How to Be Your Own Independent Financial Advisor

–The Series of Questions you have to ask yourself to assess your own financial health and plan for your financial goals!!–

I frequently trawl through the excellent forum over at MSE to read through other people’s experience and circumstances and questions that they face on a daily basis. Very often, various questions of the nature ‘What should I do with my money’ will come up which I feel that everyone who has a reasonable income will ask at some point or another…

Where to invest £500 per month

Savings for rainy day / retirement / happiness

Where To Save £30k

Here is how I might approach this question..

  1. What are your life goals?
    • Habit 2# of the 7 Habits by Stephen Covey: Begin with the end in mind. To be effective with your money, you need to know what you want to achieve in life. Is it to retire at 65/60/55? Do you want to live in a bungalow/terrence/mansion? Do you want to drive a ferrari/BMW or a nifty Fiesta? How many kids are you going to have, how many holidays are you going to have in a year etc… You get the picture.
    • You need to have a vision of what is going to happen in your future to know how to effectively manage your money and not put your money in inapproprate risky investments that might not provide a reliable return.
    • A different version to this question is ‘What do you need in your life to make yourself happy?‘ because the only logical pursuit in life is happiness.
  2. What is your cashflow like on a monthly basis/yearly basis?
    • Monthly Earnings (Income) vs Expenses (Outgoings)
    • There are various ways to monitor this; ie. budgeting, spreadsheets, tracking all spending on one card
    • I do this very simplistically by tracking my monthly ‘Cash Worth‘ and tracking on Net increase/decrease of Cash Worth on a monthly basis. I can also figure out my savings rate from this.
  3. How much in an ‘Emergency’ Cash fund do you have?
    • The Emergency cash fund should be vital to everyone’s financial planning. The general rule is to have 6 months – 1 years of expenses in cash, preferably in highly accessible top interest paying savings/current accounts.
    • This cash buffer will allow you some leeway to take some more significant risks in investing and more importantly provide some mental relief that if things in life go south for you (eg losing your job, getting ill/accidents), there is some form of temporary self-insurance that buy you time to sort things out.
    • Imagine the alternative of not having a emergency fund and you get redundant. Most people will get into credit card debts/loans to pay for rent, utility bills and Debts are costly to maintain. Or if you don’t have access to those facilities, the cold flat or cold streets might just be your new reality.
  4. How much risk are you willing to take in investing?
    • Now how long is a piece of string? My own take on this is you wouldn’t know the answer to this question until you have taken on the risk yourself and learn the experience of holding a risky investment before learning about your own risk-tolerance. This is where the experience of an Independent Financial Adviser might come in useful or some input from an experienced investor.
    • Firstly, read and educate yourself about the various asset classes and their risk profiles and what role they play in various market cycles and various portfolio setups.
    • Start investing by regular drip feeding into a tax-advantaged account and choosing diversified passive funds or globally diversified multi-asset funds. You learn more about your attitudes to investing as you go along and you can make more informed choices later on when you have some experience. Life is a process.
    • Read this investing ultimate collection by Jacob from Poweroverlife for an introduction to investing.
  5. What are the Tax-advantaged accounts available to you?
    • If you pay 20% tax,
      • Every £100 you make, the Big G takes £20 OR
      • For every 5 day working week, you are working your ass off for the Big G 1 day per week, ie You are working for someone else.
    • If you pay 40% tax,
      • Every £100 you make, the Big G takes £40 OR
      • For every 5 day working week, you are working your ass off for the Big G 2 days per week
    • As noted above, what are you waiting for??? Start using all legally available tax shelters!
    • Have you subscribed to the yearly ISA limits for Stocks & Shares? (Cash ISAs are not too worthwhile at present of writing this article)
    • If you are going to be a first time buyer in the future, have you signed up for the Help to Buy ISA or plan for the new Lifetime ISA come april?
    • Are you paying into a pension scheme? What are the rules of the pension scheme? What benefits do you get from the scheme?
    • If you are in other countries, learn what are your local legislation, laws regarding this. I believe US has IRA, Roth IRAs, 401Ks etc. Basically educate yourself of how the system you are in works.
  6. Mortgages, Loans, Credit Cards, Mobile/Broadband contracts, etc

Okay this is an endless questionaire that most questions you probably would not have the answer to immediately. That is fine. But we need to start asking ourselves the hard questions to make ourselves being accountable to our future. Only then can we focus on the 20% of important decisions that will result in 80% of the results according to Pareto’s principle.

