Funny Life

 In the UK the government made retirement (especially for women, minorities and naturalized citizens) an impossible and unaffordable dream.  The new pension age to receive meager state pension is 66 years old and its less than a third of an average salary.   To get this “full pension” you need to work for 35 years. The pension is $1,000 a month.

 There is an expression “smoke and mirrors”.  This means the obscuring or embellishing of the truth of a situation with misleading or irrelevant information. The Black Lives Matter, climate change, transgender issues and the rest are there to distract attention from real issues, injustice and discrimination in everyday life.

 A colleague of mine is about to retire (at the age of 55), after working for the same company for 30 years.  As he worked part of his career abroad (for about 18 years), he has two pensions.  The pension for the time abroad is worth $1.7 million and you could take it as tax free lump sum.  The other is worth $1.7 million too but subject to taxes, should he withdraw it as a lump sum.

According to the pension fund conditions, the second $1.7 million pension, should he leave it in the fund, will generate $50K a year taxable, inflation adjusted pension for life.  This is an independent confirmation of my four percent rule review. 

 I am working for the same company. We worked together on two projects in to different countries, as expatriates. I actually progressed faster than him, by approximately 6 years.  The truly illuminating detail that my pension will be zero with the same company. The reason?  We have different nationalities, so when we work on the same project and in the same role the employment conditions are different.  This is hidden truth that will never be published or discussed, as this is how western system is all built and functions to this date. 

The funny part? Having zero pension contributions is not considered an employing advantage, as “non-core” nationalities are perceived as inferior.  Such behavior is revealing in its hypocrisy.

I actually have to take money out of my paycheck to make my savings for the retirement. The paycheck is lower too for doing the same job. I will be very lucky to have half of his pension as taxable and ten years later (65 years) at the current savings rate. 

 It is clear that discrimination and exploitation is integral to the UK and EU economy nowadays, like the slavery was for more than a century, with proceeds enjoyed at home and misery parked offshore.

 Fun fact: The richest 1 per cent of humanity is responsible for over 15 percent of all emissions between 1990 and 2015, while the richest 10 per cent were responsible for 52 per cent. While the poor will pay for the greenhouses gases emissions transition.

November 2020 update ($651,344 +$75,923 or +%13.2)

↑ Financial independence savings for last month $2,000

↑ Emerging Markets Stock Index Fund is up by $8,498 or +6.3%

↑ Eurozone Stock Index Fund is up by $18,738 or +17.1%

↑ US 500 Stock Index Fund is up by $15,535 or +10.9%

↑ Global Small Cap Index is up by $17,618 or +15.3%

↑ Fidelity Growth Fund is up by $5,157 or +9.7%

↑ EUR is up to USD by $7,021 or 2.9% for my portfolio

↑ GBP is up to USD by $1,357 or 2.3% for my portfolio

Grand total additions: $75,923 USD

 

Pandemic raid

I read the other day a puff piece sponsored by Swiss finance industry. It was about them attracting ultra-rich clients.  Its understood, that Swiss are desperate to restore some appearance of credibility after they rat out their clients under so-called “The swiss bank program”. In short, the program allowed for Swiss banks to avoid criminal prosecution in exchange for the disclosure of all of its U.S.-related accounts that were open at each bank between August 1, 2008, and December 31, 2014.

The piece presented the ugly truth, that this time the rich lobbied quick and hard the western governments. The markets were flooded with liquidity at the first sign of the pandemic, with very little places to go but the stock market. As the result, asset prices across financial markets have held up very well.

While the global economy is going to contract by 4.4. percent (8% in the USA, 10% in the UK, 6% in Russia and China will grow by 2.7%).

The billionaires grew richer, as they could afford to hold to their investments and even poured in more money during the crisis.  Any pre-pandemic worries about wild evaluations of the technology stocks were washed away.  The main growth in stocks was in Technology and Health Industries. Equities price to earnings ratio is now 33 for Facebook, 34 for Google, 36 for Apple, 92 for Amazon, 800 for Tesla. This is much higher the historical average, which was mostly between 10 and 20.

Amazon chief executive Jeff Bezos net worth grew by $73bn between mid-March and mid-September. The EU is unable to adequately respond to the pandemic and going into second lockdown. Jeff's net worth expected to grow further. Tesla and Facebook chief executives (Elon Musk and Mark Zuckerberg) each have $45bn more. 

There has been an enormous wealth transfer from the poor to the rich via injection and direct contracts to selected companies by the governments in West.

 On much small scale I benefited a little bit too.  I invested in the each of kids' college accounts $17K in April 2020 it has grown by 20% now.  The fact is that the poor and middle class will pay higher taxes once they are back to their jobs.   

 

 Emotions cost the investors’ money.

Family budget 2020 – Family budget over last 12 years.

 This is 12^th year we are keeping our family budget formally, recording every expense and trying to make sense of it all at the end of the year. 

