Monday, May 4, 2020

April 2020 update ($489,265 +$47,946 or +%10.9)

↑ Emerging Markets Stock Index Fund is up by $9.509 or +9.3%
↑ Eurozone Stock Index Fund is up by $5,937 or +6.4%
↑ US 500 Stock Index Fund is up by $14,328 or +12.8%
↑ Global Small Cap Index is up by $11,545 or +13.4%
↑ Fidelity Growth Fund is up by $5,014 USD
↑ Financial independence savings for last month $2,000
Grand total additions: $48,334 USD

↓ GBP is down USD by 0.8% or $347 for my portfolio
Grand total losses: $347 USD

Financial Independence April 2020 update

Wednesday, April 15, 2020

How the rich stay wealthy all their lives

     Recently I published a story demonstrating why the rich will stay rich and the poor are always disadvantaged using the current rules.
I also took some steps, to invest some money I had into the kids’ portfolio. This portfolio can not be taken away from them, even if I or they need the money badly.
     The new tax year started recently and the market was still quite volatile.  I took this opportunity and invested additional money into the kids accounts. I used all allowances for this year (~ $11,000 per child).  All the money went into S&P500 fund.
why the rich will stay rich
    The blue line the three investments I made.  For reference:  All time high was 250 on January 02, 2020.  Low during the COVID19 shutdown was 190.  Average of the three transactions I bought shares for 211.1   Today the portfolio is up by 4% or $1,400.
    The market volatility is far from over. We will still experience some wild Russian roller coaster rides.  However, I don’t see that it will sink below 190 again.
     In difficult times such as now, my provider got a little bit greedy. I put the last order over the weekend, when actual price was 205. They closed the order on Monday at highest price of the day at 211.  Because of it, I cannot really do opportunity trading with it.  If market will be back to 240 in two years’ time it is still 7% a year return.

Assuming that I will continue contribute until they are 18 years old:
- For the older child, in the worst-case scenario its college money or $100,000 college graduation money.   
- For the younger one its $150,000 college graduation money.   
All sums are in today’s money.

Did you do any trades during the roller coaster or just sat tight?

Thursday, April 2, 2020

March 2020 update ($441,319 -$82,344 or -%15.7)

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

Emerging Markets Stock Index Fund is down by $18,457 or -15.3%
Eurozone Stock Index Fund is down by $19,297 or -17.2%
US 500 Stock Index Fund is down by $15,901 or -12.4%
Global Small Cap Index is down by $22,499 or -20.7%
Growth Fund is down by $6,111 or 12.1%
GBP is down USD by 4.7% or $2,079 for my portfolio
Grand total losses: $84,344 USD

A journey to financial independence - personal how to guide

Sunday, March 15, 2020

How to stay wealthy. Inequality or the rich vs. the poor

Looking back home Americans believe that hard work is essential to become rich.  The study shows that it is quite unlikely that somebody from the poor background will make it. Two the most common ways are: have the rich parents or get married to a rich person. The third is get into Harvard or Yale university and into finance industry.  The universities prefer the kids from the rich families.  This goes back in time and the example below can show how the rich are staying wealthy.

Tax efficient account in the United Kingdom
In the United Kingdom there is provision to open Individual Savings Account (ISA) for children and adults.  After income taxes are paid, you can invest either in cash savings account or shares into one of the two ISAs. As long as the money stay on the account any income (interest or dividends) is tax free and no capital gains is paid on the sale.
Currently the annual allowances are:  4,368 GBP per child and 20,000 GBP per adult. From 2020 the kids’ allowance will go up to 9,000 GBP per year. When the child turns 18 years old the Junior ISA converts into adult one automatically.  I put the British currency (GBP) for the reference, but please ignore throughout the text, as it is of no importance (for facts hungry, current exchange rate GBP to USD is 1.25 and GBP to EUR 1.1).

Ability of an average family’s to use the tax efficient account
Let’s look who benefits from the ISAs in the United Kingdom.
Average salary for a full-time worker in the UK is 35,423 GBP per year (27,623 GBP after taxes).   
Assuming a family with two children and both parents are working.   You need to have 48,736 GBP savings left to keep the ISAs full this year or 58,000 GBP from 2020 onwards.
Average of living of our family is 3,500 GBP per month, including rent or mortgage and the house taxes (council tax).  The family will be left with 13,000 GBP a year of potential savings.

How is benefiting from the tax efficient accounts?
How much do they need to earn to keep their ISAs full?  The family need combined income of 90,736 GBP this year or 100,000 GBP next year. This is after the income taxes are paid. 
To have 50,000 GBP after taxes you need to earn 72,000 GBP per year (double the average salary). This needs to happen for both parents. To earn single handedly you need to have salary of 170,000 GBP per year.  This assumes no pension contributions or any other investments.
70,000 GBP salary is top 5%, and 170,000 GBP is top 1%.  The reality is that people earning 170,000 GBP a year do not live on 3,500 GBP a month while taking 8,500 GBP home.  The actual threshold is even higher.

Why is it important?
The income from the ISAs is tax free. If you receive an average salary of 35,423 GBP, you will have 2,300 GBP a month after taxes. To have 3,300 GBP a month your gross income should go up by 18,577 GBP before taxes or 1,548 GBP a month.
 Imagine if you had rich parents and they used Junior ISA from your birth until you are 18 years old.  Even if you put no additional money, at age of 40 you still can get extra 1,000 GBP a month just as dividends tax free, while earning the average salary.   It gets even better in case you maximized your ISA allowance from 18 onwards.  In this case by the age of 39 you are getting the average salary for life tax free.

See the table below which has two scenarios: Investing maximum amount allowed by ISA through the life and stop investing at age of 18. I assumed 3% inflation adjusted income on investment. The money is in thousands GBP.

Saturday, March 7, 2020

February 2020 update ($523,663 -$42,905 or -%7.6)

Financial independence savings for two months $4,000
Grand total additions: $4,000 USD

Emerging Markets Stock Index Fund is down by $5,600 or -4.5%
Eurozone Stock Index Fund is down by $9,654 or -7.8%
US 500 Stock Index Fund is down by $11,585 or -8.3%
Global Small Cap Index is down by $10,996 or -9.2%
↓ EUR is down USD by 2% or $4,266 for my portfolio
GBP is down USD by 1.4% or $789 for my portfolio
Grand total losses: $46,905 USD 
Financial Independence update February 2020

Tuesday, February 4, 2020

January 2020 update ($566,569 -$8,517 or -%1.5)

Monthly pension plan investment $2,293 (outstanding tax rebate on the investment)

Emerging Markets Stock Index Fund is down by $4,623 or -3.5%
Eurozone Stock Index Fund is down by $2,199 or -1.7%
US 500 Stock Index Fund is down by $119 or -0.1%
Global Small Cap Index is down by $3,443 or -2.8%
GBP is down USD by 0.8% or $425 for my portfolio
Grand total additions: $10,809

Saturday, January 18, 2020

Are mutual funds pave the way to mediocrity?

Recently Vanguard mutual funds assets reached $6tn in value and its rival BlackRock has about $7tn to manage.  On one hand index and pension funds manager have enormous voting power over the companies.  To put this into prospective, total capitalization of S&P500 is $28tn (as a comparison British FTSE 100 and FTSE 250 combined are $3tn and German DAX is about $1.5tn).
On there other hand there are more voices, which are echoing my concerns raised back in March 2018, that index fund strategies are essentially a piggy back on stock pickers and a handful of people manage the large number of companies. This is not how capitalism traditionally works and the risk is that stock market will become inefficient.
Vanguard is doing some things other funds don’t do: it is owned by its own funds, allowing it to use profits after covering costs and business investments to lower its fees, rather than reward outside shareholders with dividends and buybacks. 
The Vanguard does a lot of good - average expense ratio in the US is 0.1 percent ($6 billion in fees), while average in the US is 0.58 percent.  The Vanguard overcame bureaucracy and corruption in the UK – its going to launch is first Self-Invested Personal Pension (a pension plan that enables the holder to choose and manage).  This is equivalent of 401K in the USA.  I escaped the robbery of my “hundred years old” bank which was charging me 1.25% for the privilege of   keeping my pension to a corporately negotiated scheme with 0.26% annual fees. The Vanguard SIPP will charge an annual account fee of 0.15%, capped at $500 per year (No fees increase as soon as you have over $333K on the account).  It will be the cheapest option for anybody in the UK who has more than $55K in pension savings (even with the corrupt and misleading reporting practices).
Still there is an unease. Is it becoming too big to fail? Who is going to build S&P500? It used to be done by stock pickers and analysts.  Passive index funds exploited a hole in the stock pickers business model.
Although I am still shocked that 80% of the market still controlled by the stock pickers. In twenty years top three index fund management companies will control 40% of the S&P500 (by 2040).  In practical terms it will mean than ten to twenty people will set agenda for the US corporate world.  The Vanguard founder before he passed away in 2019 wrote that that if index funds owned more than 50 per cent of the stock market it would not “serve the national interest”.
What is the practical take for me? I feel that I adequately diversified my assets over S&P500, emerging markets and western europe. The remaining risks as I see them: keeping everything with one investment company and all in the investment funds.  On of the possible solutions is to think about different investment and the holding company.  Partially I did it with my pension, but the volume is about 9 percent of my financial independence nest egg size outside of Vanguard.
Do you share these concerns? What is your view on the index fund dominance and few big mega players in the industry?