While all the attention seems to be focussed on the Self employed and their National Insurance payments, little or no comment has been made about the effects on investors.
It seems that investors have been caught in the cross fire of the attack on the tax savings available to the self employed.
Thus the £5,000 dividend allowance, which everyone seems to have forgotten, was introduced to make up in some small way for the scrapping of the dividend tax credit last year is being reduced to £2,000 after just a couple of years. Largely because this is how many self employed chose to pay themselves thanks to the tax advantages. Consequently whereas most investors would not have previously been affected by the tax credit change, this will now potentially bring far more investors into the net to pay tax on their dividends.
Thus this highlights the on going benefits of other tax shelters for longer term savings such as SIPP's and ISA's. Thus if you can't afford to make use of the new higher ISA allowance of £20,000 for the next tax year, then it would make sense to sell down in your taxable portfolio and use the proceeds to top up your SIPP or ISA to avoid getting hit by tax on your dividends, if you are not already in that situation.
Meanwhile the small sop to savers in the shape of the 3 year savings bond doesn't look that generous as it will probably hardly keep pace with inflation. Nevertheless I guess it may be competitive with private sector providers and is at least backed by the government.
Any way that's enough of a rant from me you can see more from the BBC here on how the budget might affect you including a helpful table looking at how much extra tax you could be liable for on your dividend, depending on the size of your portfolio and with an assumed 4% yield.
..or Financial Independence and Retiring Early which I thought I would write about as there is not much news today. Having said that there is lots of press today about the Governor of the Bank of England talking about interest rates rising, maybe later this year. I seem to remember we had the same blarney from Carney last year and we were supposed to have seen a rate rise by now. So I remain sceptical of that and I will believe it when I see it.
Any way back to the point of today's post. For some the idea of financial independence and retiring early may be appealing and to others it might seem like a pipe dream or even a nightmare if they love their job. So what are the best ways to achieve this and how much do you need? Well as ever it depends on what lifestyle you want to lead and how much you realistically need to live on for the rest of your days. Now rather than reinvent the wheel (as I have better things to do with my time) I'll recommend a few good blogs and sites out there that have covered this ground already.
So first up the answer to the above question - how much do you need and maybe even life the universe and everything is not apparently 42 but 25 according to an interesting site called Mr. Money Mustache (I know that's the wrong spelling but that's the address). He explains why he thinks 25 is the answer in this post and also references a useful site where you can plug in your own numbers and see how you would have fared in the past here. While these are US centric I'm sure similar results could be achieved for those using UK equities or a diversified global portfolio. He also looks at The Shockingly Simple Maths Behind Early Retirement which is all about saving hard if you can and he touches on the mindset required for achieving this with a bit on Stoicism.
Meanwhile in the UK we have similar sites and one I stumbled on recently is called Fire v London which is about Financial independence in London (which is how I stumbled on Mr. Mustache). Hat tip to Mike at The7Circles.uk (a useful site for UK investors) for putting me onto Fire v London. The Fire v London site also put me onto a useful resource for Private Investors which might help with the often asked question of how to calculate the returns on your portfolio. This comes from something called boglehead.org which is a Wiki set up by John Bogle the founder and retired CEO of the Vanguard Group.
Links to various formats of useful spreadsheets for this purpose can be found here.
Finally, last but not least is another blogger called Wheelie Dealer who is quite helpful and educational and who has written recently about how much you need to retire. All interesting, I hope you find these useful and that they might help you on you way to your own Financial Independence and retiring early - if that is what you want.
Talking of which since I get strange looks and people seem dazed and confused when I say I'm an investor or I'm retired perhaps I'll start saying I'm a FIRE-man which might make them see me in a better light and seem less bemusing for them. Talking of bemusing I'll leave you with a bit of old music today (which if the Led Zeppelin dazed & confused link above doesn't float your boat) then the video below might amuse and it seems appropriate to today's post - I am the god of hell fire and I bring you:
...the sage of Omaha as he is known and as you probably know - Warren Buffet. This comes from his annual letter to shareholders in his company, Berkshire Hathaway, the latest of which was published this weekend. There is quite a lot in it and I attach a copy at the end of this post if you want to read it in more detail. However, one section which I thought provided the sound advice dealt with returns from investing in equities and peoples perceptions of risk. It was so good I think it is worth highlighting verbatim.
Extract from Berkshire Hathaway Shareholder letter 2014:
Our investment results have been helped by a terrific tailwind. During the 1964-2014 period, the S&P 500
rose from 84 to 2,059, which, with reinvested dividends, generated the overall return of 11,196% shown on page 2.
Concurrently, the purchasing power of the dollar declined a staggering 87%. That decrease means that it now takes
$1 to buy what could be bought for 13¢ in 1965 (as measured by the Consumer Price Index).
There is an important message for investors in that disparate performance between stocks and dollars.
Think back to our 2011 annual report, in which we defined investing as “the transfer to others of purchasing power
now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal
gains – in the future.”
The unconventional, but inescapable, conclusion to be drawn from the past fifty years is that it has been far
safer to invest in a diversified collection of American businesses than to invest in securities – Treasuries, for
example – whose values have been tied to American currency. That was also true in the preceding half-century, a
period including the Great Depression and two world wars. Investors should heed this history. To one degree or
another it is almost certain to be repeated during the next century.
Stock prices will always be far more volatile than cash-equivalent holdings. Over the long term, however,
currency-denominated instruments are riskier investments – far riskier investments – than widely-diversified stock
portfolios that are bought over time and that are owned in a manner invoking only token fees and commissions. That
lesson has not customarily been taught in business schools, where volatility is almost universally used as a proxy for
risk. Though this pedagogic assumption makes for easy teaching, it is dead wrong: Volatility is far from
synonymous with risk. Popular formulas that equate the two terms lead students, investors and CEOs astray.
It is true, of course, that owning equities for a day or a week or a year is far riskier (in both nominal and
purchasing-power terms) than leaving funds in cash-equivalents. That is relevant to certain investors – say,
investment banks – whose viability can be threatened by declines in asset prices and which might be forced to sell
securities during depressed markets. Additionally, any party that might have meaningful near-term needs for funds
should keep appropriate sums in Treasuries or insured bank deposits.
For the great majority of investors, however, who can – and should – invest with a multi-decade horizon,
quotational declines are unimportant. Their focus should remain fixed on attaining significant gains in purchasing
power over their investing lifetime. For them, a diversified equity portfolio, bought over time, will prove far less
risky than dollar-based securities.
If the investor, instead, fears price volatility, erroneously viewing it as a measure of risk, he may,
ironically, end up doing some very risky things. Recall, if you will, the pundits who six years ago bemoaned falling
stock prices and advised investing in “safe” Treasury bills or bank certificates of deposit. People who heeded this
sermon are now earning a pittance on sums they had previously expected would finance a pleasant retirement. (The
S&P 500 was then below 700; now it is about 2,100.) If not for their fear of meaningless price volatility, these
investors could have assured themselves of a good income for life by simply buying a very low-cost index fund
whose dividends would trend upward over the years and whose principal would grow as well (with many ups and
downs, to be sure).
Investors, of course, can, by their own behavior, make stock ownership highly risky. And many do. Active
trading, attempts to “time” market movements, inadequate diversification, the payment of high and unnecessary fees
to managers and advisors, and the use of borrowed money can destroy the decent returns that a life-long owner of
equities would otherwise enjoy. Indeed, borrowed money has no place in the investor’s tool kit: Anything can
happen anytime in markets. And no advisor, economist, or TV commentator – and definitely not Charlie nor I – can
tell you when chaos will occur. Market forecasters will fill your ear but will never fill your wallet.
The commission of the investment sins listed above is not limited to “the little guy.” Huge institutional
investors, viewed as a group, have long underperformed the unsophisticated index-fund investor who simply sits
tight for decades. A major reason has been fees: Many institutions pay substantial sums to consultants who, in turn,
recommend high-fee managers. And that is a fool’s game.
There are a few investment managers, of course, who are very good – though in the short run, it’s difficult
to determine whether a great record is due to luck or talent. Most advisors, however, are far better at generating high
fees than they are at generating high returns. In truth, their core competence is salesmanship. Rather than listen to
their siren songs, investors – large and small – should instead read Jack Bogle’s The Little Book of Common Sense
Decades ago, Ben Graham pinpointed the blame for investment failure, using a quote from Shakespeare:
“The fault, dear Brutus, is not in our stars, but in ourselves.”
Summary & Conclusion
So some great advice there about the longer term benefits of owning a diversified share portfolio to protect your income and capital from the ravages of inflation over time. However to do this you need to be prepared to accept and embrace some extra volatility in your capital. He also talks about a portfolio acquired over time and owned in a manner which incurs only token fees and commissions. This should be the essence of a DIY portfolio and is certainly one I subscribe to along with utilizing tax free wrappers wherever possible to maximize your after tax returns.
I am fortunate in having the time, knowledge and inclination to devote to this and thereby save myself fees and commissions that I might otherwise pay to professionals to manage my money. For others who are perhaps time poor or don't have the inclination to devote the necessary time to running their own portfolio then Warren Buffet's advice is equally clear that you should probably use index funds to get your exposure so as to keep you costs and time commitment to a minimum. Setting up regular payments so you can automate the savings process before you spend the money would also seem to be a good way to stick with the programme through thick and thin.
Also if you are early in your investing journey then you should be hoping for more falls and bear markets so you can get the chance to accumulate more investments at cheaper valuations.
After last weeks special which featured a product from my youth which unfortunately wasn't going to be available this Christmas. This week I thought I would feature something else that I enjoyed in my youth which has been reinvented and is available this Christmas. But first don't forget there are sites out there like Top Cashback where you can earn cash back when you shop on line and in store.
As you have probably realised by now I'm something of a music lover, although I acknowledge that my dodgy musical taste may not be to everyone's liking. So with that in mind this week I will suggest some music for you which you may have caught on TV recently. If not it is the "new" acoustic sound of Status Quo stripped bare or Aquostic as they call it. Amazing they are still going and if that is of interest, you can read more about it and buy the album by clicking the image below. In addition in line with my Happy Monday, Happy Money post you can also get tickets to see them live for an experience if you or someone you know might enjoy that.
Finally, if you are not sure about this then see today's Advent Calendar for their recent appearance with this on TV, although you'll be pleased to know that they did keep their clothes on! That's all for now folks so see you back here on Monday and hopefully the markets won't keep going down, down...
...£15 off of a £75 spend (might be tough to do in Aldi) in today's Daily Mirror, voucher good until 24th December.