The Passive Investing vs Active Investing Debate

A search on Google for passive investing vs active investing yields 1,330,000 results with plenty of support on both sides of the fence.  In brief passive investing is a method where you buy an investment product that simply tracks an index.  They are commonly called index trackers and with this method you expect to do no better than the index it is tracking after expenses.

In contrast active investing is a method where you pay a financial professional higher expenses than those of a passive tracker and in exchange he or she is supposed to beat an index s/he is measured against.

Beating the index is the critical point as research I’ve quoted before shows that somebody entrusting their money to a UK financial advisor or investment manager will be paying an average 2.56% annually for financial planning services and financial product expenses.

Let’s demonstrate the effect these expenses can wreak with a simple example knowing that UK equities have ‘only’ returned a real 5.0% over the last 116 years.  Passive Punter self invests £10,000 into a UK Equity Passive Fund which sees expenses of 0.25% and then promptly forgets about it for 20 years.  Assuming that fund returns a real annualised 5.0% before expenses over that period our Passive Punter ends up with a real £25,298.  So far so good.

Snakes and Ladders

Well it looks like asset prices don’t always go up.  Of course I’m not surprised by this revelation but the mainstream media did seem surprised with headlines such as “Dow loses 7 million points in the session” and “Worst market performance since dinosaurs roamed the earth” but then of course they need sensationalism as they’re attention seeking.  The market action even meant that it made the first news item on the radio for a couple of days.  It could almost be 2008 again.  It would be enough to scare people off investing if they did nothing more than listen to news sound bites.

What has really happened thus far?  I say thus far because the market can of course continue to fall...  Or it might flat line...  Or it might go up again...  By my calculations this week the S&P500 has fallen 5.2%, last week it fell 3.9% and the week before that it actually gained 2.2%.  In contrast the FTSE100 this week fell 4.7%, last week fell 3.9% and the week before that fell 0.8%.

This is what has happened to a couple of single indices and makes for great news items but how has this impacted a long term investor who buys, holds and rebalances a variety of global asset classes.  I like to think I’m one of those so let’s use my real world portfolio as a comparator.  This week my wealth has decreased by 2.3%, last week it decreased by 1.5% and the week before that it decreased by 0.4%.

I’ve written and published that book

Over my 9-year journey to financial independence (FI) I’ve had a number of readers of both this blog and the fora that I frequent ask me if I’d write a book.  If the truth be told I was reticent while on my journey as I thought I would be a hypocrite for writing about how to achieve something that I actually hadn’t done myself.  That all changed in July 2016 when I achieved my financial independence goal with being a hypocrite switching to feeling empowered and ‘qualified’ to tell the story.

I also thought that I was too busy to write the book but in hindsight that was just the victim coming out in me.  Like anything in life both achievement and success is all about unrelenting prioritisation in my experience.  Without that you just don’t have a chance.  So with a focus on just work and the book (thanks go out publically to a very understanding and supportive family who’ve had to put up with it and me) I’ve been able to get it written over the past months and it’s now published.

I’ve called the book - From Zero to Financial Independence in less than 10 Years: Tools and techniques to escape the rat race quickly.  It’s currently only available on Amazon but is available in both ebook and paperback formats giving some choice.

So why write it?  A few reasons:

• I’ve found my FI journey an incredible experience both financially and spiritually.  I’ve also learnt so much, including a lot about myself, most of which will serve me well for life.  This includes a switch to focusing on quality of life rather than the far more common standard of living.  At age 44 I am also now in a position that is incredibly liberating and empowering.  I would just love others to be able to at least see what’s possible and hope the book might spread that message further than this blog.  If they then choose to stay on their current course I’m more than ok as at least they saw an alternate option and made a choice.  The book has only been live a few days and this goal is looking good so far.  It is already ranked number 4 in their retirement planning category, number 11 in their ebook personal finance category and number 24 in their ebook finance category.
• I wanted to provide the book that readers asked for.
• An unexpected reason was that I actually found the whole process incredibly cathartic.  For years I have been learning and had tonnes of information swirling in my thoughts.  By sitting down and putting pen to paper it allowed all that to be organised and filed forever freeing my thoughts for more.

