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%.

Source: Pixabay


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

Source: Pixabay

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)

Source: Pixabay

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.

Driving in my car

Source: Pixabay

Having a car can be a significant benefit to an individual or family but can represent significant costs being incurred. A car can be one of the top five household expenditures but it is one where we can have and make some choices.

A car incurs an initial purchase cost, and an interest cost or opportunity cost depending on whether funds are borrowed or not. Petrol, servicing and repairs, insurance, and tax are ongoing running costs.

The first choice is whether to have a car or not. This choice can be impacted by where one lives, the availability of public transport, one’s time of life, and one’s lifestyle in terms of work place, leisure activities and holidays. As a student and young worker in a large city it didn’t occur to me to have a car because of the need to use public transport to get to college or work. Later on, it became a useful option when taking up a job outside of the big city.

The second choice is about a new or second-hand car. I was fortunate enough to have the use of company cars for about 30% of my working life – although the company car tax was a burden. My first company car was, however, second hand so I had the opportunity to experience that before I was able to pick a brand-new vehicle. When opting out of the company car situation I chose to buy outright a second-hand car of a lower specification as a conscious lifestyle choice. I wanted to step away from the big new company car in favour of a second-hand medium-sized car that I would be wholly responsible for. This was symbolic of career and job choices I was making at the time.

A third choice is about funding a car purchase. I have chosen to never borrow to buy a car. If I couldn’t afford a car then I wouldn’t have one was my view at the time. Then later as mentioned I bought a second-hand car outright. Later as that car approached a mileage of one hundred-thousand I opted to buy outright a brand-new car of similar or slightly higher specification. This was a conscious lifestyle choice again and reflected the time of life I had reached. A key follow-up decision from this was to continue to run this car which I have now had for over fourteen years and over ninety-four thousand miles.

A significant cost to having a car is depreciation but by running a car for longer, even if bought from new, that cost can be brought lower as an annual cost. The same is true of any interest costs. I have not really considered the opportunity costs of a car purchase, i.e. could I have saved and invested the purchase cost and earned a return of 2% or 8% per annum from that. If one considers that then it may act as a further pause for thought.

There are some steps to take to minimise running costs. I always consider insurance costs via a comparison website to ensure that these costs are kept as low as possible. I have maintained membership of a lower cost rescue service and also check that on a comparison website. I have chosen to have car services, MOT’s and most repairs at a franchised dealer and whilst that has proved expensive at times, I am not disappointed with that approach. I have at times referred to websites that advise on the best local petrol prices but have generally opted for what is a convenient location.

A key choice on buying a car is of the brand and class of car. After some early ideas of having a big-name brand I have preferred to go for lesser name brands that have a reputation for reliability. Having had larger family cars as company cars I have opted for medium family cars when purchasing my own car. One needs to check the storage capacity and the people carrying capacity, which were mostly the same! One helpful thought on this is that our smaller cars have been easier to park.

In conclusion I would say that car choices are a part of one’s lifestyle choices. I have chosen to have a car (and a good one) but not an over-expensive ostentatious car. I have chosen cars that have facilitated and not conflicted with my chosen aim of financial security leading to financial independence.

I can share some of the financial numbers that measure my choices:

Costs per year: Purchase cost £949 (so far), Petrol £912, Services £547, Insurance £280, Tax £163. Total £2,851.

Can you live on 4%?

Source: Pixabay

The 4% “safe withdrawal rate” (SWR) is often mentioned on financial independence blogs (e.g. Monevator) or in books (e.g. Reset). I view it as a guideline based on a specific historical model. I prefer to use natural yield as my guide. Having ceased paid work just over five years ago I have now calculated how that has worked out for me so far.

The 4% 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. Some commentators suggest this draw down should be reduced to between 2.5% and 3.5% based on current high stock markets and to allow for fund expenses and taxes. Others suggest that a 4% draw down will leave you with a richer legacy to pass on in most cases.

Based on the original capital this 4% approach would start at a 4.00% withdrawal in year one and based on the UK retail price index (RPI) would have increased to 4.06%, 4.11%, 4.22% and 4.39% in the following four years.

The natural yield on my draw down portfolio started at 3.53% and has increased to 3.81%, 3.90%, 4.63% and 4.89%, calculated on the original capital value. This has been helped by a recent tilt to higher yield investments.

Interestingly both the above guidelines average 4.16% per year on the original capital value. The natural yield began 12% below the SWR (3.53% versus 4.00%) but is now 11% above it (4.89% versus 4.39%).

We can now consider how these guidelines compare to what was actually drawn down and spent. Being cautious in year one only 2.92% was spent, but this rose to 3.31%, 3.86%, 3.90% and 3.99% in the following years. This was an average of 3.60% per year on the original capital value and represents 86% of the SWR and 86% of the natural yield.

We can also look at how capital values have moved. Over the five years capital growth was only 3.07% but income exceeded draw down spending by 2.81% meaning that overall capital was 5.88% higher. This shows to me the importance of re-investing some income where possible and not spending capital gains.

Overall over the five years RPI Has increased at a compound rate of 2.42% (just ahead of the Bank of England target), spending has increased at a compound rate of 4.66% (after a low start), but investment income has increased at a compound rate of 7.38%. I’m pleased that the natural yield of income has grown to exceed that of the RPI and of my spending.

I am using tax free ISA’s and capital gains and income tax allowances to minimise taxes. My natural yield is after incurring individual investment trust charges. Low platform fixed fees and minimal transaction charges (as well as any tax charges) are included in my spending.

I aim to remain flexible on both spending and investing according to future circumstances and will use natural yield as a guideline.