Category Archives: Financial Independence

Key metrics to track for Personal Investors

It is important to track certain key metrics when working towards Financial Independence. Different types of metrics can be tracked including investment performance, personal goals and even macro-economic ones. Having an eye on key metrics is particularly useful in times such as today with ongoing events of civil unrest over social injustice, Coronavirus, trade wars and an uncertain economic outlook.

In this post I will outline the key metrics I have been tracking over the years. Without these, investing would feel like driving blind.

Stocks proportion rule

Historically stocks have been the best performing asset class for investors with a typical portfolio which also includes cash and bonds. It makes sense to maintain a minimum proportion of stocks in order to capture returns of the market in line with your personal risk level.

I prefer to set this level to 80%; this ensures that as long as I have this amount of stocks I do not have to worry about what is in the remaining 20%.

Stock proportion rule

Stock proportion rule

Other assets/ liabilities such as cars or real estate can also be included in this comparison.

Asset Liquidity Breakdown

Financial liquidity is the ease with which an asset, or security, can be converted into ready cash without affecting its market price. Knowing how much of your portfolio is liquid is critical; a lot of people claim to be wealthy because the house they live in appears to be worth a lot.

However, the house is highly illiquid, requires maintenance, has many fees and taxes attached, has a price of ultimately what the other party is willing to pay, and is just somewhere to live. If the person has very few or no other assets, or has negative equity they are a long way from financial independence.

Liquidity Breakdown

Liquidity Breakdown

Property such as real estate, business assets and pensions which are to be accessed after many years are regarded as illiquid. Liquid assets can be stocks, shares and bonds in an investment portfolio held in an ISA (Individual Savings Account) and cash. Usually, such assets can be converted within a matter of days for use towards Financial Independence purposes.

You can also further breakdown the liquid portion to specific asset classes. This way, you can identify if the liquid assets are geared appropriately for desired long term returns by determining if the portfolio is too aggressive or conservative.

Liquid - asset classes

Liquid – asset classes

Financial Independence Goals

Tracking the overall goal towards Financial Independence is another important metric. The chart below shows how I do this.

Financial Independence - Goal tracker

Financial Independence – Goal tracker

The black line is the ultimate portfolio size to enable Financial Independence at 25 times  annual expenses. The red line shows historic progress. Current portfolio size is shown by the dotted line – once this crosses the black line the goal is achieved.

Achieving 75% (green line) of the goal is also a big milestone as one can easily find other ways to make additional income required or they can become more comfortable to transition to a different type of working such as self-employment.

The dashed grey line shows the current portfolio size plus property. If this crosses the grey line it shows that if the property is converted to the portfolio the goal can be achieved early.

Data and update frequency

To visualise these key metrics and others I regularly enter relevant data into a Google Sheets spreadsheet and have created charts which are updated automatically. This does not have to be an onerous process and only needs a few minutes of updating every month.

So far it has been incredibly helpful in keeping an eye on progress and providing much needed motivation. Definitely something for every series investor to consider.

 

Berkshire Hathaway Shareholders Meeting 2020 – Top tips from Warren Buffett

The latest annual 2020 Berkshire Hathaway Shareholders meeting (AGM) held on 2 May in Omaha was as insightful as ever. Warren Buffett was on top form, dispensing timeless advice to investors, new and pros alike. Charlie Munger, Buffett’s partner was not present at this year’s meeting due to logistics difficulties brought by the ongoing Coronavirus epidemic. Instead, Buffett was flanked by Greg Abel, one of his deputies. Unlike previous years, the thousands of attendees were absent and the virtual meeting as streamed by Yahoo Finance. Here are key takeaways.

Market volatility

Dow Jones Industrial Average Chart

Dow Jones Industrial Average

Stock market prices can be very volatile for a whole range of reasons. This is something that investors should expect and huge price drops are to be expected once in a while. Buffett referred to the Dow Jones Industrial index’s long term performance. The price dropped by more than 50% in the 1930s, following the roaring twenties.

Full recovery only occurred after 1950, although dividends were collected in the meantime. Therefore, it is important for investors to have the psychological temperement in order to go through market drops and were possible buy more stocks at reduced prices.

Buffett gave the example of owning a farm. You would have purchased it at a value based on its projected investment return. However, A neighbour with a similar farm may offer to sell to you at a price which varies wildly from day to day. This is how the stock market behaves and does not mean that you should act on these prices.

Plant seeds now

Responding to a question about why Berkshire Hathaway invests huge capital in its energy businesses, Buffett and Abel outlined that these are long term, planned investments analogous to planting seeds. As investors, we can use this to plan for the future by making the right investments as soon as possible without focusing on an immediate return. Returns may not be epic, but will become substantial over a long time.

