Getting Minted – On the road to financial independence and beyond

House prices then and now

Posted on 14th May 2021 by GM

My brother sent me an email headed “To bring back memories of the 80s and your first flat/property.” It included a link to the place where I bought my first property that showed a studio flat, like mine, for sale. “Offers Over £175,000” were being sought.

I responded “That’s a 600%+ price rise! I read that Nationwide now offer 5.5 x salary! You would need to be on £28,000 per annum and have a £21,000 deposit, plus money for any other costs. So daunting, but not impossible.”

A quick bit of research had shown me that the current rate for my first job might now pay £28,000 per annum and thereby could allow a £154,000 mortgage. In this case, to buy a starter home for a single person now would need a mortgage of 5.5 x salary and a deposit of 0.75 x salary based on that salary which was close to the average. It looks to me like the increase in salary plus the increase in the mortgage multiple since the 1980’s has allowed this house price rise to happen. The higher multiple is possible because of lower interest rates today. Are more expensive houses the result of money being cheap? Will we see cheaper houses without seeing more expensive money first?

Browsing online today I see that Politics for all have tweeted on 12 May:

NEW: UK average house prices compared to average salary
House building House Prices / Salary
1970: £4000 / £1000
1980: £20,000 / £4000
1990: £60,000 / £10,000
2000: £85,000 / £16,000
2010: £170,000 / £23,000
2020: £230,000 / £28,000
Today: £260,000 / £30,000

The ensuing debate mentioned:
• interest rates being higher in the earlier years and lower now
• London and regional differences in house prices and salaries
• mostly single earners in the earlier years but now two earners
• the deposit size is the bigger hurdle now
• the accuracy of the average salary or whether a median or mode should be used

My starting salary and first (and second) property price in the mid-1980’s sit between the 1980 and 1990 figures in that table.

Back then in the mid-1980’s I had borrowed just under 3.0 x salary and put down a deposit of just over 0.5 x salary. In my early 20’s I was on a reasonably good starting salary that was below the average salary but I was confident that it would rise. I made sure to borrow less than 85% of the property value so I didn’t have to pay mortgage indemnity insurance that would have only benefited the lender. I had some money I had inherited at ages 18 and 21 and my parents topped that up so I had enough for the deposit. Without that help I would have needed a 90% to 95% mortgage and a multiple of 3.0 to 3.25 x salary. That would have been possible but more difficult to arrange at that time.

Back then mortgage interest was 12% but had increased to 14% before I even moved in. Mine was a new build so the builders gave buyers a little money back in response to the interest rate rise to encourage us to go ahead. The interest rate meant that I was spending about 40% of my take-home pay on the mortgage. That percentage fell as my pay increased. I owned that flat for three years and only paid back 1.5% of the mortgage advance. Putting it another way about 95% of my payments were interest.

My attitude then, just a few weeks into my first job, was that if I could do this then I should do it. Property prices were rising fast so the opportunity might be lost. I don’t remember thinking much about the risk of interest rates rising. The idea of the property price falling below the value of the mortgage and being in negative equity was unknown to me then. I also didn’t think about the possibility of losing my job or wanting to relocate. I was young, naïve but optimistic.

If I was in my early 20’s and in my first job now I’m not sure what I would do. If I could buy a property, should I? I suspect that my starting salary now in 2021 would be below the average rate for the job according to my Google search so I wouldn’t be able to move so quickly. I would maybe need to work for a couple of years. That would have given me more time to consider the situation. I think there is more information available now, via the internet, so I could be more informed about the issues. I could consider whether prices are at a high, and whether interest rates are at a low. Would I consider the impact of a possible change of circumstances such as losing my job, or wanting to relocate? Would I consider the risk of being trapped at the bottom of the housing ladder? I could be less young and less naïve but how optimistic would I be? I was optimistic back in the mid-1980’s despite being unemployed after graduating and struggling to get that first job!

Buying a first property because I could do it worked out OK for me back then, but I only realised how risky that was long after the event. Now I suspect that more time and more information would make me more cautious.

Changes made

Posted on 22nd April 2021 by GM

This is a late update on my portfolio for the month of March including some detail on actions taken in March and April.

