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Fire accumulation getting harder

Including Financial Independence and Retiring Early (FIRE)
Adamski
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Fire accumulation getting harder

#446626

Postby Adamski » September 30th, 2021, 3:04 pm

I think we've just had a golden 18 month period for fire investing, growth in personal saving in working from home and house prices. Had a bull run from April 2020 to August 2021. May continue, who knows? However think now good news may probably be in prices and markets may move sideways? Ok, worrying about a correction wrong way to invest. But.. had a super bull run last 18 months, plus recent house price boom. Surely cannot continue indefinitely, as always some trigger event will cause a correction.

Now got inflation fears, soaring energy prices, supply chain problems. Guess markets may continue to grow, but growth may be slower and linked in to earnings.

Which means retirement investing going to get more difficult to retire in your 30s or 40s, is it even plausible if you don't work in the City or some mega job or an inheritance? Think those got into investing in last 18 months should prepare psychologically ahead for pull backs, but doesn't mean holding cash as that obviously loses money v inflation.

Positive bit is salaries going up, economy bouncing back and all this cash got to make its way somewhere, guess that will still likely be the markets and houses. Anyone with similar thoughts?

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Re: Fire accumulation getting harder

#446629

Postby Alaric » September 30th, 2021, 3:12 pm

Adamski wrote:Positive bit is salaries going up, economy bouncing back and all this cash got to make its way somewhere, guess that will still likely be the markets and houses. Anyone with similar thoughts?


Labour shortages could send cash in the direction of wages probably resulting in higher prices. The government may make attempts to bring its books towards balance by increasing taxation.

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Re: Fire accumulation getting harder

#446657

Postby JohnB » September 30th, 2021, 4:13 pm

Starting your assessment from April 2020 is cherry-picking the bottom of the market. For FIRE, 5-10 years are more relevant, and even then you have Brexit distorting 4 of them.

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Re: Fire accumulation getting harder

#446779

Postby MrFoolish » September 30th, 2021, 10:39 pm

It depends on what timescale you want to look at. As you say, we've had an 18 month bull run.

But look at it another way, the FTSE isn't much higher than it was 21 years ago.

So which of these two versions of history will you use to predict the future?

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Re: Fire accumulation getting harder

#446791

Postby JohnB » September 30th, 2021, 11:16 pm

You need to quote total return measures for indexes. You can't ignore all the dividends the FTSE returned when doing a FIRE calculation

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Re: Fire accumulation getting harder

#446834

Postby JohnW » October 1st, 2021, 7:37 am

Adamski wrote:... but doesn't mean holding cash as that obviously loses money v inflation.

Such truths are always valuable, but the size of the effect is also always relevant. An activity that lengthens a healthy life-span is a good one to do, but if it lengthens it 2 days and it means never drinking carbonated water, I'll take the carbonated water. So, does anyone have any information on the effect size here, for cash and inflation?
Portfolio visualiser shows that for US 'cash' returns they have consistently kept your head above inflation water level since 1982. Is there any UK data?

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Re: Fire accumulation getting harder

#446866

Postby simoan » October 1st, 2021, 9:32 am

JohnW wrote:
Adamski wrote:... but doesn't mean holding cash as that obviously loses money v inflation.

Such truths are always valuable, but the size of the effect is also always relevant. An activity that lengthens a healthy life-span is a good one to do, but if it lengthens it 2 days and it means never drinking carbonated water, I'll take the carbonated water. So, does anyone have any information on the effect size here, for cash and inflation?
Portfolio visualiser shows that for US 'cash' returns they have consistently kept your head above inflation water level since 1982. Is there any UK data?

I realise this is big brush FIRE stuff, but I have this aversion to such received wisdom as "inflation => cash is bad". On a personal level, I have never understood it because it depends on your lifestyle and how you spend cash. On a corporate level, the idea is to hold companies that have pricing power which means they can pass on increased inputs costs to maintain profitability. This is easy to do if you control your own investments.

IMHO it's far worse to lose capital by being fully invested in order to attempt to combat inflation in a bear market, watching your pot shrink, and then start worrying about sequence of returns. Of course, the people making the loudest noises about the dangers of inflation on cash holdings are brokers - I have lost count of the number of emails I have received from my SIPP brokers on the subject in the past couple of months!