I have never met with a IFA, but I believe the above is what a good IFA should do for a client. In reality, I doubt that’s what will happen. I think IFAs still have a role to play especially to work round a increasing complicated system of financial/tax/pensions bureaucracy and also gearing your investments appropriately  to your goals and risk tolerance. How does your IFA help you in your personal finance and what other tough questions you had to ask yourself in your personal finance journey??

Start asking the tough questions and start learning about yourself as you try to answer them. Baby steps.

Good Luck!

-Fireplanter

Dividends Series 2016 Q4

Time to harvest the fruits of the FIREplant. The beauty of a plant is that you it grows independently as long as there is a fertile and conducive environment for it to grow. Light, water, nitrates, CO2… You can look at it day to day and it will look practically the same. However see it in a monthly, yearly basis and you may see the flowers developing, fruits riping, writhing of the flowers, leaves and then the warmth returns and there’s growth yet again in another season. Patience, my friend is virtue.

Q4 2016 Dividends hasn’t been great, even with the addition of just about 87 arbitrary units into my portfolio in Nov 16. The overall trend is that of decreasing absolute value of dividends over each subsequent quarter over the year. This may be general nature of the portfolio I have built or perhaps due to the marcoeconomic effects of Brexit etc. It probably doesn’t really matter much.

Overall Dividend Yield is about 2.0% in 2016 on the amount invested. (Note that this is with only 3 quarters of Dividend). It would be interesting to get several years of data on this. However I am too lazy to do retrospective studies, so I shall just do a prospective study as I go along.

quarterly-dividends

As I stated in Lighthouse for the Cruising Ship, I am looking for some growth of the Dividends in 2017. That is important for the momentum for Compound effect to build up.

Even the dung beetle takes time to roll up a ball of dung.

-FIREplanter

AD 2017. Lighthouse for the Cruising Ship.

Living is nothing but consuming time until you die.

-Tehching Hsieh

I came across this performance art piece by Tehching Hsieh, a Taiwanese where he explored the meaning of time and living. Within a year from April 11, 1980 to April 11, 1981, he challenged himself to punch a time clock EVERY hour on the hour. In his ‘Timeclock’ piece, he recorded his progress every hour by taking a single film exposure. And then he compressed into a 6 mins video of art.

As crazy as it sounds, 24 punches per day for 356 days equals 8760 hours that he has to be awake to punch the time clock on the hour. I think he only managed to get 8627 mugshots, which meant that he missed 133 punches. All basic societal routine is thrown out, in terms of sleeping, eating, being free to roam about and this brings his interaction to time as close as it can be.  This is in essence watching a deliberate human interaction with time and his reflection on his experience shows how we can reinterpret living and time.

Notes:

  1. Notice how he wears a prisoner-esque clothing, perhaps to reflect the ‘Life Sentence’.
  2. Missing 133 time records in his piece either due to human failure or mechanical failure. Very reflective of how life experience is.
  3. Doesn’t this remind you of everyone around us, punching timeclocks as our daily routine? We are a slave to this then. There are some freedoms we cannot attain.

I punch time for every hour; its repetition but another way to see it, its is not repetition because it’s a new hour

In life we are in a process

 And here I am punching my time clock. If life is as bleak and simple as he breaks it down to be, I think it is up to ourselves to fill in all the bits in between punching the time clock to make it what it meaningful to ourselves and to have to freedom to fill it up with what we value and find important.

Lighthouse for 2017!

There are certain goals I would like to set out to try to get myself going a little. I don’t want to be too focused on attaining too far-fetched goals but hopeful this can be a guide to give me direction when I get lost in my journey (too often this has happened in the past). This are some financial ones I have set out in a forum I am part of:

1) Save £15 000 in 2017
2) See Dividend in 2017 increase compared to 2016
3) Keep outgoings at a similar level compared to 2016
4) Complete a full years worth of accounts, including Savings Rates, Outgoings
5) Read at least 5 Books
6) Join Park Run and get it going.

Others I want to include to keep exploring myself and help me grow as a person:

7) Produce a short film (A simple one will do)
8) Travel more – Crazy idea to plan a hike from Chamonix-Zermatt (Hey if you are not going to do it when you are in your 20s, when are you going to do it?)
9) Write more. Poems, Prose, anything.
10) Spend time with people I love (more than anything, it helps you learn about yourself)

I think like FI, many other things in life needs that bit of planning and visualizing and working towards before you arrive there. For some, it might come naturally or society has pre-programmed it into most, but for others it will take some exploration and deliberation. No one said it was easy.

I am curious what else I will encounter in 2017. And you?

-FIREplanter

2016 in Review

The year of 2016 has been a year of growth, in many aspects of life. Financially, relationships, goals, prospects, meaning…

The FI journey is important in that you need to evaluate what is important in your life first and foremost. Most things in life we have is finite, time, money, food, resource.. The earlier you realise that the earlier you can focus on living in the moment and investing for the future.

The principles you value, the friends you enjoy just being with, the people you meet along the way that you look at them with your heart and think these are beautiful people with beautiful lives. The key thing though is that you need to live to figure these out. My predilection for stories, fiction or not and the moral of the story helps in some way to gain some sort of insight (whether true or false).

Net Savings

monthly-cash-savings-bar-chart

It seems that I am doing fairly well being in positive balance most months of the year. The missing months of July and August is down to poor record keeping. However because of how I track my net cash worth, it will likely reflect in the following months values, hence the yearly net savings value should still be fairly accurate.

One method I found that was very motivating for helping me keep up to speed on a monthly basis was to join a savings community online. There are various threads over at the MoneySavingExpert Forums where people keep each other motivated with their monthly savings and what’s been happening in their various lives that makes savings difficult or easier. Unfortunately, this is not so much as an exciting topic over dinner with friends or mates over beer, hence I have to do it over the online community to gain some encouragement.

Portfolio

portfolio-volatility

My YTD value of my portfolio is up just about 12%. How well have I done compared to the indices?? Worst than some, better than some… Does it really matter? Perhaps. Would it change anything I do? I hope I have better sense than that. I am waiting for a bear market at a appropriate circumstances where I am in a stable financial situation to sort out my mentality with regards to risk. That would be the real test of my mettle I reckon.

This is all really a big ‘experimentation’. I mean you can only know how much you hate or enjoy the rollercoster only after you have experienced it right? However, better buckle up my safety harness!

 

Decade of Deaths, Weddings, and all the rest.

2016 is also the year when my granddad passed away. This was a fairly novel experience for me and my generation and it has taught me some lessons. There are people you love, and you want to be with them when they need you. You want to be able to be with them when they need you. That is important. Two of my friends my age had similar experiences as well and I think I can see some similar reflections on their part. This will happen more often from now on, this is inevitable.

The ages of 20s is also when there are numerous wedding invitations flying across through the mail and where social media is just flooded with wedding photos. I attended 2 of them myself this year and I took it more of an opportunity to reminiscence with old friends and also to figure out what it is all about. I enjoyed it immensely but hope not to get caught up in the hype. I really wished them all well and hope to see them do well themselves.

So the Decade of 20s is now known as the decade of Deaths and Weddings.. Perhaps by the late 20s, I will be used to this.

Imagine a Life of You and I

Everlasting Strawberry Summers

Sneezing at pink blossoms

Sharing stories like no tomorrow of soft rye, work and  adventure

Morning coffees on rain fell weekends

Late night brews and chats

Train rides across the city

Napping in front of moving pictures

The heart yearns for The silhouette of my dreams and likewise the mind is occupied

yet Life is such a stoic existence that the only way is to

Swallow that bittersweet feeling and call it living

Pieces of Me by haleshine

I hope you had a decent 2016. Time provides all and takes all in the end. Enjoy the journey.

-Fireplanter

I Wished I had a Barbershop

I wished I had a business like this.

There is no future in house work.

Maybe when I save some money I can have a barbershop someday.

But I can never save.

Money slips through my fingers like that.

Trouble is I have lived up to every penny I’ve earned.

Why shouldn’t I?

We’re here today and gone tomorrow and then where are you?

Quote from Hannah from The Great Dictator

This classic from Charlie Chaplin has his stylistic style of satire slapstick and moving lines. And then I found this quote which made me stop and record it down.

Now we can all relate to the difficulty of saving, of living up to every penny  we have earned. After all, we have worked hard enough to make the dough, why shouldn’t we be able to enjoy the fruits of our labour??

“You Only Live Once!”

This is especially true in times of true hardship where there is no visible sight of the exit route, where your future looks bleak and you feel trapped by debts, lifestyle inflation and costs of living. The middle class trap. Hence it is very easy to take the easy way out and spend to release the steam or stress. Some even make the mistake of spending on credit, which is basically spending future earnings.

‘Money Slips through my fingers like that’

Ouch.

Fortunately, the start of the line offers us a solution. Own a barbershop. A Barbershop is a business which has a capacity to produce an income. In the real world, this translates to use your savings to buy assets and assets tend to produces an income. 

Assets

There are various asset classes that we can own. They are the following main classes:

  • Cash
    • We all know what cash can do. It appears to be the most apparently valuable and useful asset to us given its liquidity and ability to allow us to buy goods and services. It also can provides us a buffer from dipping into the our more volatile aspects of our portfolio in turbulant markets. Cash is King sometimes
  • Fixed Income assets
    • This includes Treasury bonds, UK Gilts, Corporate bonds. Basically a IOU from the government/company that you lend money to for a set time-frame and they agree you to pay you back a set percentage of interest. The complexity comes from the IOU having a value that can rise or fall with the markets.
    • Risk/Return is higher than cash but less than equities.
  • Equities
    • Owning a business or a slice of the business in the form of stocks/shares and getting a return from dividends. Nothing beats owning a business and it generating a return itself.
    • Key thing is the value of the business/stock/share is only as valuable as the next buyer is willing to pay for. Hence market sentiments and how well the business is run plays into this.
    • It is risky to own just one business but the idea is owning hundreds of companies through a tracker fund would diversify the risk of a few companies not performing as well.
  • Property
    • I call it the ‘Romantic asset’
    • People have this romantic idea that house prices never fall and always rise and will continue to rise and is the best to own as an asset. However the same has been the case for Equities. All asset prices tend to rise with inflation!
    • The disadvantage of property is that it is extremely illiquid and requires some effort in manging the property. 
    • If you are owning to stay in, it doesn’t even count as an asset as it does not provide a source of income. 
    • I would consider investing in it as a diversifer in my portfolio though through Real Estate Investment Trusts as it behaves differently to equities though the market cycles.
  • Commodities
    • The bad boy asset: Steel, Copper, Gold, Oil…
    • The most volatile asset out there! Just reading about Oil price drop over the past year, I get the sinking feeling of one that owns the oil companies. Same for minerals and rare materials, steel price drop affecting the Australia/UK markets.
    • Might be useful at some point but at the size of my investment, it would be a long while before I look at this asset class more closely.
    • Buffet hates these. They don’t produce anything.

Key message is to Diversify Diversify Diversify. Have your finger in every pie (that is worthwhile having your finger in). Don’t put your eggs in one basket. etc etc etc.

Well you get the message.

And hopefully I shall own my own Barbershop one day!

–Fireplanter

The Long Bet

The case for passive investing has been well put forward by this long standing bet between the Sage of Omaha and Protege Partners.

“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S&P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.”

So the story goes that Mr Buffet postulates that within a 10 year period, the index of S&P 500 will perform better than a portfolio of selected stocks by portfolio managers. He actually bet US$1 million on that with Protege Partners, a hedge fund company.

To put simply, passive investing is to follow the stock market blindly by investing in all the companies listed on a particular index, such as the S&P 500. The S&P 500 index comprises of the 500 largest companies listed on the US stockmarket by market capitalization. By investing in the whole index, you are basically going to be tracking the performance of the stock market, ie. if the stock market does well, so will your investments, if it does poorly, your investments will follow suit. There is no activity in actively selecting stocks, hence the ‘passiveness’ of the investing.

On the other hand, to buy individual stocks or to invest in a mutual fund with a manager, you be will subject to picking stocks. You would be trying to better the performance of the stock market. (If not, what’s the point of picking stocks in the first place right?) However, to beat the performance of the stock market (which would the average performance of all the stocks), you would need to pick the stocks with ‘above average’ performance. To attempt to do that, you would need up to date information on the companies, knowledge on how the markets/companies/industries function, analyse all the above and then make a judgement which would be companies with the ‘above average’ performance and then you need luck as well for things to go well as you planned. And to make sure  you achieve that on a year on year basis, you would need to do that and reassess things regularly again and again.

Reasons the average investor would do better with passive investing compared to active investing more often than not:

  1. Fees
    • Current fees for passive investing via tracker funds costs as low as 0.07% (Total Expense Ratio) for instance for the Vanguard S&P 500 UCITS ETF. This is compared to managed funds which can be from anything from 1-2%. One of the more popular equity income funds Woodford Equity income fund has a Annual Management charge (AMC) of 0.75%. The Vanguard UK FTSE 100 tracker has a fee of 0.09% to compare with.
    • Hence the active funds have to perform signifcantly better perhaps 1-2% than the average market performance before fees just to meet the same returns as the index tracker fund. And this has to happen EVERY SINGLE YEAR to justify the fees.
  2. Diversification
    • The greater diversification of index tracker funds over hundreds and hundreds of companies makes the risk of investing less than choosing just a few companies. You have to be careful of certain indexes which may be overly populated by certain sectors, eg Tech stock in in S&P, Financial in the FTSE. Basically this is a case of spreading your eggs across as many baskets as possible. The first rule of investing is to protect your capital and we do this by spreading the risk.
  3. Not needing to choose
    • Not having to choose is a brilliant strategy! You avoid choice paralysis, you don’t get bogged down by inertia, you don’t have to worry about the specifics of each and every company if you are not interested at all. Owning a slice of every company on the index means you get the benefit of getting the average returns from the market regardless of what happens. And being average is mostly good enough.

As of end of 2015, the S&P index fund has been outperforming the hedge funds the past 8 years. It is surprising and perhaps counter-intuitive as to how such a simple strategy can be more potent then doing some research and picking out the better performing companies. This is apparently better shown after there has been year after year of changing market conditions. The active funds, just can’t keep up!

protege2016-720x400
 

Source: Berkshire Hathaway Annual Shareholder Meeting 2016

 

On of my favourite writers on investing proposes that active investing is a Zero Sum Game. When there is a buyer, there has to be a seller. When someone profits from the sale, someone will lose from the buy or vice versa. The total net effect is that there is no gain or loss in the market. The only net gain is from the dividends being paid out from the companies. The price of the asset on the market will be volatile depending on peoples valuations. However the tendency of prices is to go up as companies become more valuable and produce more and as inflation pushes the prices of assets upward. Joining the active game is where you might just as well be the winner or the loser just the same at the cost of a fee to the active managers or transactions costs brokers charge!

We might as well settle for average and let time do the compounding for us.

 

 

 

 

Dividends: the Fruits of the Market

So August, September and now October is just passing me by since I last looked at FIREplant. Not exactly dedication is it? I am still keeping an eye on the finance bit side of things tho and continuing to read into the markets and news about Brexit and pound and elections and stuff that happens all around the world. And life just goes on…

This is just an update on the Dividends I have earned so far this year. Fruits of the market. Some dividends are paid yearly, some are paid quarterly but the funds that I have picked pays out quarterly dividends. I think it gives me somewhat of a bit of motivation when I can physically see the returns trickling in. Another benefit of quarterly dividends is the chance of rebalancing with the dividends if the portfolio allocation gets out of their desired allocation if I need to, although my level of dividends at the moment is not enough to do anything significant.

2016 Q1 Q2 Q3
VAPX 64.85 66.2
VEUR 132 45.45
VHYL 88.91 67.89
VFEM 25.28 69.63
VUSA 13.18 15.98
Total 0 324.22 265.15

I have not bought any more units since I dipped into the markets, so the dividends are coming off the same number of units I have bought.

Each quarter of dividends current equates to roughly 0.6-1% of the portfolio value, but given that the value of my portfolio has increased 20% since April 2016 it doesn’t seem to bad. A good learning point is that % yield on a portfolio may fall when the value of portfolio increases and vice versa, the % yield may increase when the underlying assets fall in price. Hence, looking solely at the yield doesn’t tell you about the whole picture but may be indicative of how the underlying price of the asset is.

It is interesting to see also that the same number of units for VEUR paid out a third of dividends from the previous quarter or how VFEM paid out 2+x in Q3 compared to Q2. Perhaps this is due to how the underlying companies in VEUR/VFEM pay out their dividends throughout the year or could this be due to other socioeconomical factors? I don’t reckon it matters much it the grand scheme of things but it would be interesting to see what happens next quarter.

All in all, I am quite satisfied so far with my picks and the dividends. Over the course of 1 whole year, the estimated dividends on the whole portfolio would be roughly 2-3%, excluding any underlying volatility of the price of the portfolio. The challenge is to focus on the dividends and try to ignore the volatility of the portfolio. I hope when the volatility shows up as a fall in price of my portfolio, I don’t get the butterflies in the stomach. That is the true test for any investor I reckon. Hence the importance for  Cash as a buffer/reserve as an emergency fund.