A path to financial freedom

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Having attained a measure of financial freedom for myself I would like to outline my thoughts on how to reach this point. The path I will discuss is informed by the actual one I followed. When I set out on my journey through the world of work and earning, saving and investing over thirty years ago, I did not have any route map to read or to follow, but over that time my experience has enabled me to devise one. My writing here on this blog is intended to include providing the route map I didn’t have but would have liked to have had.

Key factors include vision, commitment, planning, earning, spending, saving, investing and time.

Once you have seen the vision and embraced the objective of financial freedom then you need to make the commitment to follow a path, and be disciplined in staying on it, so you can reach that destination.

Some planning is needed and is useful when considering the necessary ingredients of earnings, spending, saving, investing and time. The past may not be a perfect guide to the future but it may be a useful guide when planning. An interest in financial matters and an attitude and approach of trying to handle these areas of life in an effective manner is key.

In your early years it will be key to maximise your earnings as soon as possible. Above average or double the average earnings will make this journey easier. A commitment to achieving success in the workplace so as to maximise earnings is useful, but so also is the ability to consider things from one’s own perspective and not always from the employer’s or the job’s perspectives.

At this time, it will also be important to think carefully about spending habits and “lifestyle management” and how you approach the consumer society. The idea of living below your means by a significant margin, such as only spending 80% of your take home earnings, is important. An ability to stand back from the consumer society and make choices so as to maximise savings is also key.

The cost of housing and the issue of house prices will need special consideration of both the past and the future possibilities.

If you have achieved above average earnings, and have your spending under control, then you should have the savings to proceed. These will need to be deployed carefully towards eliminating any debts, dealing with housing, and setting up planned savings. A ready cash reserve is useful and necessary but in my view most of your available savings should then be deployed in growth investments where a real above inflation total return can be obtained.

A preparedness to invest so as to grow one’s savings at a rate above inflation despite the perceived risks of losing money will be critical to growing one’s wealth. My preferred investment is equities and the vehicles to be used include investment accounts, ISA’s, and pensions. It is important to establish a pension plan in order to gain any employer contribution and to gain any available tax relief. As pensions are not accessible until the age of 55 or later at present and as current and recent governments are prone to changing the rules then one should proceed carefully.

The main investment plan after pensions should be ISA’s because of their tax privileges. If you are fortunate enough to have savings that are surplus to the ISA limits and to any pension commitments, then an ordinary investment account can be used.

Various investment approaches can be utilised, such as the permanent portfolio, and passive equity index tracking. My current preferred approach is investing in income and growth equities using investment trusts.

Finally, one can consider the importance of time and timing and the influence of luck. I think you will be pleasantly surprised by the financial position you can reach after a long time following this path.

Holding your nerve during a stock market tumble

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It has been reported that “only 18 per cent of investors said they stuck with their investment plans during the volatile three-month period at the end of 2018” when “the MSCI World index fell 13.9 per cent, the 11th worst quarterly fall since 1970”. The Schroders Global Investor Study 2019 added that “In the final three months of 2018, when the MSCI World index of global equities fell sharply, only 18% of people kept their investments the same, and a further 9% made changes to their portfolio but kept the risk profile the same.” According to this report in the UK we stay invested in an investment product for only 2.9 years on average.

I read that and decided to review my own experience of this situation. At the time I noticed the drop in the market in that quarter and especially in October but I didn’t feel any inclination to react to it. My only transactions during the quarter were automatic and manual dividend re-investments already decided upon, a fund switch within my ISA, and a drawdown sale of dealing account assets. The switch was a minor one concerned with adjusting the relative sizes of a global fund (increased) and an Asia Pacific fund (reduced). The asset sale was also a routine one that I carry out every three months at present.

My total return during the full 2018 year was a fall of 6.45%. My total return during the final quarter of 2018 was a fall of 5.91%. October 2018 was my highest losing month since beginning drawdown in January 2014 but was not much worse than some other months in 2014, 2015 or 2016.

I follow the markets and the news affecting the markets and aim to be informed but I also aim to be sceptical of commentaries on the market situation and of “noise” in the markets. News of Trump, trade wars, USA versus China, interest rates and Brexit may be interesting and may influence market activity or may provide an explanation for market moves, but it doesn’t give me a reason to trade.

Rather than considering the market situation I try to stay focussed on my own situation. I’m broadly happy with my portfolio allocations to equities in the UK income, global income, and Asia Pacific income sectors, and to UK real estate and UK bonds, and to be almost fully invested. I might switch between assets to adjust position sizes or to increase my ISA and reduce my dealing account, but otherwise I am just re-investing dividends and selling down assets in my dealing account to fund my expenditure. In 2018 my portfolio turnover was about 7%. My current holdings have been held for an average of 9.76 years.

I began investing in equities in 1986. In thirty-three years, I have had nine losing years of which four were worse than 2018. So, I regarded 2018 as a disappointing year but it didn’t compare with 2001-2002 (-27%) or 2008 (-23%).

My first experience of a loss in the markets was in October 1987 when I remember my £3,000 invested fell to be £2,000 in only a few days. It happened so quickly that I didn’t have a real opportunity to react. These were all certificated unit trusts or privatisation shares and my dealings then were by post. Fortunately, I didn’t need to access these funds and not having any desire to recognise this loss I stayed invested. My losses were recovered by the end of 1989. Interestingly the full 1987 year isn’t a loss year for me or for the UK market. The October fall was a correction to gains made earlier in that year.

I now prefer to take a one-year view or a calendar year view of stock market moves so as to put short term volatility in perspective. I now regard it as very useful to have had that experience of loss in my second year of being invested and when I only had £3,000 invested. It prepared me to deal with similar percentage losses on much bigger numbers in both 2001-2002 and 2008. In both cases I stayed invested, and invested more when possible. I held my nerve and with hindsight I think that was the right thing to do.

Financial review at 30 June 2019

Half Year Summary

A total return in the year to date of 11.70%, slightly behind the index, results after draw-down expenditure in a capital uplift of 9.65%.

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I review my/our financial situation at the end of each month so as to track where we are, and also because I find it interesting. I’d now like to write up a review for this month end and half year end, after 5 ½ years of drawdown.

As I am not earning any income from employment any more, I am in draw-down in that I am drawing down some of my financial assets each month to cover our spending. I have been in draw-down for 5 ½ years now so that will be the main time period under review. My key performance indicators in this review are capital, income, expenditure, total return, and income growth. My key comparisons are with an inflation index, an equity index, and the “safe withdrawal rate” (S.W.R.).

Inflation (R.P.I.)

My chosen inflation index is the retail price index. I have chosen this one because it has the longest history, it is perhaps more inclusive than other rival indices, it tends to be higher than these rivals, and is favoured less by politicians.  In 5 ½ years the RPI index has increased by 14.44% (I have estimated the figure for June).

Equities (FTSE UK All Share)

My chosen equity index is the FTSE All Share total return index. I have chosen this one because I live in the UK and the majority of my portfolio is invested in UK equities. This index also has a history that extends back to when I started investing in 1986. In 5 ½ years the FTSE UK All Share total return index has increased by 37.97%. If I chose to invest in funds that attempt to passively replicate and track the index these would return less than the index because of fees and tracking errors. A typical unit trust tracker (M&G Index Tracker Fund Sterling A Acc) had a total return of 34.26%.

“Safe Withdrawal Rate” (SWR)

This approach suggests taking an income, or drawing down, only 4% of your available capital in year one and then increasing that amount by inflation each year.


In 5 ½ years my capital has increased by 16.10%. This is above the increase in RPI inflation at this point. If I give my drawdown portfolio capital an index value of 100 at 31 December 2013 then at 30 June 2019 it is now at 116.10. The year by year movement is shown in this table and graph:

Year endCapitalGrowthRPIGrowth
as % of 2013 assets


In 5 ½ years my income has increased from 3.53% to 5.18% of my original capital. This is now above the income level according to the “safe withdrawal rate” which has increased from 4.00% to 4.51%. The year by year movement is shown in this table and graph:

Year end4% RuleIncome
as % of 2013 assets

* I have estimated the annual income for the full 2019 year.


In 5 ½ years my expenditure has increased by 29.93%. This is above the level of RPI inflation, but below the increase in my income. My spending as a percentage of my income has fallen to 79.34%. Expenditure is running at an annual rate of 3.70% of the average asset value during the 2019 year, which is similar to recent years. The year by year movement is shown in this table and graph:

Year endIncomeExpenditureGrowthRPISpend %Expenditure
as % of 2013 expenditureas % of year average assets

* I have estimated the annual income and expenditure for the full 2019 year.

Total return

The portfolio total return has been 40.43% over this 5 ½ year period. It is pleasing to exceed the FTSE All Share total return index and a typical index tracker fund (M&G Index Tracker Fund Sterling A Acc).

The year by year movement is shown in this table and graph:

Year endTotal ReturnGrowthIndexGrowthTrackerGrowth

Income growth

My current main objective is income growth rather than total return and here I am pleased to record that income has grown by 51.06% over 5 ½ years. The portfolio income yield has increased from an annual rate of 3.82% in 2013 to 4.66% in 2019. This is calculated on the average asset value during the year. The year by year movement is shown in this table and graph:

Year endIncomeGrowthRPIGrowthIncome Yield
as % of 2013 incomeas % of year average assets

* I have estimated the annual income for the full 2019 year.

