exactly that since I started this journey in 2007) going forwards.

On top of that I continue to work on methods to save hard:

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Every little 0.01% helps

Today’s post title will possibly make High Yield Portfolio (HYP) advocates think I'm about to talk about Tesco’s (Ticker: TSCO) Friday action which included a 75% cut in the half-year dividend to 1.16p and a share price fall of 6.6%.  I'm not though because my own HYP contains alternate Sainsbury’s so I'm not (yet) affected plus there is already plenty of good blog coverage on the topic.

Instead I want to cover an important announcement that could with time save passive index investors a lot of money but which for some reason gained no MSM press inches that I'm aware of.  I don’t know why but the cynic in me thinks it could possibly be because the company that made the announcement doesn't advertise heavily and that is what much of the news is today – thinly veiled advertisements.  It was however picked up by the very astute non vested interest Monevator team.  Some Vanguard UK and Irish Domiciled Index Mutual Fund’s, ETF’s and LifeStrategy Fund’s have had their investment charges lowered.

Personally this affects me in the following ways:

• I hold a lot of the Vanguard FTSE UK Equity Index Fund in my Youinvest SIPP.  Ongoing Charges on that fund from Monday reduce from 0.15% to 0.08%.
• I hold the Vanguard S&P 500 UCITS ETF in my TD Direct NISA.  Ongoing Charges on that ETF will reduce from 0.09% to 0.07%.
• I also hold the Vanguard FTSE Developed Europe UCITS ETF in my TD Direct NISA.  Ongoing Charges on that ETF will reduce from 0.15% to 0.12%.

The Two Phases of Wealth Building

Every week I religiously capture the value of each of my investments which I then sum to give me an instantaneous net worth.  This week saw my net worth increase by more than £5,000 without contributing any new money.  For me that is a very large amount of money, and of course Mr Market could take that £5,000 away this week, but it reminded me of the two phases of wealth building that I'm seeing as I'm working to build wealth over a quite short period of time.

The first phase is Building Capital.  As you start on your wealth building journey this is the first phase you pass through.  Here you just want to be adding as much capital to your wealth as quickly as you can get your hands on it.  Saving Hard by Earning More and/or Spending Less will have a much bigger effect in this phase than Investing Wisely.

The second phase is Return on Capital.  Here while Building Capital is still providing a big boost to your wealth it’s now more important to have a stable investment strategy which is very tax and investment expense efficient.  In this phase you could even start to ease of the Saving Hard by for example going part time or taking up that lower paid higher enjoyment opportunity you’ve always desired without moving your financial independence day greatly.

Let me demonstrate the two phases with a simple example (where I’ll ignore inflation) that tries to cover many of the points that I personally live (and have lived) as well as regularly capture on this site.  Average Joe works hard and for his hard work receives £45,000 per year making him a 40% higher rate taxpayer.  Joe wants early financial independence to give the option of early retirement and so starts to think about he might achieve that.  He realises he firstly needs to focus on Building Capital by Saving Hard.  His employer offers a pension scheme where if Joe salary sacrifices 5% of his own salary then they will match it.  There’s some free money there so he goes for it.  Salary sacrificing also brings the benefit of lowering Joe’s taxable salary to £42,750 saving both employee and employer National Insurance.  Joe’s employee NI saved is added immediately to his pension but his employer also generously adds the 13.8% employer NI that they also save.

A Significant Milestone

Noel Whittaker in his book Making Money Made Simple states that in a country such as the UK (he actually cites Australia as an example) “the average person needs only two things to become wealthy – the knowledge of what to do, and the discipline to practise the things that need to be done.”  When put that way it sounds so simple (and of course it is) however reality is of course a different story all together particularly when I look back at my own potted history.

I graduated and started work in 1995.  Almost instantaneously I took on plenty of debt in the form of a car loan and was quick to ramp my standard of living by spending nearly everything I earned (I did save a small amount into an employer pension but it was nothing more than the default fund).  It actually took me until 2002 to make a small purchase into my first investment fund which was not part of any overall strategy but simply a random purchase.  I can’t even remember what prompted the purchase but it certainly wasn’t the “knowledge of what to do”.   It was a great selection [sic] with annual expenses of 1.78% along with a 4% contribution fee.  Hardly the road to wealth.

It actually took me until 2007 to wake up and start to figure out what the game was all about which is when my wealth building journey to financial independence really started.  It was in this same year I bought my first tracker - a FTSE All Share Tracker Fund.  That is 12 years from when I started earning a full time salary to even begin to have the personal finance “knowledge of what to do”.

The RIT High Yield Portfolio (HYP) – Adding GlaxoSmithKline

I’ve now been building my High Yield Portfolio since November 2011.  A reminder of my previous purchases:

• On the 28 November 2011 I purchased AstraZeneca (LSE ticker: AZN), Sainsbury’s (LSE ticker: SBRY) and SSE (LSE ticker: SSE).
• On the 21 December 2012 I added Vodafone (LSE ticker: VOD).  To avoid all the Verizon Wireless disposal fun and games I subsequently sold out on the 21 January 2014 and then repurchased the new VOD on the 30 April 2014.
• On the 11 October 2013 I received 227 shares as part of the Royal Mail Group IPO (LSE ticker: RMG).  I didn’t consider it a HYP purchase at the time (and still don’t) but simply the closest thing to free money I’ve come across in a long time.  The tax payer really was fleeced on that one.  It sits within my HYP as it is the closest match within the different portions of my portfolio.
• On the 03 March 2014 I then added HSBC (LSE ticker: HSBA)
• On the 30 June 2014 I added Pearson (LSE ticker: PSON) and Royal Dutch Shell (LSE ticker: RDSB).

The experience continues to be positive with the HYP as of Friday (excluding the GSK purchase) sitting on a trailing dividend yield of 4.6% compared to the FTSE 100 dividend yield of 3.3%.  At the same time the HYP is also outperforming the FTSE 100 from a capital growth perspective.  Year to date capital growth of the HYP is down 0.6% compared to the FTSE 100 which is down 1.0%.  Since inception the HYP has grown 35.4% compared to the FTSE 100’s 25.7%.

Wealth Warning: I don’t know if long term this HYP strategy will work.  There is every chance that a simple diversified portfolio of lowest expense index trackers that are invested tax effectively will in the long term outperform this strategy.  Only time will tell. 

Buying GlaxoSmithKline

So with hundreds of shares to choose from I grabbed GSK on Friday.  Let’s review why by sharing my usual selection criteria.  At the same time let’s also have a quick look at how HYP’able my current holdings also look today.

1. Is the business model simple to understand?

The first criteria is qualitative.  I want to understand how the business I’m buying makes its revenues in less than 10 seconds.  GSK and its brands hardly need an introduction.  They are a global pharmaceutical and healthcare company developing and supplying medicines to help people do more, feel better and live longer.  They make everything from Ventolin which any asthma sufferer will likely know well, through remedies such as Beechams Cold & Flu and onwards to day to day brands such as Macleans toothpaste.  They even own the Horlicks brand.  This is simple to explain and understand so meets my first criteria.