Index fund investing

To avoid disaster, investing in index funds offers wide diversification of industries within the economy. This is particularly important now in the time of the Coronavirus. Different sectors’ performance will vary as evidenced by a contrast in fortunes of Technology companies and the airline/ travel industry.

Berkshire has sold all of its holdings in four major airlines at a loss due to bleak prospects in the sector. Buffett alluded that the initial purchases were a mistake and that the world has now changed due t the virus. Such losses can be inflicted on individual investors too if the are into buying single stocks and day trading, rather than diversifying across the whole market.

Be prepared according to goals

Buffett revealed that Berkshire now holds over $130 Billion in cash/ equivelants. This seems like a huge figure but must be taken in the context that Berkshire’s overall market cap is nearly $400 Billion.

A large cash pile enables the company to protect investors and part of it may be used to make a large ‘Elephant’ size business acquisition when valuations permit. This opportunity has not appeared to Buffett during the recent chaos on the markets.

On a personal investor level, one can develop micro portfolios, which ensure that you are better placed to meet your goals if the market crashes. For example, if saving for a real estate property, one can have a dedicated fund with less than 40% stocks, and be 100% stocks if they have a longer term goal such as early retirement.

Appreciate key workers

Buffett and Abel also made known their appreciation of key workers in the current COVID-19 crisis. It is disheartening that people born in the right place at the right time or who can do things such as arbitrage bonds become more successful than those who do truly important work such as teachers, nurses delivery and transport workers. We really on such workers in times of crisis and rarely fully appreciate them in normal times.

It will be interesting how the next few months play out for investors. Diversification will be as important as ever as the World emerges to different ways of doing things.

The full 2020 Berkshire Hathaway Shareholders meeting can be streamed on Yahoo Finance here.

How to avoid lifestyle inflation to achieve Financial Independence

House and bicycleHousing, Transportation and Food are the big three categories to control in order to maintain a relatively high savings rate. To achieve financial independence (FI), the most important thing is your savings rate as I explained in a previous post here.

A lot of people try to find investments or other means with a high return rate. However, this may turn out futile if the necessary capital available to invest is not substantial. Good returns do not have a big impact if you intend to be financially free at a young age, considering that the stock market typically returns nominally 10% a year.

I am in the process of looking for a new place to live in January 2020 and this has made me to seriously consider my lifestyle costs in future. When I moved to new places previously, I did not  do the math well, particularly for housing and transportation costs in relation to my new lifestyle. In a number of cases, this has resulted in me being worse of either financially, by quality of life or both.

For example, when I moved for my current job (from Cambridge to London outskirts) my salary went up by 13%. This seems great but I ended up living 11 miles from work compared to 4 miles previously. This seemingly innocuous change turned a simple 20 minute commute into a gruelling drive of over an hour in rush hour traffic.

The new job meant that I lost many hours a month plus cash due to the long commute and I was generally more tired. It felt like I had already been to work when I got to work.

Housing and Transportation

I see management of these two elements as being critical in propelling me towards financial independence at this stage. It is not wise to find a cheap place to live which is very far from work, costing time, an arm and a leg to get there. For this reason, I have decided to find a rental within walking distance of the office. Costs will be roughly the same as the previous place but the commute by car or train will be completely eliminated, resulting in cost savings and 7 hours a week freed each week. That would be effectively gaining an extra work week each month! 

55% savings rate

To be financially free by my target date I have estimated that at least an average 55% savings rate will be required. This has been over 53% so far. I will also need to maintain the progress made by maintaining my core living expenses or even better by reducing them. To do this it is important to know current and expected expenses which will guide the search for new accommodation.

Housing and Transportation to gross income ratio

People often wonder how much they should spend on housing in relation to their income. It will depend on what you can afford and what you value in life. I was a bit shocked when the estate agent said that I could afford a place which is my gross salary divided by 30. This would mean that 53% of net pay would go towards housing which is ridiculously high. Admittedly I would get a nicer place but my financial independence progress would drop to only 29% and future savings to 35%. Achieving freedom would become practically impossible, leading to many more years in the cubicle.

Housing and Transportation to gross income ratio

With these facts in mind how much should one allocate towards housing and transport. I have been tracking how much I spend on these two since 2007 as shown the the graph above. When I started my first job in 2007 I lived in shared accommodation with very low costs and a 20% spend. However, within a year I got a small pay rise and had a huge bout of lifestyle inflation by moving to my own studio flat.

Now with a hefty 30% expenditure I managed to save absolutely nothing after a three year period and remained with even more credit card debt while having a negative net worth.

Over the next few years I moved locations for new jobs and back to shared accommodation. This enabled me to pay off the credit card and start the fi journey in 2012.

