Real life story

I am not really into any inspiration stories but when one comes around, can not resist it.  I have been having lunch with a colleague of mine and we unexpectedly touched on subject of financial independence.

He intimated that his portfolio is up 6% since beginning of this year and he pays about $800 a year to manage it.  His portfolio is worth about $7,5 million.

He and his wife have been living quite humble and frugal  life style – 15 years ago he bought a piece of land 5/8 of an acre for $29K and built house for $150 K. Now just prior retirement he treated himself with a swimming pool in the back yard and design garden, cost all together additional $150 K.

He & his wife will have company pension combined worth about $5 K gross a month, while in his best year net salary is about $100 K a year, plus his wife's. She is a buyer in a local company, so can not be that high.

The bottom line – everything is possible. When the colleague went into retirement seminar, he was urged to start spending some of his money but he does not need to. His pension will cover all his needs and the nest egg is just for a rainy day.

Perhaps a prime example when on the way to financial independence people adjust their spending habits and way to look on the things.  One of the first things he wants to do, once retired is to go with a trailer and see as many national parks and beautiful places all of over the country as possible.

Inflation adjusted rate of return on investments.

So far my portfolio has been very conservative, even now exposure to cash & precious  metals is 56%, before that it has been almost 75%. 

Large exposure to cash is still going to be inevitable, as my emergency fund is equal one year worth of expenses.  I will reduce it to 22% by 2016, by investing money into the stock market.

I was curious to find out, what sum  should I have if instead of investing into the stock market and keeping cash on the savings account I would bought TIPS (Treasure Inflation Protected Securities).

In July my nest egg networth  was $192,700 (£122,700) - the savings of $3,300 is subtracted.

I took inflation rates for each year and start adjusting my investments:

July 2012 update (196,000 +7,500 or +4%)

The portfolio changes:

↑ Accumulate additional $3,300 as part of my annual savings plan.

↑ The stocks went up by $2,500 or 4%

↑Mutual funds went up by $800 or 1.4%

↑ Precious metals  went by $900 or 7%

 

- The stocks I selected last month went up by $1,500 or 3%

Diversification 2012

Last year I have pointed that my portfolio requires diversification and I set it as one of my financial goals for 2012.

 After recent acquisitions, portfolio currencies  diversification June 2012:

 Portfolio investments vehicles diversification

  

June 2012 update ($188,475 -$300 or -0,16%).

The portfolio changes:

↑I have invested $55 K from the cash pot left for investments.  I consider this as positive, as position was stable but have not generated any meaningful growth so far.

↓ Company shares lost about 2% of their value

↓ Emerging markets lost 5% of their value.

↑ Gold went up 13%

Example of investment at 32% a year over 9 years time

I wish I could find an opportunity like BP did in 2003 by investing in TNK.  In 2003 BP invested $6,5 billion in TNK in exchange for 50% stake. At that time BP  market capitalization was about $150 billion. Brent oil cost $30 a barrel.

TNK-BP production:

Today BP share of production from TNK BP accounts for 25% of the group production, while CAPEX is only 8%.

Up to 2011 BP  has received $19 billion in dividends from the venture. Or 32% a year, on the original investment, annualized.  BP as group paid 5.1% in 2011 to its shareholders.

Energy Stocks screening

I repeated the analysis conducted early in January 2012 of the main energy companies.  For an energy company there is  two main factors of prime importance:

- Amount of reserves it has (replenishment rate is always an uncertainty)

- Current cost of the reserves, i.e.  who much  the company investors have paid so far per barrel. This will give an indication of potential profit.

Major energy companies reserves vs current production rate. As you can see:

 

Cost per barrel of reserves - major oil and gas companies: