2017 in Charts and Graphs

2017 was a great year for equities, CAPE ratios are raising all around. Great but that might suggest future performance will be expected to be poor given the popular theory of reversal to the mean CAPE. Or will momentum play a bigger role for the next year leading to further highs?

I doubt anyone has a crystal ball of that sort that could predict the future or where the next crisis will arrive but our best bet is to focus and be steadfast on the simple and enduring values and principles that will hold true help us steady the ship and sail along despite the storms. Come what may!

Portfolio

FP Portfolio

Towards the end of Dec 2016, my unitized portfolio Unit value was at 113.11. This grew to 137.75 per unit on 4th Jan 2018. A growth of 21.78%! I must say I am pleasantly surprised but cautiously suspicious of the reasons for this performance. I must admit I am no genius or brilliant in my methods just following the passive route to wealth building.

A lot of this performance I gather is due to the weakening pound/dollar currency exchange in 2017. At this stage of wealth accumulation with a long way off decumulation, this volatility shouldn’t be too much of an issue but it is a good lesson to note how currency fluctuations can affect your portfolio and note how currency hedging can help wealth preservation in the latter stage of life.

FTSE WORLD INDEX

Part of the reason I tracked my returns in a unitized fashion was so I could capture data of some resemblance to standardized methods and therefore I can compare to various funds or indexes. Looking at the FTSE World Index:

Between 30th Dec 2016 and 31st Oct 2017:

FTSE World Index (Net Tax) grew from 2531.6 to 3026.9 (19.56% increase)

FIREplant portfolio grew from 113.11 to 133.09 (17.66% increase)

The lack of up to date data on the FTSE Russell website means I could only compare to Oct 2017. Losing by 1.9% to the FTSE index will probably a reflection of the allocation of my portfolio. I am content with that. Perhaps in another year, the FP portfolio will outperform but we know average is good enough.

Dividends

Dividend Chart

Dividends has been steady growing as expected. 1st year of breaking the 1K Dividend barrier. Hurray! Time will tell whether this chart will become exponential and if the laws of mathematics will hold true.

Cash

Cash Worth

I only just met my savings target for the 2017 semi-motivated by the thread on MSE forum. Saving is such a lonely journey sometimes, people tend to be quite protective about their financial situation perhaps quite rightly. However, it is quite liberating to chat and talk to people about how you are doing in terms of your monthly savings and your failures and successes. It helps us introduce a reflective practice and accountability to our choices and actions and also learn from the mistakes and failures of others.

To be successful, learn not to commit the mistakes of others.

Savings Rate

Savings Rate 2017

In the end, my total savings rate sat at a dismal 46.5%. Not hellish but could be a lot be better. I think it tells a lot about how much more potential I have to streamline and smooth out the edges in terms of spending and practice active minimalism. Let’s hope I can improve on this in 2018.

Enjoy a photo I took in Château de Versailles in 2017:

And Yet Here We Stand

FIREplanter

Of Decisions and Outcomes

Many a times we arrive at a metaphorical fork in the road, having to make a decision which way to go. Which dish to pick? which colour to choose for that bag? Which girl to choose? Which stock to buy? When to buy?

Fork in Road

For most people it comes naturally, decision making process learnt through parental influence, informed by knowledge through education, reading, friends etc. Do we choose the decision that feels right for us or do we choose the logically, rational decision. And then do we fear the decisions we make or potential outcomes that may come out from it that would paralyse our decision making process.

The classic analogy of how making decisions can be so overwhelming is an anecdote from the film, The Legend of 1900, think Forest Grump type of biopic lifestory about a musical piano genius who was born, grew up and died on an oceanliner.

Take piano: keys begin, keys end. You know there are 88 of them. Nobody can tell you any different. They are not infinite. You’re infinite…. And on those keys, the music that you can make… is infinite. I like that. That I can live by….

You rolled out in front of me a keyboard of millions of keys, millions and billions of keys that never end. And that’s the truth Max, that they never end. That keyboard is infinite… and if that keyboard is infinite, then on that keyboard there is no music you can play. You’re sitting on the wrong bench…. That is God’s piano.

Christ, did you… did you see the streets, just the streets? There were thousands of them! Then how you do it down there, how do you choose just one… one woman, one house, one piece of land to call your own, one landscape to look at, one way to die…?

Land? Land is a ship too big for me, it’s a woman too beautiful, it’s a voyage too long, perfume too strong…. It’s music I don’t know how to make. I can never get off this ship.

-Danny Boodman T.D. Lemon 1900

Danny Boodman T.D. Lemon never set a foot out of the ship, never existed out on land before, never knew what other wonders of the world, never know what love was or wasn’t out there because of the choices and decisions that he saw faced him and it overwhelmed him in the end.

You can never make the right decision

Faced with the idea of investing, it is equally a minefield of decision making process. What to buy? When to buy? How to buy? Are FANG stocks overvalued? Is the S&P overvalued? Is value investing going to provide better returns?

The thing is we will never know until after the event has happened and when we look back in retrospect, which is not very useful. And what every responsible mutual fund would have on their prospectus is the warning that past performance is not indicative of future results. What is useful though is evaluating the reasons why things played out the way it did. History tends to repeat itself after all.

What has been shown to affect performance of a portfolio are:

  • Expense Ratios
  • Trading Costs
  • Management Charges
  • Tax

Therefore, sticking to low cost index funds with a passive approach in a tax efficient strategy sounds like you might do pretty good enough in the long run.

Being Average is good enough

I used to have a friend who told me that if he had average grades, had an average girlfriend and lived an average life, he would be content enough in life. Thinking back, I thought how sensible this idea was.

The issue with chasing returns in investing through active investing is that it is a Zero Sum game. When someone in the system makes a profit, someone else has to be making a loss. (with the middle man taking his cut via the transaction costs). It is difficult to be make the right decisions again and again year after year. In fact there is evidence that over 10 years 83 percent of US active managers fail to match their benchmarks and perhaps only around 5% of managers do outperform the market for 3 consecutive years.

Perhaps for the average person investing for the long term, average is good enough after all.

Outcomes

Martin Lewis always had the knack of simplifying complex financial jargon and principles into bits that are easily digestible.

The Coin Bet

Say I offered you a bet on heads or tails of a coin flip.
If I win, I get £1 from you.
If you win, you get £100 from me.
50/50 Odds

We flip the coin and you lost! You lose £1 to me.

Was it a good decision (to take the bet)? Yes because there was a great potential upside to it.

But you lost £1 pound!

The crux here is that it was a good decision but the outcome was bad. The two are actually quite distinct really and we shouldn’t let the potential of a bad outcome affect our ability to make a good decision. Think of some of the decisions we make all the time that perhaps may not have had the desired outcome. Not neccessary on financial decisions, but perhaps in relationships, in choosing our habits etc. It might give us a idea of how closely related a decision is related to an outcome.

 

You can see the whole video of Martin’s lecture on Martin Lewis: How to teach your kids about debt here

Hope 2018 would be as kind as 2017.

FIREplanter

Dividend Series 2017 Q1

So a quick review of the first quarterly dividends of the year! Hurray I made it to the 1 year mark of my first post. The thing with writing and saving and many things we do in life is you need to be committed. If you want to get good at it, you need to be committed and be prepared to put in the hard yards. Many Ideas, Loads of Imagination but not so much production. I think I need to try harder. I think the key is to keep going at it relentlessly. No one said it was easy.

Similar number of units in the portfolio from the last quarter, according to my accounts department. The snowball is marginally gathering momentum I hope.

On another note, it was tough getting the site sorted past month with hosting my own domain and getting all the site content transferred across. I still have no clue how I did it myself. Too much confusing information and guides out there on the world wide web (more like the ‘wild wild west’) The theme is still not my ideal theme but I will have to make do with it for now. I hope to get a more professional looking interface that is easy on the eye when I have the luxury of thinking about it more. Life is a bitch when you are stuck in Prison Camp.

-FIREplanter

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

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.