The housing and transport expenditure proportion has been steadily decreasing due to some some pay rises and is expected to get back to near 20% when I move to the new place. I find this to be an acceptable amount to pay. It may mean sacrificing a little luxury but will not derail progress towards financial independence within a few years.

*It is also important to stick to a budget while tracking your other expenses as these will affect the overall picture.


In summary, to maintain a 55% savings rate I would need to spend roughly 20% of my gross income to housing and transport to achieve financial freedom within 3 years. This is based on my current level (52%) of expenses covered by passive income.


I have found this to be the most comfortable scenario for me in relation to my goals. Everyone’s situation will be different.

Geographic Arbitrage

As I am currently based in one of the most costly areas of the UK (South East), applying some Geographic Arbitrage almost anywhere would definitely have a positive impact. Quality of Life could be increased and Cost of Living reduced readily so this will definitely be on the cards soon. In fact I realise that I am already 70% FI for less costly parts of the country.

Also, renting a place rather than owning is beneficial as one would be far more flexible to take advantage of opportunities and overall expenditure on housing and transport would be far easier to limit.

Things look set to get more exciting in the next couple of years as the snowball keeps gathering speed and size, opening up more possibilities and options.

Why I am Optimistic about future investment returns

New York City Skyline at DuskFuture stock market investment returns are likely to be very substantial, even more so than past returns. This is an interesting topic as I have had a few conversations recently with people who believe that future returns will be lower than before or even negative. Their reasons do not seem logical to me; particularly because they are mainly based on short term thinking, ranging from a few months to a few years and lack of understanding of how the stock market works. 

A crash is coming!

The most common reason for pessimism about future returns is that a stock market crash is imminent because the market has sharply risen to very high levels recently. Having been a stock market investor for nearly 10 years I have heard this all the time but it has not deterred me from investing.

In fact, I have often taken advantage of this negative sentiment by buying more shares at depressed prices. Without fail prices have always come back to where they were, sometimes after what felt like forever, but the end result is an outsized gain.

The key is to believe in “reversion to mean” of stock prices and remaining invested by not touching yourlong term investments when volatility happens. It is best to take the long term view, typically 5 to 10 years or more.

Dow Jones Index Chart (1985-2019)

The chart above of the Dow Jones Industrial Index shows investment returns since 1985. Red bars are years of negative returns. It is clear that over the long term, buy and hold investors have benefited, despite a few short term shocks along the way.

Here are a few reasons why the future of investments is bright.

The rise of new industries

The S&P 500 index is packed with great companies which have thousands of workers striving everyday to bring value to Shareholders. Over time we have seen new industries come, becoming bigger and superseding what was there before. It is hard to imagine that Amazon, Facebook, Netflix and Alphabet did not exist 30 years ago.

New industries are always developing according to the needs of the time and the new companies providing the required services or transforming accordingly will surely reap the benefits. In-order to participate  in this, the intelligent investor will realise this fact and construct a portfolio which invests in the stock indices that will hold such companies.

Billionaire Space Race

A good example is the new Space Race. Private entities like SpaceX, Blue Origin and Virgin Galactic are jostling for stakes in this space and the potential is huge. Space tourism would be highly profitable and take various forms. Governments are already contracting such companies for International Space Station missions. Mining operations in far off places like Mars may become possible. Establishing a true industrial base in space is another objective. Reusable rockets drastically reduce mission costs, accessibility and time.

Innovation

The pace of technological innovation in this Digital age is staggering. Take investing for example. A few decades ago the process was very cumbersome as one needed to hold and mail a lot of stock certificates. Information was not readily available therefore very few people had access to this and brokers charged astronomical fees to everyday investors. Today one can research and buy global stocks instantly on a handheld device.

In this and other sectors, automation is increasing productivity and has potential to drive up returns. It is certain that innovation will continue to happen, offering new opportunites, products and services.

Population growth

I remember a time when the World population was hovering around 6 billion. Today this has jumped by nearly 2 billion and is trending higher.

World Population data estimate - 8 Sept. 2019

World Population data estimate – 8 Sept. 2019

The graphic above from here is very interesting. Net population growth appears to be very high. This fills me with optimism; many more potential users of goods and services than ever before. Astonishingly it took 200,000 years to reach 1 billion; and only 200 more to 7 billion. More importantly, these bigger markets will be more and more prosperous than ever before, fuelling the growth of current and future corporations. 

Too much Information

Every time I turn on the news it seems like the world is about to end. From trade wars, geopolitics, questionable economic forecasts to severe weather events it is not hard to see why some believe that a recession is around the corner. The facts outlined above lead me to believe the opposite. It is best to have a low information diet and focus on the facts.

Gaining financial independence requires discipline in saving and investing so staying the course is vital. Staying optimistic will provide motivation over the long term.