Overall:

The expenses this year exclude a one-off house redecoration - $60K. This is fence around the house, internal doors, wardrobes and hallway parquet replacement, repainting the walls and ceilings.  The house is a typical one for the UK of approximately 1,700 square feet.  Previous once were 60 years old, I think.  These are not registered on the expenses but something to take into account.  I think its reasonable to assume that you need to put aside at least $3K a year on the house long term maintenance. This day will come sooner or later.

Four percent rule

 This rule was advertised by the finance industry since mid-90s, when a paper had been circulated stating that withdrawing 4 per cent from your portfolio a year will make it last for at least thirty years.

Before we look into the background and underlying assumptions lets have look at the 30 years of retirement. This is particularly important to note that healthy working life expectancy at the age of 50 years is on average 9.5 years for men and 8.5 years for women. This means that the healthy working life expectancy at age 50 years in the USA and the UK is below the remaining years to State Pension age.  So out of the average life expectancy of 80 years old, last twenty are in poor health, where people are unable to enjoy the life.

Interesting that the four percent a year withdrawal underlying assumptions are largely omitted by the finance bloggers and the mainstream media.  There are three main ones:

#1 Firstly, after you spent four percent in the first year, you need to increase that amount by inflation each year. 

#2 Secondly, your withdrawal rate is four percent of the initial portfolio. Whatever happens you need to keep it that way, for the calculations remain true.  Imagine, even if your portfolio would increase substantially due to the stock market growth, you should keep your initial withdrawal rate constant.

#3 Thirdly, you need to keep your nest egg invested in a 50/50 mix of equities and fixed income, re-balancing it back to 50/50 each year as the market moves.  The imaginary portfolio that was used for calculations, was also consisting of intermediate term Treasure notes. The long-term average for them was 4.41%, while current rate is 0.81%. In the most recent years, it is 1.8%. The government policy in the USA is to keep them that way for the next five years or more. The UK is even worse, where the long-term gilt yields are at their lowest level in 300 years, depressing prospective investment returns.

October 2020 update ($575,421 -$7,906 or -%1.4)

↑ Financial independence savings for last month $2,000

↑ Emerging Markets Stock Index Fund is up by $3,588 or +2.7%

↑ GBP is slightly up to USD by 0.8% or $412 for my portfolio

Grand total additions: $6,028 USD

 

↓ Eurozone Stock Index Fund is down by $6,540 or -5.6%

↓ US 500 Stock Index Fund is down by $3966 or -2.7%

↓ Fidelity Growth Fund is down by $1322 or -2.4%

↓ EUR is down to USD by 0.9% or $2,105 for my portfolio

Grand total losses: $13,934

 

Enough by John C. Bogle

  Some of my expectations which I had before reading the book were met. As a founder of Vanguard company John C. Bogle allocated significant part of the book describing advantages of the mutual funds and greed of the active managers.

The book is intentionally simplified, there are no numbers, calculations or anything else. Its targeting emotions.

There is an interesting statement on the greed: “… the rampant greed that threatens to overwhelm our financial system and corporate world runs deeper than money.  Not knowing what enough us subverts our professional values. It makes salespersons of those who should be fiduciaries of the investments entrusted to them.  It turns a system that should be built on trust into one with counting as its foundation.  Worse, this confusion about enough leads us astray in our larger lives. We chase false rabbits of success; we too often bow down at the altar of the transitory and finally meaningless and fail to cherish what is beyond calculation, indeed eternal”.  

 

With internet at our fingers, waiting online to serve us, we are surrounded by information, but increasingly cut off from knowledge. Facts (or, more often, factoids) are everywhere.  Wisdom, the kind of wisdom that was rife seventy – one hundred years ago is in short supply. Soon we shall know everything that does not count and nothing that does. 

 

Leadership and values

A difference between a leader and a manager? Managers task is to do things right,  then as leaders, whose task is to do the right thing. 

September 2020 update ($583,327 -$22,778 or -%3.8)

 ↑ Financial independence savings for last month $2,000
Grand total additions: $2,000 USD

↓ Emerging Markets Stock Index Fund is down by $2,717 or -2.0%
↓ Eurozone Stock Index Fund is down by $3,519 or -2.8%
↓ US 500 Stock Index Fund is down by $6,165 or -4.0%
↓ Global Small Cap Index is down by $3,038 or -2.6%
↓ Fidelity Growth Fund is down by $411 or -0.7%
↓ EUR is down to USD by 2.4% or $6,392 for my portfolio
↓ GBP is down to USD by 4.5% or $2,535 for my portfolio
Grand total losses: $24,778

British FTSE trading like an emerging market

 My August financial independence monthly update contained graph, comparing various indexes. This included British Financial Times Stock Exchange Group (FTSE) and Moscow Exchange (MOEX). 

Couple days ago “Fortune” writer Bernard Warner made similar observation, but his writing made it to Yahoo finance.