Where’s the snowball – why you’d better save if you want to FIRE

You don’t have to travel far into most personal finance sites before you find the obligatory compound interest post.  Even I did one back in 2012 where I was so bold as to call it The Miracle of Compound Interest.

In brief Compound Interest, sometimes also called the snowball effect, is at its most basic just interest on interest.  A trivial example.  Let’s say you have £1 and can get an investment return of 10% per annum (those were the days).  Choose that option and after a year you’d have £1.10 which is your £1 plus ‘interest’ of £0.10.  If you reinvest that for another year you’d have £1.21 which is your £1, last years interest of £0.10, this years interest of £0.10 on your £1 but also £0.01 which is interest on your £0.10 interest from last year.  Interest on interest...

So that’s the lovely theory but as someone who is now Financially Independent and so has been there, done that, got the t-shirt, what’s my view on it.  I’d now say care is needed.  Let me demonstrate with three simple examples.  Let’s go back in time to the end of 2007 where I’m going to give each of our punters seed capital of £50,000, I’m going to assume a real (after inflation) return of 4.1% (what I’ve achieved on my portfolio of trackers after expenses) and I’m going to assume their each looking for wealth of £800,000 (which is not far off what I thought I needed back then although inflation since has ensured I now need 2 commas) before packing in the day job.  From here their journeys will vary:

• TheRIT will crack on with working hard, focus on quality of life and so annually squirrel away £58,728 per annum (which is the average annual savings I’ve achieved since I’ve been on my FIRE journey, equating to a post tax Savings Rate of 82.4%) earning a real return of 4.1% per annum (my actual real annualised return thus far).  I know that will include inflation adjusted savings but please give me a little slack here as it’s not important to the point I’m trying to make today so won’t bother with inflation adjusting.
• MrAverage will also crack on with working hard but instead focuses on standard of living.  This means he can only save 5.1% of post tax earnings which has been deliberately chosen as it’s the current UK household saving ratio according to the ONS.  Like TheRIT, MrAverage achieves a real return of 4.1%.
• MissInvestingSuperstar follows in the footsteps of MrAverage but boy does she know her stuff when it comes to picking winners.  So much so that every year that she invests she manages double the return of the others and so achieves a real 8.2% per annum.  Ask yourself how many people actually achieve that and would you be prepared to back yourself to achieve that with severe disappointment many years hence if you don’t?

Click to enlarge, My after tax Savings Rate over the long term has been 82.4% 

My Early Retirement Financial Strategy and Portfolio

With FIRE now on the doorstep it’s time to finalise what my early retirement drawdown strategy and portfolio is going to look like.

Firstly, let’s look at the strategy and portfolio that has put me where I am today.  I first published it in detail in 2009 and then polished it slightly in 2012.  In brief it was about building significant wealth (at least for me) in quick time.  Quick time was less than 10 years which meant I needed to be accruing wealth in relation to My Number at just a little less than 1% per month.  A very aggressive target when I look at it that way in hindsight but one which provided Mr Market behaves for just a few more months looks real.

By living frugally while focusing on earning more I believed I could Save Hard.  To date my Savings Rate has averaged around 52% of Gross Earnings so that has played out.  This then advantaged me when it came to investing as I didn’t have to take great investment risk giving me an increased probability of success.  I called it Investing Wisely.  As it turns out since starting my annualised investment return has been 5.9% which is 3.3% after inflation.

When I came out I stated that at the point of Early Retirement I wanted wealth of £1 million (it was actually £1,011,000).  Today my trusty Excel spreadsheet is telling me that once I hit £1,023,000 I’m good to retire.  At this point it’s then no longer about building wealth but instead the simple problem of ensuring I outlive my wealth which will be drawn on as I’ll have no other earnings.  I suspect it may require a slightly different strategy and investment portfolio to that which I have today.  That said the principles of tax efficiency, low expenses and a diversified investment portfolio, with a key decision of what Bond to Equity Allocation Percentage at its core, I intend to keep.

