Lenses

A chart of the monthly FTSE 100 price looks something like this:

Click to enlarge, Monthly FTSE 100 Price

This is the chart that you’ll see on all the mainstream media channels and it shows that the FTSE 100 still has about 32% to fall if it’s going to match the worst of the global financial crisis (GFC).  This sounds like a long way until one thinks about a big failing with this type of chart.  It’s unit of measurement…  The FTSE 100 is priced in £’s and they’re constantly being devalued via inflation.  So, let’s take out a different lens and try and look at the chart in real, inflation adjusted, terms.

Firstly, let’s correct for the consumer price index (CPI):

Click to enlarge, Real (CPI) Monthly FTSE 100 Price

That shows that instead of falls of 32% being needed it’s actually closer to falls of 16% for parity with the worst of the GFC.

Perspective

If you were a trader on the financial markets, I’d think that you’ve probably had quite an interesting week.  After all the S&P500 is down 11.5% (an official correction without even going back into the declines of the previous week), our FTSE100 is down 11.1%, the Nikkei225 is down a more modest 9.6% while the ASX200 is down 9.8%.

Word on the street is that this has been caused by fear of what coronavirus, or to use its catchier name, COVID-19, could do to global financial performance, including the more than 1,000 companies contained within just those four faceless indices I’ve mentioned.  Years ago I proved I was a useless trader so with that in mind I’d also still suggest that some of the moves are caused by the coronavirus being a good excuse to have a market pullback given markets like the S&P500’s current hefty valuation.

Down market moves like this then give those of us who are paid to sell drama a great opportunity to come up with headlines like “Coronavirus meltdown: Airlines plunge as global stock markets suffer their worst week since the 2008 financial crisis” (I won’t link to the source of that one but if you’re interested Google is your friend) through to something a little more data driven like “Shares drop in worst week since financial crisis”

If you didn’t take personal finance seriously, articles like those might even be enough to cause you to panic (whether or not the first $100 billion trading day for the ETF SPY (an S&P500 tracker) was panic is of course debatable) with your own wealth or even not get started on the road to financial independence in the first place.

Insanity and 2019 in review

“Insanity is doing the same thing over and over and expecting different results” – not Albert Einstein as I always thought but actually Rita Mae Brown 

2019 represented my first full year of FIRE, albeit with a slip-up back to FI during the year, which was then later corrected.  Despite a lot of my pre-FIRE posts being financial in nature finances actually occupied very little of my mind through 2019.  Having my wealth increase by £148,000 and my spending, albeit profligate, significantly less than this certainly helped here.

What did occupy a lot of my mind, as regular readers will be well aware, was the psychological, emotive and decompression elements of FIRE.  So let’s start here first and take a snap shot of where I find myself.

Nearly 14 months into my decompression I would have to say that while the days are getting easier I am still very much deep in the decompression mud.  There are still many unanswered questions and much soul searching (or is that naval gazing) going on.  To help with that I’ve tried to continue with the human being while changing only one thing at a time theme I started mid-year.  One conclusion I’ve come to, and started to accept, is that it’s unlikely that I have a “silver bullet” single purpose in me and I’m really ok with that.  My purpose doesn’t have to occupy 60 hours per week, like my previous job, so why I was thinking that is beyond me.  Instead I’m starting to take great joy in many small “successes” that without FIRE I wouldn’t have been able to do.  That extra 3 miles of hiking into the forest, seeing something new, because I have the time...  That 3 hour lunch with a loved one that builds a stronger bond because I have the time...

The one change I have made is that an old friend asked me to help with a very short term very temporary job.  I never expected it to be purposeful (so it’s a job and not work) but I did think it would be interesting so took it on.  I just hope that is helping with my decompression and not clouding it.

2019 HYP Review

It’s now a little over 8 years ago that I started to build my UK High Yield Portfolio (HYP).  It was a much talked about strategy back in the Motley Fool forum days and today still gets plenty of attention on the Lemon Fool forums today.  I built the portfolio between November 2011 and July 2015 by which time I’d amassed 17 shares across multiple sectors.  That included a token amount of Royal Mail Group (ticker: RMG) during the initial public offering in 2013 and the spin-off of S32 by BHP in 2015.

Today the portfolio is down to 16 shares because of the forced Amlin sale in 2016.  It was set up to be close to a low tinker portfolio with only a few mechanical rules that would trigger a sale if there were big changes to a share.  For example if the actual value of a holding became 50% larger than the median share holding I would sell 25% (I’m looking at you Astra Zeneca, ticker: AZN, who is now 2.4 times the median) or if the actual dividend yield dropped below 50% of the FTSE All Share.

As it’s turned out to date I’ve done precisely zero tinkering unless forced by corporate events.  This means in 2019 there were again no buys or sells.  The complete HYP and the respective values of each share are shown in the chart below.  The purchasing rule that I followed while building the HYP was the amount of the next purchase was the median share value of the current portfolio (with the exception of RMG and S32).

Click to enlarge, Retirement Investing Today High Yield Portfolio

Real life portfolio returns

I was recently reading a FIRE blog post, from a couple who are still very much deep in the swim phase of the FIRE triathlon, where the post was exploring who in society has the opportunity to FIRE if they so choose.  Of course as many of us FIRE bloggers love a good spreadsheet, the weapon of choice for exploring this was an Excel model and a whole pile of assumptions.  Two of these assumptions were that we were living in a hypothetical world where there is no inflation and where the expected annualised investment portfolio return was 7%.  So to my reading a critical assumption in their Excel model was a real (ie after inflation) portfolio return of 7%!

I’m much further on the FIRE journey than these good folks being in the triathlon bike phase having now been FIRE’d for a little over a year and having been on my FIRE journey for around twelve years.  At one end this means I have more experience and data than these folks but it also means I’m more grey, grizzled and cynical.  With that warning out of the way to me that real 7% return assumption just seems way to bullish!  So I then asked myself why are they using such high returns in their model as not for a second do I think they are trying to deceive?  The simple answer I came up with is that the vast majority of FIRE blogs are from people who are pre-FIRE with many never having witnessed a bear market so they have no real life data, only published financial data.  Then from those that are FIRE’d I am yet to see transparent long term portfolio returns shared.  So today’s post aims to do just that.  Put a stake into the ground where hopefully your comments and other bloggers posts will tear my investing performance apart showing me to be either a poor, average or good investor.  With time that might help us all fine tune the expected returns we can all plug into our much loved spreadsheets.