Investment changes

In March I made a few changes. Firstly, I sold some shares, about 0.79% of my portfolio, to raise my cash levels. That covers about three months of drawdown spending. That was my first sale to raise cash since April last year. Secondly, I sold an investment held since 2007 and bought a very similar one in order to realise some capital gains. These should match against some capital losses incurred on some shares sold in April 2020. I therefore expect to pay little or no Capital Gains Tax for the year. The Chancellor hasn’t increased Capital Gains Tax rates yet but I suspect he will do that in the future. I am therefore pleased to have reduced my taxable gains. Thirdly, I sold a slice of one of my UK high income investment trusts and bought shares in a UK smaller companies investment trust that targets growth companies. That represents 0.86% of the portfolio and is a first small step in re-positioning away from high income towards growth. Fourthly, in early April in the old tax year I sold investments in my dealing account and then re-invested the cash in my ISA in the new tax year. Overall, I increased my portfolio income despite raising cash and switching to a smaller companies’ growth fund because the other two switches were to slightly higher yielding trusts.

March

The FTSE All Share Total Return index, my chosen benchmark, went up by 3.98% in the month of March, and it was up by 5.19% for the opening three months of the year.

My investment return for the first three months of the year was a rise of 4.13%, including 4.61% in the month of March. Lagging the index slightly. My individual holdings recorded share price movements ranging from a loss of -5.70% to a gain of 10.96% with an unweighted average result of a gain of 3.43%.

Interestingly an investment platform is saying that their average investor returned 2.91% in Q1 of 2021. They add that returns got better as their customers aged, rising from 1.78% for the 18-24’s to 3.21% for those aged over 65 (ii Private Investor Index).

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013, taking an index value of 100.00 as the starting point. This capital measure on the graph is now at 131.40. At the end of March 2021, the capital value of my investment portfolio is at a new peak and is up by 3.43% since the end of the 2020 year. Investment returns, growth and income, were 4.11%, and draw down expenditure deducted -0.68% for the three months.

Income

I have tracked the annual level of my dividends received since 31 December 2013 as shown in the income graph. This income graph shows the annual dividend income as a percentage of the opening portfolio value. My income has increased from 3.37% on 31 December 2013 to reach a new peak of 6.66% at 31 March 2021. This now exceeds the previous peak of 6.58% in July 2020 by 1.20%. The portfolio income has now recovered from the dividend cut last August by a property REIT but I remain concerned by the possibility of future dividend cuts. My two property REIT’s and my bond fund are perhaps most at risk. My UK equity income trusts are now using up their revenue reserves in order to maintain their dividend hero status. That can only be sustained for perhaps a couple of years so they will need company dividends to increase again in that time.

After three months of the year portfolio income has increased by 2.98%. The income measure on the graph rose to 6.66%. That is a 97.94% rise since draw down started on 31 December 2013. The increases this year were the combined result from the automatic re-investment of dividend income in more shares, from dividend increases announced, and from portfolio changes.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by sector, that is by geography for equities, or by type for non-equities.

	Yield %	Capital %	Income %
UK	4.46	39.65	34.84
Asia Pacific	4.93	24.26	23.61
Global	4.28	19.69	16.61
Bonds	8.68	7.56	12.93
Property	8.86	6.82	11.91
Cash	0.23	2.02	0.09
	5.07	100.00	100.00

I have also analysed based on the income and growth characteristics of each holding. I have classed my holdings as high income (dividend yields greater than 5.5%), as income (yields between 4% and 5.5%), as growth and income (yields between 3% and 4%), and as growth (yielding less than 3%). I am aiming to gradually reduce my investment in high income holdings and increase my investment in growth holdings.

	Yield %	Capital %	Income %
High Income	7.28	34.79	49.94
Income	4.59	38.89	35.19
Income & Growth	3.74	15.77	11.64
Growth	1.86	8.53	3.13
Cash	0.23	2.02	0.09
	5.07	100.00	100.00

Cash

My annual draw down spending is now around 3.28% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about eight months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments every few months in order to cover spending.