If cash is good enough for Warren Buffett and Charlie Munger, it's good enough for me. I'm talking my own book because I am "playing defense", as Howard Marks would say, and currently 30% cash. There will be a time for "playing offense" but for now I'm really very happy with a large cash position given the optionality it provides going forwards. BTW This is not because I'm trying to time the market, it's because I have found it difficult to find investments that offer the right risk/reward for the longer term.

All the best, Si

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Re: Fire accumulation getting harder

#446923

Postby dealtn » October 1st, 2021, 12:37 pm

MrFoolish wrote:It depends on what timescale you want to look at. As you say, we've had an 18 month bull run.

But look at it another way, the FTSE isn't much higher than it was 21 years ago.

So which of these two versions of history will you use to predict the future?


The one that use Total Return as a more appropriate answer to such questions.

EthicsGradient
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Re: Fire accumulation getting harder

#447371

Postby EthicsGradient » October 2nd, 2021, 11:05 pm

Total return for UK indices from 31/12/1999 to 16/4/21:
idx Capital Return%  Total Return% TR p.a. 
FTSE 100 1 116 3.68
FTSE 250 249 524 8.99
FTSE All Share 24 155 4.49
FTSE Small Cap 130 304 6.78
Avg UK fund* 138 166 4.70

https://www.ajbell.co.uk/news/ftse-100- ... -rise-1999

(though I have my doubts about the 'average UK stock fund' figure - that would imply an average dividend yield of just 0.5% over that period - while they do pay their costs out of dividends, I wouldn't expect it to cut the yield that low. There's no indication what the asterisk, in the original, means.)

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Re: Fire accumulation getting harder

#447439

Postby ADrunkenMarcus » October 3rd, 2021, 11:44 am

EthicsGradient wrote:Total return for UK indices from 31/12/1999 to 16/4/21:
idx Capital Return%  Total Return% TR p.a. 
FTSE 100 1 116 3.68
FTSE 250 249 524 8.99
FTSE All Share 24 155 4.49
FTSE Small Cap 130 304 6.78
Avg UK fund* 138 166 4.70

https://www.ajbell.co.uk/news/ftse-100- ... -rise-1999


Somewhat sobering! I do think it is also a reflection on UK equities in general and the FTSE 100 in particular, even with dividends included. We do not have the quality of companies to be found on overseas exchanges. I expect inflation will have averaged 2% or more for the period, so the FTSE 100's 3.7% annual return is slashed at least in half in real terms.

It promoted me to look at my SIPP. I have data since 3 December 2001. Since then the accumulation units are up 341.3% (8.1% CAGR) compared to 215.7% (5.9% CAGR) for the FTSE All Share and 179.6% (5.3%) for the FTSE 100. I did not capture the FTSE 250 data at the start point, unfortunately. However, that did well and probably better than my 8.1% CAGR!

Since 5 April 2014, the portfolio has been more concentrated and the CAGR since that date is now into the mid teens: up 138.8% (13.2% CAGR) vs 107.4% (11% CAGR) for the FTSE All World ($). The UK indexes and even the FTSE 250 lag far behind.

I think valuations in 2021 are probably closer to overvalued a.k.a. 1999 which means returns in the 2020s will likely be subdued vs. the 2010s. That is good for people still accumulating and putting new capital to work.

Best wishes


Mark.

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Re: Fire accumulation getting harder

#447447

Postby xeny » October 3rd, 2021, 12:22 pm

simoan wrote:BTW This is not because I'm trying to time the market, it's because I have found it difficult to find investments that offer the right risk/reward for the longer term.



Investopedia says "Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods. If investors can predict when the market will go up and down, they can make trades to turn that market move into a profit."

Doesn't your reluctance to invest at current anticipated risk/reward imply you predict it will improve?

onthemove
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Re: Fire accumulation getting harder

#447498

Postby onthemove » October 3rd, 2021, 2:36 pm

Adamski wrote:Which means retirement investing going to get more difficult to retire in your 30s or 40s, is it even plausible if you don't work in the City or some mega job or an inheritance?


I'm not sure it was ever easier.

I've been saving as much as I can with the intention of financial freedom since I started working, pretty much straight out of uni give or take a few months.

I'm now mid 40's and only just about at the point I feel tentatively financially independent - albeit not a huge amount over the minimum wage coming in from investments, but enough to cover all my current living costs, but with little margin for luxuries, and little margin for unexpected hiccups - inflation, etc.

Admittedly I chose to keep renting instead of buying, and clearly, with hindsight, was wrong footed on that decision! Though had I bought a property right at the beginning, I doubt I would have been as committed to building investment savings to the extent I have - I would probably have spent much instead on home improvements and just paying off the mortgage, so I probably would never have taken the investment plunge.

I also chose to invest (my non-pension investments) primarily in the UK stock market - and similarly I was wrong footed on that decision as well.. my proper pension, can't remember exactly when started, but probably between 15 to 20 years ago, but told the pensions advisor that I was intending to retire early on non-pension savings, so since my pension would just be a fall back, so just split 50:50 UK vs international, nothing exotic.

Upshot is, I've been putting 50:50 a month, every month, unchanged since then into UK equities vs international equities in my pension.

And the international component is now 30%+ ahead of the UK equities ... and that's not a sudden change of fortunes - it's pretty much grown like that over time.

If I'd done that with my investments outside my pension... :cry: ... well 30% extra on where that's at now would be making a HUGE difference. There'd be nothing tentative about feeling financially independent - though only just.

While I don't work in the city, I do earn a reasonable amount - not doctors salary or anything like that, but above average.

I actually think the low interest rate environment, has actually made saving for FIRE very difficult over the previous 20 yrs. I remember briefly when I just started out into the real world as an adult moving out into my own place, interest rates were around 6%. Compound interest on that makes a difference! Sadly no sooner had I started on my financial savings path, interest rates dropped and have never recovered.

I can't help feel that in periods of higher interest rates - which usually result in higher equity yields as well - has meant earlier generations building to FIRE pre-2000 were able to benefit far greater from compound interest while they were saving for retirement.

But My Biggest Realisation...

The young me, setting out on this path, really hoped to achieve FIRE in my 30's, and put just about everything in life on hold in anticipation of achieving this goal. Sadly the rest of my 20's and 30's flew past in a blur of almost just living to work, and I still hadn't achieved my goal by the time I hit 40. (Which is why it makes me very angry when Kier Starmer suggests those earning dividends should become a cash cow to pay for everyone else... get stuffed Kier, I worked damn hard and sacrificed a lot of living to build up those investment savings)

Was FIRE in my 30's ever even a realistic goal?

When I think back and wonder what could I have done differently to arrive at FIRE earlier, as I'd originally hoped ... with hindsight, obviously investing outside the UK, but I wasn't to know that. Similarly with house prices, I wasn't to know just how silly they would get (relative to income). But who knows where these will go in future. Maybe renting now is the better option. Maybe UK equities are now the better option. Who knows.

But I think the one and only thing that almost certainly would have made the biggest difference, and would make the difference to any youngsters looking to do this in futures...

... if I could have found a partner (wife / girlfriend) who had exactly the same goals and drive to earn, save and invest, rather than spend, and with whom I could have lived with all these years and shared the share-able bills.

Two people (albeit only if they share the same goals) living together are clearly going to be in a far better position to FIRE, than the same two people each living separately on their own, each having their own accommodation and heating bills to pay.

But this risks of that route are obviously at least twofold ... (1) that the person you end up with isn't as committed to the goal, with all the potential squabbles, disagreements, etc that would likely then ensue, and (2) if it came to separation, any divorce would be a financial catastrophe, at least for the me, as the bloke.

But other than potentially having a partner equally committed to the goal, I don't think there's anything definite that I could otherwise have done to arrive at FIRE earlier. And that's on a moderately-above-average salary, and with the exceptionally good fortune of avoiding any interruption to income for savings, or worse still any need to consume savings before reaching FIRE, due to redundancy, etc.

Upshot... I'm not convinced that FIRE in your 30's is at all possible for an average person in an average job.

Perhaps possible by very late 30's to early 40's for a couple who are both committed to the goal, and sharing accommodation, etc.

