The RateSetter Experiment (6 month update)

My low charge investment portfolio today holds 7.4% of my total wealth in cash.  I currently use 2 main repositories for this.

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The first of these is a Yorkshire Building Society (YBS) Savings Account which 6 months ago was earning an interest rate of 1.25% AER.  Looking today they seem to have stealthily reduced that to 1.24% AER for which I have received no notification.  YBS, if you’re reading this, I hope you make good use of that extra 0.01%!  As a higher rate tax payer and with inflation now running at 2.1% this savings account is allowing my savings to be eroded at the rate of 1.36% per year.  So every day that goes by a pound held in this account has less purchasing power than it did the day before.  I’m going backwards.  If you happen to be a basic rate taxpayer then you’re also going backwards, albeit at a more leisurely 1.11%.

Little to no movement here is of course no surprise given the latest average savings account data from the Bank of England shown in the chart below.  It shows instant access savings rates up a mere 0.03% in the last 6 months.

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What alternative do I have?  Well moneysavingexpert.com tells me the Santander 123 current account which pays interest of 3% AER on balances between £3,000 and £20,000 is still hanging around.  It of course also comes with a monthly fee and minimum deposit requirements but it also offers cashback opportunities although I already get that with my American Express Platinum cashback credit card.  Personally, I prefer clean simple accounts and today that looks to be Coventry Building Society with a 1.4% interest rate but these accounts can’t be run online.  I mean honestly an account that cannot be accessed and managed online.  Do the Directors have shares in Royal Mail or something or are they just trying to grab headlines...  For now I’ll just leave what I have in YBS and continue to deposit new savings into my second newer different risk profile repository, Peer to Peer lending (P2P).

How about those falling oil prices – Adding BP to my High Dividend Yield Portfolio

Unless you've been living under a rock you will be very familiar with oil prices falling for a few months now.  Regular readers will know that I have a monster commute so I’m certainly noticing the difference at the petrol pump.  That said I also have Royal Dutch Shell within my High Yield Portfolio (HYP) which as I write this post is now under water by 15.3%.   Search online for some oil data and you won’t have to go far before you find a chart not unlike this:

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I have a problem with these types of charts because the unit of measure used to compare oil against is being constantly devalued through inflation.  Let’s therefore correct for that:

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With West Texas Intermediate Oil (WTI) for February delivery settling at $48.69 a barrel on the New York Mercantile Exchange the real oil price is certainly now below the trend line.  It’s also 15% below the real average of $57.08 but it’s 7% above the real median price of $45.57.   What do you think, is oil now over or under valued?  Personally, I’m not even going to think about it because I’ve proven in the past that I’ll probably lose money if I do.  What I do know is that the oil price change has had a big effect on the share price of Oil & Gas Producers like Shell and BP.  It’s also had a big effect on Oil Equipment, Services & Distribution companies like AMEC Foster Wheeler and Petrofac.

2014 In Review

Retirement Investing Today charts my financial journey to hopefully Early Financial Independence with Early Retirement then being an option at any time thereafter.  This is not a model or a demonstration journey.  It is my real DIY financial life warts and all.  Get it right and it’s smiles all round.  Get it wrong and I have a long compulsory work life ahead of me followed by a derisory State Pension thereafter.

The headline numbers are that in 2014 net wealth has increased by 13.2% and spending has decreased by 5.1% allowing me to move significantly closer to Early Financial Independence.  In line with my Plan, Do, Check, Act (PDCA) approach let’s now Check in detail by focusing on the three key focus areas that I believe are essential to get over the Financial Independence line - Save Hard, Invest Wisely and Retire Early.

SAVE HARD

Saving Hard is simply defined as Gross Earnings (ie before taxes) plus Employee Pension Contributions minus Spending minus Taxes.  Earn more and one is winning.  Spend less or pay less taxes and you’re also winning.  Savings Rate is then Savings divided by Gross Earnings plus Employee Pension Contributions.  To make it a little more conservative Taxes include any taxes on investments but Earnings include no investment returns.  This encourages me to continually look for the most tax efficient investment methods.

On the Gross Earnings front it’s been a great year with total earnings having increased by 37.7%.  Spending on the other hand has decreased by 5.1% by continuing to challenge all spending.  My one fail is that taxes are up a long way.  This is caused by the earnings increase but also more investment taxes as the portfolio continues to grow and is now significant.  The end result is the chart below which shows an average 2014 Savings Rate of 48.1% against a target of 55%.  The majority of the big gap was all caused by my good friend HM Revenue & Customs making a pigs ear of my taxes in years gone by and then chasing me for it at the start of this year.  By the back half of this year that Savings Rate had recovered to 52.8%.

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Saving Hard score: Conceded Pass.  Savings contributed 7.8% of my net wealth increase.  I’m also earning more and spending less but my big problem is taxes which I’m struggling to control.  Any extra £ that I now make is taxed at the Higher Rate of 40% plus 2% National Insurance plus as my non-tax efficient investments grow in size I’m being taxed on these as well.  I could solve some of this by increasing personal pension contributions but I don’t want to go there for 3 reasons:

• They’re very open to tinkering by government which includes extending the age at which you can access them.  That’s not conducive to Early Retirement.
• I’m already making big pension contributions.  2014 saw 71% of Savings put into them.
• I may need a big cash or cash like pile to be able to buy (not mortgage) my family home in the not too distant future.

