Am I Making a Mistake?

Security of employment is not what it was once.  Changes including globalisation, technology, automation and lean (lean is basically doing more with less through the elimination of waste), amongst others, have sent it well on its way.  We see lack of security of employment manifest itself in many ways with one of the more recent ones making headlines in the mainstream media being zero hours contracts.

The problem with this change is that without security of employment there is always the risk of starving to death (maybe an extreme example given the UK’s welfare state status, but certainly not in some countries and hopefully you get my drift).  According to Maslow’s Hierarchy of Needs inability to correct for this deficiency need (or d-need) then prevents one from ever reaching Self-Actualisation which is essentially the realisation of your full potential.

Click to enlarge, Source: www.convene.com

Personally, in my current career I’m also under no illusion of having any sort of security of employment.  I know that my current security is linked to nothing more than my last performance review or (not and) nobody anywhere else in the world being able to offer the equivalent service for a lower cost.  Part of this is within my control, but mistakes do happen, and part of this is outside my control.

With time I’ve come to realise that my solution to this problem in the short term has been to keep my skills current (the 1% inspiration) and then work hard (the 99% inspiration).  So far this is working with a recent notification that I’ll be receiving a salary increase of 4% and a bonus that exceeds my notional amount in recognition of my performance last year.  I never thought too much of this work hard approach, including was it too extreme, but when readers last week made comments like;

“I appreciate this is the path you've chosen, and for well thought out reasons, but your hours of work sound awful“;

and;

“Holy s**t - good job you have an escape plan as that is a brutal life you currently have carved out for yourself - 16 hour days!  You must be tough as nails!”;

it really did make me take a step back and think.

My Non-Financial Life

This blog is focused on charting my progress to Financial Independence and optional Early Retirement.  By having to continually to write about it I am forced to stay the course because I’m continually held accountable.  You the reader get to see my journey, warts and all, which also includes most of the financial research I do behind the scenes.  It stays very unemotional and fact based as that’s what personal finance in my opinion should be.

Behind all this though is a living breathing human being and also my family who are personally affected daily by what I publish here.  I rarely write about this side for a few reasons:

• At this time my anonymity is important.  I don’t think this will always be the case but right now it’s probably not a good idea if my boss knows I might retire in 18 months at 43 years of age;
• This is a personal finance site and not mumsnet;
• Even though I'm a STEM graduate it’s the financial side including all the planning that I've found the most difficult.  Executing on it including finding ways to Earn More, Spend Less by Living Well Below Your Means, Spend Less by effectively opting out of consumerism or even Spend Less by sweating the small stuff I haven’t found difficult at all; and
• Finally but importantly while achieving Financial Independence by 43 is pretty exciting stuff knowing that I eat Weetabix (I don’t BTW because I wouldn't buy a more costly brand when equivalent lower cost alternatives are available) for breakfast probably isn't.

All of that said it is of course relevant for anyone considering, but not currently on, a similar journey to my own.  Some 7 and a bit years on it’s now just the life my family and I live but thinking back our personal lives have changed a lot.  This was reinforced this weekwith a reader making the following comment:

“Have you previously posted on what you get up to in your daily life? I have a lot of respect for what you're achieving and would enjoy hearing how you enjoy daily living while being frugal. When last did you go on holiday? What do you do for entertainment? Etc. Does that make sense? Just trying to get a feel for the types of adjustments I'd have to make.”

So without further ado let me give some insights into how I live my personal life.

18 Months to Go?

6 Months ago, almost to the day, I made the bold statement that I had 2 Years to Go before Financial Independence beckoned and optional Early Retirement was staring me in the face.  If I'm on plan for that then today I need to be writing that I have 18 Months to Go.  So do I?  As always let’s run the numbers.

Saving Hard

One of the key pillars of my overall Retirement Investing Today strategy is to find ways to earn as much as possible while finding ways to spend as little as possible by living healthily and intentionally well below my means.  The difference between the two is savings that can be invested to start working for me.  So how have I done on this front given that to be successful I need to maintain a savings rate of 55% of gross earnings, which I define as Savings plus Employer Pension Contribution divided by Gross Earnings (ie before HMRC takes their portion) plus Employer Pension Contribution?  Against that 55% target I've actually averaged a savings rate of 53.9% over the last 6 months.

Note that here I don’t include any investment returns, EBay sales, savings account interest, credit card cashback or 5p coins picked up on the roadside as earnings.  I do however make it hard on myself by counting the tax from both my salary and investments/interest as spending which encourages me to structure my finances as tax efficiently as possible.

On a chart my savings look like this:

Click to enlarge

So I've failed to meet this objective but I'm actually still happy with the result.  Why, because you’ll see the savings dip occurred just before and just after the end of 2014 during which time as a family we conducted some Early Retirement research by spending some time in one of our preferred Early Retirement locations – Puglia, Italy.  We went in the depths of winter as we know that part of the world is beautiful in summer as a tourist but we’re talking about living there permanently and so wanted to see it in its worst light.  The conclusion?  As a tourist location it’s still a pretty impressive part of the world:

Click to enlarge, Trullo in Alberobello, Puglia

Active vs Passive Portfolio Rebalancing

When I set out my Investing Strategy some years ago, which included my initial asset allocation as well as how that allocation would change over time, I effectively established a portfolio risk vs return characteristic.  Over time that asset allocation has and will continue to change as different asset classes provide different returns in relation to each other.  To recapture the required portfolio risk vs return characteristic I then need to periodically rebalance the portfolio.  Importantly, I rebalance to manage risk rather than to maximise returns.  Over the years I've found that I follow effectively two types of rebalancing – what I call Active and Passive Rebalancing.

Active Rebalancing

Active is what you will predominantly read about in books or online.  There is not much conflict out there as to what it is.  It is simply selling down the assets that have performed the best and using those funds to top up those assets that have performed the worst.  What you will see plenty of conflict about is the frequency of when you should rebalance.  I've seen preset frequencies talked about which could be monthly, quarterly, half yearly, annually or even longer periods.  It could also be triggered by a memorable date such as a birthday or the New Year.  Personally I'm conscious that every time I rebalance Actively it’s likely I’ll be staring down the barrel of trading expenses, possibly taxes and certainly lost time that could be spent doing something else.

With this in mind and given my whole mantra has always been to minimise expenses and taxes I instead adopted and have stayed with a valuation based rebalancing approach.  This is not complicated and is simply if any asset allocation moves more than 25% away from a nominal holding I will either sell or buy (as appropriate) enough of that asset to move the allocation back to nominal.  This methodology plus the Passive Rebalancing element, which I’ll cover in a minute, has meant I've been forced to do very infrequent rebalancing.

Why I Hold Gold in my Portfolio

In my experience if you’re discussing UK Equities as part of an investment portfolio its validity is unlikely to be challenged and any response is likely to be fairly passive.  A typical response might be something like what percentage allocation do you have.  If you say to somebody that you hold Gold then the responses can be far more variable.  At the extreme they can range from I don’t believe in Gold as an investment as it doesn’t pay a dividend because it just sits there looking shiny to I’m 100% invested in Gold, guns, ammo and tinned beans.

Within my own portfolio I target a holding of 5%.  So why do I hold gold?  It’s for the same reason that I buy property or gilts on top of my equities.  To quote Bernstein’s The Intelligent Asset Allocator it’s simply because ‘Dividing your portfolio between assets with uncorrelated results increases return while decreasing risk’ which is a key concept within Modern Portfolio Theory (MPT).  Bernstein continues with ‘Mixing assets with uncorrelated returns reduces risk, because when one of the assets is zigging, it is likely that the other is zagging.’  The keyword in the first quote is uncorrelated.  In the book he works up some examples to validate these statements.

Let’s run a simple analysis looking to see if we can find an example of gold being uncorrelated with another asset class.

My first chart shows how the Monthly Gold Price in Pounds Sterling (£’s) has changed since 1979.  Over the past year its Price has fallen by 0.6%.  We looked in detail at the FTSE100 last week so let’s use that as a different asset comparator as that dataset is up to date.  Over the past year the Price of the FTSE100 has risen 7.0%.

Click to enlarge

Diverting quickly for completeness, as I always like to show charts in Real terms to remove the emotion that comes with the unit of measure continually being devalued by inflation, let me quickly also show the Real Gold Price in Pounds.

Click to enlarge