And perhaps it is asking a lot... if you only start working in your 20's which is probably average for most people, and then expecting to retire after spending only roughly 15% - 25% of your (average expected) life working, is perhaps expecting a lot, when most people expect to work for something like 60% of their life.

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Re: Fire accumulation getting harder

#447543

Postby Adamski » October 3rd, 2021, 5:50 pm

@onthemove - interesting post. Think you've done very well to reach tentative FI at mid 40s, about 7-8 years before me.

Re two people living together, yes helps a lot, unless of course ends up with divorce or children at private schools!!

My guess on stocks could be totally wrong but think we could be in for lower growth decade to the last one, hence why think fire is harder. And may be better with diversification into property and alternatives to hedge against inflation. Cheers

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Re: Fire accumulation getting harder

#447558

Postby AsleepInYorkshire » October 3rd, 2021, 7:11 pm

simoan wrote:
JohnW wrote:
Adamski wrote:... but doesn't mean holding cash as that obviously loses money v inflation.

Such truths are always valuable, but the size of the effect is also always relevant. An activity that lengthens a healthy life-span is a good one to do, but if it lengthens it 2 days and it means never drinking carbonated water, I'll take the carbonated water. So, does anyone have any information on the effect size here, for cash and inflation?
Portfolio visualiser shows that for US 'cash' returns they have consistently kept your head above inflation water level since 1982. Is there any UK data?

I realise this is big brush FIRE stuff, but I have this aversion to such received wisdom as "inflation => cash is bad". On a personal level, I have never understood it because it depends on your lifestyle and how you spend cash. On a corporate level, the idea is to hold companies that have pricing power which means they can pass on increased inputs costs to maintain profitability. This is easy to do if you control your own investments.

IMHO it's far worse to lose capital by being fully invested in order to attempt to combat inflation in a bear market, watching your pot shrink, and then start worrying about sequence of returns. Of course, the people making the loudest noises about the dangers of inflation on cash holdings are brokers - I have lost count of the number of emails I have received from my SIPP brokers on the subject in the past couple of months!

If cash is good enough for Warren Buffett and Charlie Munger, it's good enough for me. I'm talking my own book because I am "playing defense", as Howard Marks would say, and currently 30% cash. There will be a time for "playing offense" but for now I'm really very happy with a large cash position given the optionality it provides going forwards. BTW This is not because I'm trying to time the market, it's because I have found it difficult to find investments that offer the right risk/reward for the longer term.

All the best, Si

As usual Si, a pearl of wisdom. I've long known about the value of cash and liquidity in business. I think I've only very recently seen it as a defence mechanism in a market that cannot be predicted. I think it was so simple to understand that it was sitting way inside my horizon :lol: If the market goes up the value of the cash is offset by stock gains. If it comes down then the liquidity pays the bills or alternatively buys up good companies at fair prices. Either way cash seems to be a great defence and one I will ultimately adopt when retired. I don't see the need just now as I could be flexible with my planned retirement date and/or work less hours each week and it's a risk I need to accept.

AiY

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Re: Fire accumulation getting harder

#447651

Postby simoan » October 4th, 2021, 9:57 am

xeny wrote:
simoan wrote:BTW This is not because I'm trying to time the market, it's because I have found it difficult to find investments that offer the right risk/reward for the longer term.



Investopedia says "Market timing is the act of moving investment money in or out of a financial market—or switching funds between asset classes—based on predictive methods. If investors can predict when the market will go up and down, they can make trades to turn that market move into a profit."

Doesn't your reluctance to invest at current anticipated risk/reward imply you predict it will improve?

You'd need to understand how I ended up 30% cash for the answer - it's not like I was 100% invested and have sold down 30% of my portfolio. The only "selling" I have done in the past couple of years was because I wanted to move some old Personal Pensions with high fees to my SIPPs, and I had to sell the investments to cash in order to make the move. So most of the cash is in SIPPs which I have yet to access, hence the optionality that cash gives me with regard to taking tax free lump sums without selling any investments. In the meantime, I am beating the FTSE ALL Share by 2.5% year to date, even after a dreadful September for my portfolio. OK the FTSE is a pretty low bar as a metric, and I don't consider that a great result, but given I've only been ~70% invested, I can live with it.