Expenditure

Draw down expenditure was only 57.35% of my portfolio income for the last twelve months. This compares to draw down spending being 75.58% of my portfolio income in the previous twelve months. Portfolio income has risen by 22.47% whilst expenditure has fallen by -7.06%. The increase in income includes inheriting extra capital in April last year, and the continued effect of dividend reinvestment, dividend increases, and portfolio changes. The expenditure comparison is mostly one of pre-lockdown and lockdown. The fall in spending is mostly a result of lockdown restricting spending opportunities.

Conclusion

I have now started to add to my growth holdings which are now 8.53% of my portfolio. Going forward I aim to use further increases in portfolio income as an opportunity to continue this switch by reducing my higher income holdings (now 34.79% of my portfolio) and increasing my growth holdings. I may choose to stall this switch if I face further dividend cuts.

An alternative approach to decumulation

Posted on 31st March 202131st March 2021 by GM

Taking up on Sovereign Quest’s challenge here is my contribution.

In the discussion about attaining financial independence and retiring early (“FIRE”) there is an accumulation phase and a decumulation phase. In the first phase you accumulate assets by earning, saving and investing in order to have enough assets to be financially independent. This is followed, sooner or later, by the second phase when you spend, or decumulate, your assets in order to fund your retirement. The objective in this second phase being to make your money or assets last for as long as you, and any dependant family, live.

I have looked at the ONS life expectancy tool. Using only age and sex this tool suggests that on average my wife and I will reach our mid-eighties. It also suggests, however, that there is an 11.19% probability that at one or both of us will attain one hundred years of age. I left work behind in my early fifties so, rounding up, I am looking at a fifty-year decumulation phase.

Some early research on decumulation by an American financial adviser, Bill Bengen, in the 1990’s, suggested that there was a safe withdrawal rate (“SWR”) of 4% per annum. Using an equity and bond portfolio and based on all previous thirty-year periods, you could withdraw 4% of the opening assets in the first year and increase that amount for inflation each year, and have some assets remaining after thirty years. This was a historical model based on past performance. I regard it as a useful rule of thumb, or an estimate of what might happen, rather than an absolute truth.

My alternative approach is not to decumulate my assets but rather to use those assets to generate an income to fund my life after leaving work. I currently aim to maintain the real value of my assets. I have followed this approach for just over seven years. One aim of my approach is that my capital assets keep pace with inflation. On my last review they had fallen 3.09% behind inflation. I am hopeful that will reverse in future. I also track my investment portfolio income and my expenditure against the 4% “safe withdrawal rate”. So far, my expenditure, or withdrawal rate, has been below the SWR, whilst my income has been higher than the SWR for the last four years. This is encouraging.

Historically a significant risk in decumulation is a bad sequence of returns in the first few years. I calculate that real returns, after inflation, for a UK investor have been under 2% per annum over the last seven years. This compares poorly to longer term historic real returns of over 5% per annum. I believe these poor returns so far have not undermined my approach.

In considering the longer-term viability of my non decumulation approach I have studied the historic past performance of certain investment trusts that are included in my portfolio or are representative of my portfolio. Certain of these investment trusts have existed for between fifty and one hundred and fifty years, and historic records for some can be traced back as far as the 1960’s and 1970’s. A key issue is whether the dividends that were paid out in the 1970’s kept pace with the high retail price inflation of that time. I follow the so-called dividend heroes and next generation dividend hero trusts and hold some of them. Although they have increased their dividends for many years, it is important to understand whether such increases exceeded the inflation rate.

I considered the fifty-year history of five investment trusts from 1970 to 2020 using their published accounts. The net dividend yields for these five averaged only 2.26% back in 1970 so you would then have needed capital assets of 44.15 times your income requirement. (This compares to a 2020 average yield of 5.74% and 17.43 times your income requirement.)

I calculated the results of a withdrawal process of taking the initial dividend in 1970 as the first-year withdrawal, then increasing that for inflation each year. Looking at the actual annual dividend increases compared to annual retail price index increases for the fifty years, on average there were fourteen years when the dividend increases were below inflation. This meant that on average there were seven years when actual dividends were lower than these targeted withdrawals. The low points in the worst years ranged from 97.88% to 63.70% of the target. The average of these worst years was 84.80%. This suggests that you may need to contemplate an effective dividend pay cut of close to 20%.

For these five trusts I also calculated a safe withdrawal rate that would have enabled the closing capital in 2020 to maintain the real value of the opening capital in 1970. These gave an average of 3.46% and ranged from 2.70% to 4.80%. This average is 1.20% higher than the opening dividend yields. This suggests that some capital could have been drawn down in addition to the dividends in payment.

The most challenging period was between 1970 and 1982. Inflation exceeded 7% in every year and peaked above 24% in 1975. In this period compound inflation growth was 13.10% per annum. This was higher than dividend growth, higher than capital growth, and more than double capital growth net of withdrawals.

My modelling of these historic results highlighted the variable results of my selections. Also, there must be a survivorship bias because I have selected survivors. This analysis of a fifty-year withdrawal period is incredibly sensitive to small changes. Increasing these withdrawal rates by 0.5% would have caused all these investments to fail with their capital balances running down to nil. Only two of the five would have survived a 4% withdrawal rate.

A key point I will deploy is to be flexible in my spending and in my investing. If in future inflation runs ahead of dividend increases then I may need to take a pay cut rather than sell assets and reduce my capital. If an investment I hold becomes no longer committed to increasing or at least maintaining the dividend then I should probably sell it and buy an alternative.

Conclusion

This analysis has shown up some uncomfortable historic truths that would have challenged my approach during the last fifty years. It’s useful to know this but I’m not minded to change my approach at present. I will remain vigilant in reviewing the situation and be ready to be flexible in my responses.

Reference

	NDY (1970)	Div incr < RPI	Div < Wdl	Low point	SWR calc
	%	No. of years	No. of years	Div as % of Wdl	%
CTY	2.70	11	5	94.55	3.90
MRCH	2.30	21	14	78.37	2.90
LWI	2.71	9	5	89.53	4.80
MYI	1.98	13	11	63.70	3.00
HFEL	1.64	14	2	97.88	2.70
Average	2.26	14	7	84.80	3.46

1970 to 1982	CAGR	CAGR	Capital growth
	Capital	Div	after SWR Wdl
CTY	7.81	11.90	4.99
MRCH	7.54	10.07	5.07
LWI	10.02	13.41	4.22
MYI	9.51	8.44	5.97
HFEL	8.00	12.48	6.05
Average	8.58	11.26	5.26

RPI 13.10

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My Financial Origin Story – Getting Minted

Posted on 26th March 2021 by GM

Belatedly taking up on Monevator’s idea and Sovereign Quest’s challenge here is my story.

I had a comfortable upbringing. We were a middle-class family but not one for showing off. We holidayed exclusively in the UK and mostly near Blackpool. My parents were careful with money even though they weren’t short of it, as I later realised. To add to my pocket money, I did various paper rounds from the age of 14 until I was 18, so that I had more money to spend. I learned to manage the little money I had to fund my hobbies and interests. I sometimes borrowed from my dad to order or buy something I was saving up for. I always paid him back. My parents would never have considered private schools and I had little awareness of them. The eleven plus for grammar school selection was abolished locally just before I was eleven. I attended local comprehensive schools and was the first in my family to go to university.

I was an untypical student. My first term’s student grant felt like a large amount but more than half was taken by student hall accommodation and meal charges. I started a cash book to keep track of my money and my spending. I’ve maintained such records ever since then. I finished the first term in the black having not spent all my grant! I was careful but not completely deprived. In my second year I moved into a bedsit and aimed to live on a budget of £40 per week that had to cover rent, travel fares, groceries and any drinks or small luxuries. I was back in a student hall for my third year. I never lived in a student house share, so I missed that experience, although I did visit friends in one not unlike this one:

I stayed in the black and never had a bank overdraft during the three years. I had a credit card but only used it once, to buy a 12” black and white TV, and immediately paid the bill in full. I’ve always paid in full since then and never taken on any consumer debt. By the time I was 21 I had five bank accounts which amused my student friends. I had a current account and a deposit account which held my student grant. I also had one building society monthly savings account holding money previously saved monthly by my parents for my benefit, and another account holding money given to me from my deceased grandmother’s estate. I opened another account with National Savings because it paid 14% interest! This was the early 1980’s. I was careful with my money but I was still able to have drinks with friends and a meal out for my 21st birthday. I later on worked for someone who said they wished that they had gone to university so they could have learned how to manage on a little money. I was able to do that.