Given the seriousness of this topic it’s about now that I have to pop in a wealth warning:  History is not a predictor of the future, this is not financial advice, I’m not a financial planner and I’m just an average person who’s made investment mistakes on a DIY Investment journey to Financial Independence.  The post is also just for educational purposes only and is not a recommendation of any type.  Ok let’s move on...

My current estimates, based on my forecast FIRE date, suggest I’ll actually overshoot my FIRE wealth Number with circa £1,117,000.  A Mediterranean life will then mean a life priced in Euro’s.  The average exchange rate with the £ since the Euro’s inception has been 1.3742.  I’m not going to bank on that.  Instead, I’m going to use the worst average year since inception, which was 2009, with its rate of 1.123.  That gives me EUR1,254,000 of wealth to buy a home with and live from for the rest of my life.  I’m going to assume a 40 year retirement period.

Am I an outlier or could most people do it?

I don’t think there would be much argument that millennials have it pretty tough financially with their plight now starting to make it into the mainstream media (FT link or search “Why millennials go on holiday instead of saving for a pension”).  After all:

• They’re graduating with big chunks of student debt that their grey haired work colleagues didn't have to contend with, while their even greyer haired fellow countryman are being protected with triple lock state pensions;
• They’re unlikely to receive anything better than a defined contribution pension with no hope of a defined pension; and
• They’re graduating into a housing crisis where houses are today priced in such a way that ownership, particularly in the South East, is almost beyond reach.

While this is going on as a Generation X’er I'm starting to get comments that my current personal financial approach has become a little extreme.  To me it doesn't feel like it but I'm also conscious of the boiled frog analogy.

So with both of these in mind I thought today I’d run a simulation to see if a millennial graduating today, who didn't want to be as extreme as I am, but also didn't want to roll over and be a victim could still FIRE (financial independence, retired early)?  So a Saving Hard'ish, Investing Wisely, Retire Early simulation.  In short the uncomfortable maths suggests that the answer is yes...

Click to enlarge, A millenials journey to financial independence

Let’s look at the story in detail.

Raise the Private Pension Access Age & My Global Exposure

Firstly, an interesting article in the Financial Times today – Retirement experts campaign for pension freedom age to rise to 65 (should be a free click through or alternatively Google the title and you’ll also find it for free).  It looks like the pensions industry is starting to lobby the government to push back the age at which we can access our pensions from as early as 55 (some of us are not that fortunate) to 65.  Apparently, according to the Society for Pension Professionals:

• “...55 “was far too young” to allow full access to retirement savings...”
• “...it is also too young to consider oneself retired from a working life...”
• “Although I recognise this will not be popular it would result in better outcomes in true later life.”

It’s really great to hear that the Pensions industry apparently has our welfare at the top of their agenda.  To be honest though, in my years of investing I've never seen the Pensions industry do anything that has my best interests in mind so I’m not going to start believe their tripe now.  The cynic in me says that this is yet another way to extract more expenses or fees from us.  Just think about all the extra fees available if you can’t access your wealth for another 10 years.  Come to think of it maybe the third bullet point above is actually right.  Maybe it will result in “...better outcomes in true later life”.  It’s just unfortunate that those better outcomes will be for the Pensions industry rather than the punter.

As always some great Comments in response to last week’s post which included some questions around my International exposure.  Rather than give half an answer in a Comment I thought I’d spend some time and give a more thoughtful detailed answer.

As of this morning my Asset Allocation looks like this:

Click to enlarge, Retirement Investing Today Low Charge Investment Portfolio

In pounds, shillings and pence it is £819,004 and represents everything I own.  Let’s work around the pie chart to uncover my Globall exposure.