The income growth has resulted from increases in the dividends paid per share, from re-investing any unspent income, and from re-positioning the portfolio towards higher yielding investments. 33% of the portfolio is now in higher yielding investments compared to 9% at the outset. These investments pay out between 5% and 7.5% currently. I am hopeful that this allocation will not unduly impact on overall future capital and income growth. We will see.

Spending is currently around 80% of portfolio income so there is a good margin of safety for any exceptional spends that may arise (or any dividend reductions), but in the mean-time I will re-invest for more income. At some point if portfolio income runs further ahead of spending then I can choose to spend more (discretionary choices) or else review the income growth objective and the high yield allocation.

Investing a lump sum

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These are some ideas I passed on to a friend recently about taking a first step into investing in shares:


I was told that you have a lump sum of cash and are considering how to invest that for yourself and your children. I have some ideas on how I would deal with this which I can share with you. 

Interest rate returns on cash are very low at present. We get 1.10% on our instant access savings at the moment. This could be increased to 1.60% by committing to a 5-year bond, but price inflation is 2% (CPI measure) or 3% (RPI measure) so you are losing money in real terms. Therefore, I would only hold cash savings for immediate needs or as an emergency fund to cover 6 months of spending.

After providing cash savings for immediate needs and for an emergency fund I would invest in company shares. My preferred way of doing this is to invest in investment companies (also known as investment trusts).  I/We have invested in this way for many years and have achieved overall growth of 8% per year. This means that you can double your money every nine years. Individual years can vary, however, for example from a 23% loss in 2008 to a 27% gain in 2009, so you should reckon on staying invested for 5 years so any losses can probably be recovered.  

Here is a short video about investing in investment companies: Your investment journey.

The Association of Investment Companies (AIC) say that “Investment companies are a way to make a single investment that gives you a share in a much larger portfolio. A type of collective investment, they let you spread your risk and access investment opportunities you wouldn’t find on your own.” More information is available on the AIC website.

In order to invest you will need to choose a wrapper (investment account, ISA, pension, etc), and select an investment platform, before choosing an investment company or companies to invest in. If you are a first-time investor then a large global or UK investment company may be best. Here is an example of each that we hold or have held in the past:

F&C Investment Trust   They say that “the Trust is highly diversified and cautiously managed, with exposure to over 450 individual companies from around the world.”

City of London  They say that “the Company’s objective is to provide long-term growth in income and capital, principally by investment in equities listed on the London Stock Exchange.”

Please let me know if you are interested in finding out more.


Small print: This is information not advice and it may not be appropriate to your individual circumstances.


Source: Pixabay

Do you have a vision of your future? Do you know where you want to be in five years or twenty-five years, or do you take one day or one year at a time?

In considering a path to financial freedom it is helpful to have a vision of reaching that destination. It is useful to believe that you can reach that destination. This can help to provide the motivation needed to make the commitment that is necessary to get there. Your vision could include the idea of the prize being sought. This could mean being able to live and pay your bills without going out to work. It could encompass owning a property you live in and other possessions to satisfy your desired lifestyle.

Your vision could be created incrementally, piece by piece. It could begin with the idea of an emergency cash fund to cover a job loss or similar crisis, that could sustain you for a few months. It could grow to the idea of paying down or even paying off your mortgage debt. It could involve creating an investment portfolio that could provide passive income equal to a slice of your employment income. This portfolio could grow to become something that replaces all of your employment income.

Negative thinking such as thinking that this is all a pipedream is not helpful. If you have read any newspaper reports of how people have achieved these things in the past, then this is helpful to your vision. Sometime such newspaper reports emerge after someone has died and they have left a large bequest and yet those who knew them did not imagine them to be wealthy.

I remember reading just such a report back when I was still at school. As a sixth form student I delivered the Sunday papers and I stopped to read some of them including this story. It said that someone who had been assumed by those who knew him to be poor, because of his frugal ways and his old clothes, had died and left over £1 million. This money was invested in shares and it was thought that he had been very careful to save money and to invest it in shares. This showed me what could be possible.

A similar case was reported in the USA in 2015, when Ronald Read who had worked as a gas station attendant and as a store janitor died aged 92 and left an estate of $8 million mostly to Brattleboro Memorial Hospital and Brooks Memorial Library. It was reported that he invested in dividend-producing stocks, avoided the stocks of companies he did not understand such as technology companies, and was a buy and hold investor in a diversified portfolio of 95 holdings in mostly blue-chip stocks.