I struggled to get my first job. I lived at home with my parents for a year whilst applying for jobs and then, after getting one, waiting to start. I didn’t spend much until I had a job to go to. Then I felt able to indulge a little and buy some hi-fi equipment. I had to relocate for the job and the employer found me some temporary accommodation in a hostel. This was quite basic, but cheap, and compared poorly to my previous student accommodation. I shared a room with a shift worker and got to listen to his hi-fi. I only stayed there for four months.

I bought my first home as soon as possible. After only six weeks in my new job, I had decided to buy a new build, but not yet built, studio flat. I put down £300 as a stakeholder deposit. In those pre-internet days’ I was a keen reader of the newspapers and magazines that informed and encouraged home buying. I was rather decisive then in wanting to buy, mostly because I could do it. I later realised how reckless that was and why my parents were so concerned. They nevertheless helped me out with some money for my deposit. That was the only time I ever really needed any money that was given to me. The amount was equivalent to about six months of my take home pay back then. It meant that my mortgage was below 85% of value so I didn’t have to pay mortgage indemnity insurance that would only benefit the lender. Before I exchanged contracts the mortgage interest rate increased from 12% to 14%. The house builder gave buyers a little discount against the price to encourage buyers not to drop out at that stage. I moved in to the partly fitted out flat and spent another £500 to get the extra basic furnishings and appliances I needed. I began to build self-assembly furniture. I finally got to listen to my own hi-fi in my own flat. I was 22 years of age. The mortgage was about 40% of my take home pay so money was tight for a couple of years until my pay rose. That commitment to paying the mortgage served to make me frugal in my other spending.

I worked hard and progressed my career, but never let it dominate me. I learned the duties of my first job but I wished to progress further and realised that I would need to study in my own time to enable that. Later on, I needed to move jobs a couple of times in order to get on. I did, however, maintain a life outside of work, and was probably regarded as a bit of an outsider at work. I was always interested in managing my own personal financial situation and I didn’t let my work distract me from that. Some people who are successful in work neglect these things.

I earned an above average salary. When I started my first job, I earned close to the national average wage. By the end of my twenties, I was earning double the national average wage. After three years I had moved to a bigger two-bedroom flat with a bigger mortgage but the mortgage took a decreasing share of my earnings.

I spent less than I earned. Being a frugal careful spender as a student and in my first five years in work gave me a good grounding. As I earned more money, I did spend more, but I never really ramped up my spending. I may have been a “yuppie” (Young Urban Professional) by my income demographic but not by my consumer expenditure. I was certainly no splash the cash “loadsamoney” and never worked as a plasterer:

Given my relatively modest spending my higher earnings meant that I was able to save increasing amounts of my take home pay. Maybe I should have spent more, and maybe I should spend more now, but these are hard habits to break.

I started to invest as soon as I could. Within two years of starting my first job and about eighteen months after buying my first flat I started to invest in equities. My first move was to start a £30 per month savings plan with a unit trust company. I began also to invest lump sums of a few hundred pounds to other unit trusts every few months.

I learned to invest. I never used an adviser but I was a keen reader of the personal finance section of my newspaper and of magazines such as What Investment. I learned from my own reading and my own experiences. I made my first mistakes, when I had not much money invested. I invested in the latest hot new fund that went cold shortly after I bought it. I experienced the 1987 crash but without too much skin in the game. I stayed invested.

Conclusions. I see my financial origins as being rooted in my family upbringing in the 1970’s and in my own experiences as a student in the early 1980’s. I began to build on those as a young worker, early home buyer and first-time investor in the mid 1980’s. Twenty-five years later a work colleague said to me “You must be minted.”