The High Yield Portfolio (HYP) – Year 3

We've just completed the 3rd calendar year for my real life, warts and all, High Yield Portfolio (HYP) that’s still in the accrual stage.  While at the moment it only forms a small portion of my total wealth I keep a close eye on it for 2 reasons:

• Ideally at the point I reach Early Financial Independence I can have enough dividends being spun off that should I choose to Retire Early I can be in a situation where living expenses can be covered by dividends and interest only plus a bit.  I think psychologically this would be easier than having to sell down assets to live from.  With me targeting a withdrawal rate of 2.5% of wealth I'm targeting dividends and interest after I net off the cash I’ll need for a home of 3%.  Today I'm at 2.4% so have a way to go yet and the HYP is key to increasing that value.
• With the majority of my wealth being tied up in index trackers this is one of the few areas where I'm stock picking and trying to beat the market.  It’s fine to have a high dividend yield but if my total return (dividends + capital gains) can’t beat a simple FTSE tracker over the medium term then I might as well pack it in, buy that tracker and accept I may have to sell down some assets in retirement.

The HYP today now has 12 stocks.  These are:

• Sainsbury’s.  Bought on the 28 November 2011 and currently sitting on an annualised capital loss of -5.7% and a forecast dividend yield of 5.4%.
• Astra Zeneca.  Also bought on the 28 November 2011 and currently sitting on an annualised capital gain of 17.2% and a forecast dividend yield of 3.9%.
• Scottish and Southern.  Again bought on the 28 November 2011 and currently sitting on an annualised capital gain of 7.7% and a forecast dividend yield of 5.5%.
• Vodafone.  First bought on the 21 December 2012 and then sold on the 21 January 2014 to avoid the Verizon Wireless sale palaver.  Then re-bought on the 30 April 2014 for an annualised capital loss of -1.9% since re-purchase and a forecast dividend yield of 5.1%.
• Royal Mail Group which is not strictly speaking HYP but I lump it here as I have no other holding like it within my portfolio.  I saw it as a government bribe and it’s turned out to be exactly that with an annualised capital gain of 22.4% and a forecast dividend yield of 5.0%.
• HSBC.   Bought on the 30 March 2014 and currently sitting on an annualised capital loss of -2.6% and a forecast dividend yield of 5.3%.
• Royal Dutch Shell.  Bought on the 30 June 2014 and currently sitting on an annualised capital loss of -22.4% and a forecast dividend yield of 5.3%.
• Pearson.  Also bought on the 30 June 2014 and currently sitting on an annualised capital gain of 2.1% and a forecast dividend yield of 4.3%.
• GlaxoSmithKline.  Bought on the 01 August 2014 and currently sitting on an annualised capital loss of -8.1% and a forecast dividend yield of 5.8%.
• Amlin.  Bought on the 29 August 2014 and currently sitting on an annualised capital gain of 14.8% and a forecast dividend yield of 6.3%.
• BHP Billiton.  Bought on the 29 September 2014 and currently sitting on an annualised capital loss of -54.7% and a forecast dividend yield of 5.1%.
• Tate & Lyle.  Bought on the 31 October 2014 and currently sitting on an annualised capital loss of -13.4% and a forecast dividend yield of 4.8%.

Saving Hard – We’re An Interesting Bunch

Thanks to all readers who took part in the earnings and savings poll.  The results make for some very interesting reading but before we go there let’s just take a second to review what we were really looking at with this poll.

I see three distinct phases when it comes to personal finance.  I summarise it as Save Hard, Invest Wisely and Retire Early but these phases could be called many things.  In a little more detail:

• Save Hard is how we go about building capital that we can then deploy to investments that hopefully with time will give a return on that capital.  For me, and I'm sure many other readers, that is earnings from the day job that aren't spent on living today.
• Invest Wisely is how we go about maximising the return on the capital we've built from Saving Hard.  For me that’s a balanced portfolio of different asset classes invested as tax effectively and at as low a cost as possible.
• Retire Early is how big the capital pile needs to become before the goal is achieved.  For me I’m chasing enough wealth to be Financially Independent and have the option of Early Retirement but there are many other reasons why we might want to build capital.  Having a Retire Early reason is important.  Without it there is no reason to build the capital in the first place and you’re probably then just hoarding.

The polls were really looking at the Save Hard portion.  The first question asked was what are your gross annual earnings?  The results are surprising particularly when I chart them below against UK individuals who have some liability to income tax.  The surprising part is just how much we all earn.  For example 19.4% of us earn more than £100,000 a year!  In the UK that puts those readers in the top 2% of UK tax payers.  The median reader earns between £40k and £50k per year where across the UK median earnings are only £20,300.  A RIT.com median reader is earning somewhere between 2 and 2.5 times that of the UK as a whole!  The mode of readers is also £40k to £50k however across the UK it is only £10k to £20k.  These high earnings then give us all a fantastic chance to save if we live below our means and we don’t disappoint there.

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