Closer to home in the UK in 2014, Vincent Evans who had served in the Royal Navy died aged 90 and left nearly £2 million entirely to Sherborne Abbey. It was said that “He was sociable and had a lot of friends. He lived very simply in a modest bungalow and drove a fairly elderly car. The money was in investments.”

These reports show the possibility of building a significant investment portfolio over a lifetime of saving and investing. This can be a part of your vision.

You can live on 4% (so far so good)

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I’d like to say more about my experience so far of living on 4% (or thereabouts) of my drawdown funds each year. Five and a half years ago I quit my job with a view that I could live on my existing assets if I chose to. I finished work in December 2013 so I regard 1 January 2014 as the start of this new phase. Apart from a two-week assignment in 2014 I haven’t worked since then and I’m not minded to seek work at present, although I don’t absolutely rule it out.

One of the reasons I quit when I did was because I felt I had enough. Financially I felt I had enough assets to live on. At that time the natural income of my investment portfolio had just exceeded my spending. I had reached and gone past the cross-over point as mentioned in “Your money or your life” by Joe Dominguez and Vicki Robin. Working on would have produced more cash than I felt I needed based on my current lifestyle.

I had read of the 4% “rule” – the so-called safe withdrawal rate. That gave me comfort that 4% was a reasonable level of drawdown. My portfolio then, and now, is mostly based on equity income investment trusts with a typical net dividend yield of around 4%. I knew with investment trusts that some income earned is held back from payment in a revenue reserve in better years so it can be released in order to pay the dividend in less good years. These trusts often have long records of maintaining and increasing their dividends. One leading trust has increased its’ dividend every year since 1966. This gave me confidence that the investment income I had in 2013 would be maintained and should increase over time. Historically it had beaten inflation going back twenty years or more.

I wasn’t assuming I would spend less when not working, but I was thinking that I didn’t need to spend more and could maybe spend less, and within reason I could choose when to spend anything significant. This was all of some comfort.

I have shown in the tables below how things have worked out so far in the five years to 31 December 2018.

2013 to 2018 - 4% Rule versus Dividends

Year endAssetsRPI4% RuleDividendsSpend
as % of 2013 assets

The first table compares dividend income received and spending incurred against the guidance of the 4% “rule”, with the percentages calculated on the opening asset balance. I have uprated the 4% rule column each year using the RPI inflation measure. My current natural yield (4.89%) is now above what the “4% safe withdrawal rate rule” would suggest (4.39%) and also above the best flat rate annuities for my age (3.80%).

2013 to 2018 - Assets, Dividends and Spend

Year endAssetsGrowthDividendsSpendSpend %
as % of year average assets

The second table shows the dividend income received and spending incurred, with the percentages calculated on the average of the opening and closing asset balances for each year. I have also shown spending as a percentage of income, and the growth (or decline) in the asset total.

Dividend income has been stable with an average yield of 3.96% and a range from 3.52% to 4.38%. Capital returns, including unspent income, have been more volatile with average growth of 1.47% and a range from -9.74% to +11.27%. Relying on the dividends enables me to be more relaxed about these capital fluctuations. Not selling the shares enables me to benefit from future capital growth and from dividend increases. Spending about 13% less than the natural yield has allowed me to reinvest a little.

I have chosen to invest in investment trusts in the UK equity and bond income, property direct UK, Asia Pacific excluding Japan (income), global equity income, and UK equity income sectors where the average dividend yields for each sector range from 5.9% to 3.9%. I am consciously selecting from a subset of the world market. I believe my chosen subset can match or beat the FTSE All Share index but not the global index at present. I reference my own returns as an equity investor from 1985 to 2018 and the published historic returns of my main holdings in coming to this view.

Going forward I see two possible threats to my approach. Firstly, inflation in the prices of what I spend my money on. Recently this has been of the order of 2% or 3% and the Bank of England is targeting inflation (CPI) of 2%. In the 1970’s, however, I remember much higher inflation and looking at the history of certain of my investment trusts it is true that their dividends didn’t keep up with inflation in those years. Inflation as calculated is based on a specific basket of goods and hence of continuous consumption. I reckon that my basket of goods will not match that of the statisticians, but more importantly I can choose to take less in my basket if I have to.

Secondly, the consistency and stability of taxes and the financial freedoms that we now enjoy could change. A future Labour government could threaten this with policies that could have an adverse impact on the UK economy, the UK stock market and UK dividend returns, and also a tax and nationalisation regime that could be a threat to investors. You can mitigate the some of this by investing overseas but you may not be able to avoid some of it. These concerns would, however, apply also to other strategies such as total return.

In summary given stability of prices and taxation and government policy generally then I am confident that my approach will suffice. Given the numbers so far it is so far so good.