Opening moves

Posted on 1st March 2021 by GM

The newspaper reported that “the UK’s FTSE 100 index fell 168 points to 6,483, a 2.5% drop – the biggest one-day fall in percentage terms since the end of October.” (Guardian 26.02.21). Checking my source on the FTSE All Share Total Return index, my chosen benchmark, that had gone down -2.28% on the day. For the month of February, however, it was up by +1.99%, and it was up by +1.16% for the opening two months of the year. As I write on Monday 1 March the FTSE 100 has recovered more than half of Friday’s losses.

My investment return for the first two months of the year was a fall of -0.46%. My individual holdings recording share price movements ranging from a loss of -7.27% to a gain of +5.02% with an unweighted average result of a loss of -1.01%.

Capital

This capital graph shows the portfolio value at each month end since 31 December 2013, taking an index value of 100.00 as the starting point. This capital measure on the graph is now at 125.87. At the end of February 2021, the capital value of my investment portfolio is down by -0.92% since its’ peak of 127.04 at the end of the 2020 year. Investment returns were a loss of -0.46%, and draw down expenditure deducted -0.46% for the two months.

Income

After two months of the year portfolio income has increased by +2.03%. The income measure on the graph rose to 6.60%. That is a 96.12% rise since draw down started on 31 December 2013. The increase was the combined result from the automatic re-investment of dividend income in more shares, from dividend increases announced, but mostly from a portfolio change. I halved my position in that property REIT and bought a new position in another property REIT that has a higher dividend yield. This may amount to reaching for yield but it also diversifies my property risk between two different Real Estate Investment Trust’s. Each holding is now less than 3.5% of my portfolio. It has taken nearly six months for my disappointment at the dividend cut to lead to a partial sale. That was my opening move for this year.

Portfolio

The table below shows the composition of my portfolio at the end of the month. This has been analysed by sector, that is by geography for equities, or by type for non-equities.

	Yield %	Capital %	Income %
UK	4.61	39.94	35.08
Asia Pacific	5.01	24.75	23.64
Global	4.61	18.81	16.54
Bonds	8.73	7.69	12.80
Property	9.08	6.86	11.87
Cash	0.17	1.95	0.06
	5.24	100.00	100.00

I have also analysed based on the income and growth characteristics of each holding. I have classed my holdings as high income (dividend yields greater than 6%), as income (yields between 4% and 6%), as growth and income (yields between 3% and 4%), and as growth (yielding less than 3%). As mentioned in my last post I aim in the future to gradually reduce my investment in high income holdings and increase my investment in growth holdings.

	Yield %	Capital %	Income %
High Income	7.53	35.30	50.68
Income	4.80	31.68	28.97
Income & Growth	3.91	23.26	17.35
Growth	1.98	7.81	2.94
Cash	0.17	1.95	0.06
	5.24	100.00	100.00

Cash

My annual draw down spending is now around 3.41% of my portfolio value, based on the last two years spending and the opening and closing values for that period. My cash holdings are sufficient to cover about seven months of spending. In addition to this, dividends being paid out each year are sufficient to cover about four months of spending. My other dividends received are being immediately re-invested in more shares in order to grow my income. This cash position means I will need to sell some investments in the next few months in order to cover spending. I may sell something this month before the end of the tax year. I will be interested in any budget moves by the Chancellor to increase Capital Gains Tax rates. I may sell in order to pay only the current 10% tax rate on my gains rather than any higher rates that may be introduced. Investment sales in late March from my dealing account can fund future spending but can also fund an investment in my ISA for the next tax year commencing on 6 April.

Expenditure

Draw down expenditure was only 53.1% of my portfolio income for the last twelve months. This compares to draw down spending being 80.42% of my portfolio income in the previous twelve months. Portfolio income has risen by 25.15% whilst expenditure has fallen by 16.26%. This is quite a significant turnaround. The fall in spending looks likely to be mostly a result of lockdown restrictions curbing some opportunities to spend. The increase in income is likely to be a combination of inheriting extra capital, and the growing snowball effect of dividend reinvestment and dividend increases. I think there are also some short-term timing benefits from portfolio changes and from the REIT dividend that was later cut. Certainly, my current calculation of portfolio income is less than was received in that last twelve months.

Conclusion

From this point my next move should be to use any further increase in portfolio income as an opportunity to switch out of some of the higher income holdings and into some new growth holdings.