Further UK Equity Diversification

I am a disciple of Tim Hale who in my humble opinion is the investing granddaddy for UK investors.  From the emails I receive it’s rare that I can’t refer a reader to his book Smarter Investing: Simpler Decisions for Better Results for the answer to their question.  It’s a must read for anyone serious about investing from the UK.

It’s therefore probably no surprise to find out that my investing strategy is largely based around the teachings of his book (I started in 2007 and so I used the first edition as a basis).  At its most basic he starts with what he calls a Level 1 portfolio mix consisting of Level 1 UK equities and Level 1 UK bonds.  He then goes on to show how you might diversify a portion of your wealth away from these to create a portfolio for all seasons.  Importantly though no matter what your investment horizon large allocations always stay with the Level 1 building blocks.  So the question then becomes what Index should be used to represent Level 1 Equities?  As always Hale has the answer with “For your Level 1 equity allocation, the return benchmark should be the return of the whole domestic market, which provides a diversified and representative benchmark as it includes most public companies, be they large or small and weighted according to their market size... The FTSE All Share is the index of choice for the rational investor.”

I followed this guidance with no other exposure to UK Equities other than the All Share until late 2011 when I realised, that for me at least, I wanted more dividends than my strategy was forecast to give me at the end of my accumulation stage.  I therefore started to diversify a percentage away from Level UK Equities towards a UK based High Yield Portfolio (HYP).  Today that HYP contains 17 companies with 83% of them by valuation coming from the FTSE100 and 16% coming from the FTSE250.  I then continued with this strategy until I reached the point where it looked like my total portfolio would enable me to live off the dividends.  I’m fairly comfortably there now and so don’t need to keep growing my dividends at such a great rate.

Investing Like a Sloth

Stock market prices go up and down continuously.  Stock market prices also trend up and down over longer periods of time.  In recent weeks we've been seeing prices go down at a faster rate than up resulting in a trend downwards.  This has resulted in plenty of press/blog inches from experts trying to explain what’s going on.

In response to this my investing strategy is unchanged despite having lost, on paper at least, over £53,000 from my peak 2015 wealth valuation even after new contributions.  That is multiple years of post FIRE spending and so not an insignificant amount of money.  I continue to passively rebalance but importantly everything is done in slow motion and contains no ‘backing the truck up’ or ‘going all in’.  I think of it as investing at the pace of a sloth.

I do this because even though there is lots of investing noise around I am very conscious that price down trends can occur for long periods of time.  Let me demonstrate with a chart looking at US stock market price downtrends.

Click to enlarge, US Market Percentage Falls from Real New Highs    

Bond to Equity Allocation Percentages

So you’ve decided that you would like to try and gain some volatility versus return free lunch via some Bonds mixed in with your Equities or Equities mixed in with your Bonds.  The next million dollar question to answer is then how much of your wealth should be allocated to each asset class.  This is a critical question as it will likely have a big affect on your long term portfolio return.

Unfortunately, as with many investing questions, I'm yet to find a silver bullet but considerations will certainly include your tolerance to volatility and risk.  Assessing this tolerance is of course easier said than done.  For example if you’re naturally risk averse you might choose to load up with more bonds as history suggests they might dampen volatility at the expense of some return however this adds absolutely no value if you then have a low probability of  ever achieving your long term goal.  Conversely there is then no point loading up with more equities to then sell at the first significant equity downturn.  On top of this there could also be age considerations.  For example every year that passes gives you less time to rebuild wealth before retirement.

So what do others have to say about bond to equity allocation percentages?

The granddaddy of value investing, Benjamin Graham, in his excellent first published in 1949 revised multiple times book, The Intelligent Investor, says “We have already outlined in briefest form the portfolio policy of the defensive investor.  He should divide his funds between high-grade bonds and high-grade common stocks.  We have suggested as a fundamental guiding rule that the investor should never have less than 25% or more than 75% of his funds in common stocks, with a consequent inverse range of between 75% and 25% in bonds.  There is an implication here that the standard division should be an equal one, or 50-50, between the two major investment mediums.  According to tradition the sound reason for increasing the percentage in common stocks would be the appearance of the “bargain price” levels created in a protracted bear market.  Conversely, sound procedure would call for reducing the common-stock component below 50% when in the judgement of the investor the market has become dangerously high.”

My Investment Portfolio Warts and All

Two events have occurred in the past week that prompt this post:

1. My Defined Contribution Company Pension transfer to a Hargreaves Lansdown SIPP has now completed.  The timings ended up being that I sent all the paperwork to Hargreaves Lansdown on the 09 May ’15, received a confirmation letter that it was in progress on the 13 May, the cash landed in my new Hargreaves Lansdown SIPP on the 29 May, I bought all my new low expense investment products (which made this post a little redundant) on the 01 June and the £500 cash back offer landed in my account on the 05 June.  So all in about a month for it all to wash through.  Total Investment Portfolio expenses including SIPP wrapper charges now run to 0.28% per annum.
2. I received a Facebook message from a reader asking if I could do a post with “a really detailed breakdown of my portfolio starting with a rough pie chart with just equities, bond, gold, alternative investments, property etc and then a more detailed breakdown again perhaps an exploded pie chart of the main parts. For example share category American, European shares etc.”  When I read the message I realised that while I've talked ad infinitum about my portfolio over the years I've never given such a detailed breakdown including investment product percentages.

So without further ado here’s my investment portfolio warts and all.

The investment strategy (some might call it an Investment Policy Statement) on which my portfolio is based has now been in place almost since the beginning of my journey.  I first documented it in 2009 but I would suggest reading my 2012 strategy summary (as it included the addition of my High Yield Portfolio (HYP) for a portion of my UK Equities) in parallel to today’s post.  The strategy post will give you the “Why” behind my thinking while today’s post will give you the “What”.  It’s also important to note that nothing I do is original or clever.  It’s predominantly based on work by Tim Hale which is a book that I believe every UK investor should read with tweaks coming from the reading of the following books.

The Top Level Investment Portfolio

Click to enlarge, My Actual Low Charge Investment Portfolio

At a top level the portfolio contains local and International Equities, Commodities, Property, Bonds and Cash.

Life’s Great Saving Hard and Investing Wisely for Early Retirement

This week as I was thumping up and down the motorway on my lengthy daily commutes I couldn’t help but take some glimpses of the current and potential future life that this journey to Early Financial Independence is providing.  There are of course negatives but the positives really did override my thoughts.  Let me share a few random musings.

Saving Hard

In a post back in March I shared a little about my personal life which included my ‘9 to 5’.  Today is my 397th post on Retirement Investing Today and that post is right up there when it came to Comments at 51 to date.  Some of them pointed to a punishing work life which prompted me to look around at my colleagues and I do agree that I work much harder than most but this is a little by design as I always want to stay in the top 10% of my peer group.  The rub is that what seems a negative to some is now just normal and on autopilot to me plus on the whole my health and wellbeing is as good as it has ever been.  The positive though is that this approach allows things like earnings increases of 44% in a year and I can already see a door potentially opening that may allow another step change in earnings.  So while I admit to being tired come Friday night I also think my colleagues probably are as well.  The difference is that I have an extra chunk of cash which I can save to power me towards Financial Independence Retire Early (FIRE) which means I’ll be done in the not too distant future and they’ll retire when the government lets them.

On the spending front I've also realised that Living Well Below My Means is now just an autopilot activity.  I no longer crave stuff and get zero satisfaction from consumerism.  I do still track spending religiously just in case I need to correct course but I no longer have any sort of budget and certainly don’t have a £0 one.

These two mind sets currently allow me to save 54% of gross earnings.  Sure it’s not at my target of 55% but do you know what – I really am starting to not care anymore.

Click to enlarge, Gross Savings Rate

Investing Wisely

My investment portfolio which is largely just a set of diversified tracker funds is running pretty close to plan through nothing more than passive portfolio rebalancing and to the end of April 2015 has grown by a Real (after inflation) Compound Annual Growth Rate after expenses of 4% since inception.  It’s also now pretty close to being an autopilot activity.

Click to enlarge, Performance of £10,000 within RIT Portfolio and Benchmark vs Inflation

One active element with my investment portfolio is of course my High Yield Portfolio (HYP).  Trailing dividend yield is a healthy 5.0% when compared to the FTSE100 at 3.5%.  Capital Gain since inception is also a healthy 38% vs 31% for the FTSE100.  Over the shorter term it’s not so rosy with Capital Gain year to date at 3.5% vs 6.0% for the FTSE100.  So this non passive piece is not quite on autopilot but the strategy is well defined and I'm still happy with the results.  The question I'm starting to ask myself though is can I really be bothered with it.  I'm going to watch it for a year or two more but if results do start to converge toward the index I may just go passive.

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.

The Investment Products to Build a Portfolio should be Trivial : Time Suggests Otherwise

Once you’ve done plenty of your own research (which in my opinion must include a thorough read of Tim Hale's Smarter Investing: Simpler Decisions for Better Results), decided upon the different asset classes that will form your balanced investment portfolio and then decided on the percentage allocation to those different asset classes it’s time to select (and buy) the Investment Products that will give you that real world balanced portfolio.

The theory says that this should be trivial and achievable with only a small amount of products.  At an extreme it could be nothing more than a Vanguard LifeStrategy Equity Fund.  Having now been at this investing game for over 7 years I've personally found that in its infancy you will need more products than you really should and you’ll also not always be able to select the optimum products so will end up with compromise.  Then as time progresses you will end up with more and more stamps for your stamp collection.

There are many reasons for this but some might include spreading provider (whether wrapper and/or investment) risk, new products that give benefits over what you currently hold, inability to buy your preferred product in a particular account, tinkering because personal finance is a hobby and even as a result of some good old fashioned investing mistakes.

Let me demonstrate with my own investment portfolio.  These are the top level asset classes and allocations to each class I'm currently holding:

Click to Enlarge

Looks simple doesn’t it?  Now let’s look in detail at ALL of the investment products that make up my portfolio.

UK Equities:

• Vanguard FTSE UK All Share Index Unit Trust (Income).  This fund tracks the FTSE All Share Index, has a TER of 0.08% and a Stamp Duty Reserve Tax at initial purchase of 0.2%.  I'm happy with this fund however there is one small consideration that would make me 100% satisfied.  I'm with the ermine in that psychologically during retirement I would very much prefer to live only on dividends rather than having to also sell down capital.  In partial conflict with this the Vanguard fund pays dividends only once per year.  One idea to keep expenses low but increase dividend frequency would be to create a pseudo All Share Index.  85% of the FTSE All Share Index is the FTSE100 Index with the majority of the remainder being FTSE250.  By buying 75% Vanguard FTSE100 UCITS ETF (VUKE) and 25% Vanguard FTSE100 UCITS ETF (VMID) results in a TER of 0.09% but dividends paid quarterly instead of yearly.  At this time I won’t act on this as in retirement I’ll be keeping at least 12 months essential living expenses in cash so should be able to manage with annual dividends.
• My High Yield Portfolio (HYP) which continues to build nicely.  This portfolio has a TER of 0.0% (but it does have buy/sell dealing fees and 0.5% stamp duty on initial purchase) and as a believer of expenses matter that’s fine by me.
• I'm generally happy with what’s going on with the UK Equities portion of my portfolio.

Investing mechanically with index trackers is boring

My retirement investment strategy has been relatively unchanged since I started this blog in 2009.  When you boil it all down around 90% of it is nothing more than a diversified portfolio of assets that do nothing more than track indices through the use of low cost ETF’s and funds.  Each month I add to this portfolio with new money and all I do is buy whichever asset class has been performing the worst (ie whichever class is most underweight).  Should an asset class ever deviate from its target holding by 25% then I would either buy or sell back to nominal holding.  This however seems to happen very infrequently because of my continual new money entering the portfolio

Let me demonstrate just how boring this all is.  It is the morning of the 3rd of October 2014 and already all of my mechanical index tracking investing decisions for the month have been completed.  This is what has occurred:

• Last weekend, as I do every weekend, saw my Excel spreadsheet that shows my financial position and compares it to my long ago mechanically set target allocation updated.  Boring and absolutely no brain power required.  Total time spent 10 minutes.
• My employer paid me on the last day of the month, Tuesday.  Total time spent to ensure money had cleared in my account was 5 minutes.
• I’m a big believer in the Pay Yourself First mantra and I’m ruthless at it.  This means before I pay any bills, before I buy any food, before I do anything I Save Hard.  So with money in the bank and one eye on my Excel spreadsheet I knew I needed to allocate to cash and so 100% of my savings were moved over to RateSetter.  Total time to move my money and set-up an auto investment in their 3 year market at 5.0% was 5 minutes.  Again, boring and absolutely no brain power required.  
• Over the next few days my employer will get around to salary sacrificing a big chunk of my salary into my employer selected defined contribution pension fund.  I know that my current set-up will have 20% of this invested into an Emerging Markets Index Tracker and 80% will go to an Index Linked Gilt Tracker.  Next weekend I’ll login to make sure that my employer has completed the transfer and the investment is correct.  Total time will be 5 minutes and again it will boring plus require absolutely no brain power.

By next weekend I will have spent 25 minutes managing what is now a very large amount of wealth.  I am also done until next month.  However while it’s incredibly boring and requires no brain power boy is it effective.  Having been at it for a few years I now honestly believe that this strategy is all that somebody needs to build wealth successfully.

How difficult is it to segregate our assets

In the modern, in my opinion overly complex, financial world there must by now be nearly as many investment risks as there are grains of sand on that now long forgotten Spanish beach where you spent your summer holiday.  One of these is that your broker/wrapper/online provider goes belly up and takes your wealth with it because they failed to segregate your assets from their own through fraud, negligence or even good old fashioned incompetence.  Here I am currently most exposed through my SIPP provider Youinvest, my ISA provider TD Direct, my trading account provider Hargreaves Lansdown and the large insurance company (the name of which I won’t mention as I could never recommend any element of their offering) who ‘looks after’ my defined contribution pension offered through my employer.

The same problem exists if the same fate befalls your fund manager.  Here I'm personally seeing significant exposure through Vanguard, State Street Global Advisors (SSgA) and BlackRock (think iShares).

It’s a risk I've known about for some time but on a scale of risks that I’m conscious of I had it ranked fairly low, thus wasn't doing too much about, as I thought that:

1. The process of segregating your customers assets from your own really isn't very difficult so it should occur through negligence or incompetence very infrequently;
2. Given its simplicity non-segregation would be easily and quickly identified by the firms accountants, compliance officers, auditors and/or regulator should it occur; and
3. Non-segregated amounts, should they occur, would be relatively small in relation to total assets under management so result in only a relatively small loss given a large sum would be like an elephant standing in the room for those same accountants, compliance officers, auditors and/or regulators.

News this week tells me that my assumptions were naive and just plain wrong with Barclays investment arm having owned up to having “£16.5bn of clients' assets "at risk" between November 2007 and January 2012”.  This is neither a small amount of money nor a short period of time.  It also happened to occur during the period when Barclays was in severe financial difficulties and had to be ‘bailed out’ by the state investment funds and royal families of Qatar and Abu Dhabi to the tune of £7.3 billion.  It’s also not the only time with them having been penalised back in 2011 for “failing to ring-fence client money in one of its accounts for more than eight years”.  Of course Barclays say that ‘it did not profit from the issue and no customers lost out’ but they would say that wouldn't they and given the timing it could have easily been a very different story.