Figure1. British FTSE trading like an emerging market and trailing behind Russian index in 2020

Lets see Bernard’s arguments:

August 2020 update ($606,105 +$34,659 or +%6.1)

↑ Emerging Markets Stock Index Fund is up by $4,505 or +3.4%
↑ Eurozone Stock Index Fund is up by $5,399 or +4.6%
↑ US 500 Stock Index Fund is up by $10,453 or +7.3%
↑ Global Small Cap Index is up by $6,753 or +6.1%
↑ Fidelity Growth Fund is up by $2,089 or +3.9%
↑ Financial independence savings for last month $2,000
↑ EUR is up to USD by 1% or $2,183 for my portfolio
↑ GBP is up to USD by 2.4% or $1,277 for my portfolio
Grand total additions: $34,659 USD

July 2020 update ($571,446 +$35,466 or +%6.6)

↑ Emerging Markets Stock Index Fund is up by $4,084 or +3.4%
↑ US 500 Stock Index Fund is up by $7,565 or +5.6%
↑ Global Small Cap Index is up by $4,157 or +3.9%
↑ Financial independence savings for last month $2,000
↑ EUR is up to USD by 7% or $16,795 for my portfolio
↑ GBP is up to USD by 5.6% or $2,868 for my portfolio
Grand total additions: $ 37,468 USD
 
↓ Eurozone Stock Index Fund is down by $1,470 or -1.3%
↓ Fidelity Growth Fund is down by $532 or -1.0%
Grand total losses: $2,002

 

June 2020 update ($535,980 +$23,162 or +%4.5)

↑ Emerging Markets Stock Index Fund is up by $7,087 or +6.4% 

↑ Eurozone Stock Index Fund is up by $5,138 or +4.9%

↑ US 500 Stock Index Fund is up by $2,570 or +1.9%

↑ Global Small Cap Index is up by $2,683 or +2.6%

↑ Fidelity Growth Fund is up by $1,194 or +2.4%

↑ Financial independence savings for last month $2,000

↑ EUR is up to USD by 1% or $2,076 for my portfolio

↑ GBP is up to USD by 0.8% or $414 for my portfolio

Grand total additions: $23,162 USD

Dividend Aristocrats

Typical definition of a dividend aristocrat is a company which has increased dividends for 25 consecutive years in the nominal terms. We have inflation every year and if a company continues to perform in the same way, it should be able to raise dividends in line with the inflation, making it a dividend aristocrat.  This is not the case and there are only 62 out of S&P500.

 Is it worth investing in dividends aristocrats’ stocks?

 Lets have a look for investing $10,000 in dividend aristocrats vs. S&P500 in 2010 until now. I selected a random sample of 15  out of 62 companies. Companies highlighted with red under performing  S&P500 fund (all dividends are re-invested in both cases):

Notes:

•  Most companies pay dividends 4 times a year. Dividends are reinvested 4 times. For my calculation I did reinvestment once a year for the cumulative dividend.
•  Compound inflation in the USA between 2010 and 2020 is 25%.

 I used to focus on cash engines in the past. Just looking at the dividends is not a guarantee of high return. For example, if I invested in ExxonMobil, my nest egg would be lagging S&P500 quite a lot, while missing diversification.  “3M Company” is highlighted with red, because it’s just marginally higher S&P500 and such performance does not justify the investment in the single stock.

 Perhaps, a portfolio can be created of dividend aristocrats and the ones that have beaten S&P500 over 10-20 years period.  This assumes that you can have an account with low fees, as additional 2-3% drag will kill all the advantages.

 Over the past 63 years, the S&P 500’s composition has changed dramatically. In 2007, the index’s 50th anniversary, S&P published a list of the 86 companies that remained from the original line-up. That number has steadily declined, and today, only about 60 original members remain. 

As original members have dwindled, so has the average tenure of companies in the index. In 1964, the average index tenure of an S&P 500 company was 33 years. As of 2020, tenure shrank to 20 years.

 I will certainly think about it.  Your views and opinions are very welcome.

SmartMoney

I am always on a look to read personal financial blogs. There are a few of them out there.   Too many rushing to monetize, consist mainly of referrals, ending up having more advertising than the Super Bowl.  The others keep publishing very general information.  This make them very boring read to me.

 As I am doing my budgeting for the past 10 years. When I read personal finance blogs I can easily tell when expenses or investments are made up (fake).  You can see that they are unrealistic, not consistent with stock market movement, incomplete.  When I come across an interesting and active blog, which I would read I added to by Blogroll. There is no reciprocity, I use the blogroll as my favorites for financial blogging.  Here is an additional source of Early Retirement Blogs.  

 About 15 years ago financial blogs were new, easily gaining large number of readers. I was re-reading a blog of SmartMoney and one of the prominent bloggers who argued, that using Ben Graham's Formula, Discounted Cash Flow and Capital Asset Pricing Model Amazon shares were significantly overvalued at $33.  At the time the personal blogger had about $28K invested.  If he bought 850 Amazon shares, his nest egg would be over $2 million today without an additional investment.  

 About same time I was presented with my first ipod classic.  It was the time when Apple devices were still gay and for the first time, I felt what usability looks like. There was no need to explain anything.  Something told me that I should invest in this company but I didn’t.   If I listened to myself there would be no need to work for money now.  I had enough money to buy 10,000 shares at those prices, which is over $3 million today.

How you had hunches which you ignored and later  regret?