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%.

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 Buck Stops Here

Some might think this post a little cynical however I've found that it sometimes pays to be a little cynical so here goes.  Businesses and their marketing machines have few goals on their mind.  One of those is to remove as many pounds and pence from your pocket as legally possible.  Ideally they then get to do this more than once.  They then try and get you not to notice how many notes and coins you’re counting out by bringing other businesses into the game that can help you to pay the original business in one electronic form or another.  They certainly don’t assess whether the purchase will benefit you or your family’s life.  It’s nothing personal.  It’s simply maximising the revenue.

Once those businesses have completely emptied your pocket worry not.  That’s because another business will come along who will provide you with a product of one type or another that will allow those previous businesses to remove pounds and pence that aren't even yet in your pocket.  They also don’t assess whether the purchase will benefit you or your family’s life and are again simply looking to maximise the revenue.  It’s nothing personal.  It’s simply maximising the revenue.

You might even work for one of those businesses.  Again, they are not interested in whether the salary paid brings benefit to your family’s life or if you need additional State support simply to exist.  They are simply trying to pay you and all your colleagues the least amount possible that will prevent empty desks either in the form of people leaving and/or new people not joining.  If this should occur then some other business will maximise the revenue at their cost.  It’s nothing personal.  It’s simply maximising the revenue and profit.

Real Life Portfolio Performance

As I sit here writing this post the Excel spreadsheet that I use to track my wealth and portfolio performance tells me that I have accrued 76.1% of the wealth that I require for Financial Independence (and Early Retirement if I should choose to retire from work).  If there is one thing I've learnt over the 7 and a bit years that I've been accruing that wealth it is that if you want to be the person who retires by 40, who makes early retirement extreme work or who reaches financial independence in 10 years and not the one who retires when the government tells you to then you need to not only be tenacious and not blow with the wind but also rigorously PDCA (Plan, Do, Check, Act).

When I say this I'm not saying to continually alter your investment strategy to today’s new fad.  That’s just going to lead you astray and hinder your wealth creation.  Instead it’s going to have to be far more subtle and purposeful than that but it’s important because I can guarantee, if my example is anything to go, that a large portion of both your life and investments are going to be different from what you originally planned.  Therefore to reach your goal some course correction is going to be required.  Let me maybe demonstrate the principle with some personal examples:

• When I first went DIY in 2007 I was naive and really in a state of investment strategy flux as I learnt.  By 2009 the foundation of my strategy was built but it actually took until late 2011 to reach maturity with the addition of a High Yield Portfolio (HYP) portion.  As I move quickly forward to Financial Independence then I can see some more subtle change as I work to build regular income streams from areas like extending the HYP portion of my portfolio.
• When I started out Vanguard didn't exist in the UK.  They were of course big in the US but didn't actually come to the UK until 2009.  Vanguard funds and ETF’s now form a cornerstone of my portfolio lowering my investment costs.
• By 2010 I had cottoned onto the need to save hard, by both maximising income and minimising spend, and was regularly saving 60% of my gross earnings plus employee pension contributions.  That quickly moved to 2011 when I was without work.  Onto today and my family life has changed such that to maximise the benefit to the family I am paying all the family bills meaning over the last 15 months my savings rate has now fallen to an average of 50%.  Within this 50% I'm also making significant contributions to help my better half’s wealth (not detailed on Retirement Investing Today) to grow as quickly as my own meaning my wealth growth rate will also slow from what was planned.  To keep to plan I've had to work hard to continually increase earnings but also reduce costs through these changes. 
• In recent times we've seen and are seeing a lot of post Retail Distribution Review (RDR) change within the investment world.  It looks to now be stabilising and while I've generally not come out of it all too badly I am considering a shift away from Youinvest for my SIPP to again lower investment costs.
• The market moves and I respond with rebalancing according to my strategy as well as continually buying the most under performing asset class with new money.