I don't believe "market timing" and waiting for share valuations that stack up and provide a probability of good long term rewards for the risk taken are the same thing at all. Is Warren Buffett a market timer? Like him, Terry Smith et al. I invest in individual companies, not markets. The worst of all worlds is to invest purely because of FOMO and it seems to me there has been a lot of that going on in the past year or so. With interest rates and bond yields so low currently and inflation only just kicking in, I don't understand why there has been such aversion to holding cash in a portfolio. It's one of those market wisdoms that "cash is trash" that doesn't stack up for me personally. Cash is the ultimate low risk hedge position in a portfolio, and I'm pretty happy with that currently. In the medium to longer term the aim is to be 100% invested.

All the best, Si

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Re: Fire accumulation getting harder

#447674

Postby xeny » October 4th, 2021, 10:43 am

simoan wrote:I don't believe "market timing" and waiting for share valuations that stack up and provide a probability of good long term rewards for the risk taken are the same thing at all.


This is ultimately the question. FWIW, I certainly engage in it to an extent (I don't sell but will certainly pause putting new money in), and I consider it market timing.

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Re: Fire accumulation getting harder

#447677

Postby simoan » October 4th, 2021, 10:52 am

AsleepInYorkshire wrote:As usual Si, a pearl of wisdom. I've long known about the value of cash and liquidity in business. I think I've only very recently seen it as a defence mechanism in a market that cannot be predicted. I think it was so simple to understand that it was sitting way inside my horizon :lol: If the market goes up the value of the cash is offset by stock gains. If it comes down then the liquidity pays the bills or alternatively buys up good companies at fair prices. Either way cash seems to be a great defence and one I will ultimately adopt when retired. I don't see the need just now as I could be flexible with my planned retirement date and/or work less hours each week and it's a risk I need to accept.

AiY

I'm not sure my post constitutes much in the way of a pearl of wisdom, I was only really stating a case for cash holdings based on my own thoughts and current situation, but it's kind of you to say so! I have never understood why holding a certain amount of cash was a problem, but I guess it depends where each individual draws the line around their "portfolio". Virtually all my cash is inside my "portfolio" whereas others may state they are 100% invested but have substantial cash holdings (or cash like investments e.g. NSI savings/premium bonds) outside of their "portfolio". This is why I find the Portfolio updates that people share so meaningless without greater context of their overall financial situation, and why you'll never find me doing one!

All the best, Si

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Re: Fire accumulation getting harder

#447679

Postby simoan » October 4th, 2021, 10:55 am

xeny wrote:
simoan wrote:I don't believe "market timing" and waiting for share valuations that stack up and provide a probability of good long term rewards for the risk taken are the same thing at all.


This is ultimately the question. FWIW, I certainly engage in it to an extent (I don't sell but will certainly pause putting new money in), and I consider it market timing.

This is the problem, it's just semantics. I am always buying and always selling, even if the selling is not always voluntary e.g. recent takeovers of three of my holdings. When I believe a company is good value, I buy it. When a company looks expensive, I sell it. I don't really give a stuff what the market is doing and so don't understand how you can call it "market timing"! If I was buying index tracker ETF's or something you could probably make a case for it being so. I hope this makes sense?

All the best, Si

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Re: Fire accumulation getting harder

#447906

Postby JohnnyCyclops » October 4th, 2021, 10:45 pm

onthemove wrote:
Upshot... I'm not convinced that FIRE in your 30's is at all possible for an average person in an average job.

Perhaps possible by very late 30's to early 40's for a couple who are both committed to the goal, and sharing accommodation, etc.

And perhaps it is asking a lot... if you only start working in your 20's which is probably average for most people, and then expecting to retire after spending only roughly 15% - 25% of your (average expected) life working, is perhaps expecting a lot, when most people expect to work for something like 60% of their life.


I'm not sure the maths works. Even assuming starting work at 18 (as I did) and hitting FIRE at 38 - that's 20 years of production, possibly early in career (not job) when earnings may be lower. To support perhaps 3x that duration - 60 years from 38 to 98 (or perhaps 2x for a 40 year run to 78).

I'm not sure 20 years of work can support 40 years of retirement (1:2). I'm probably looking at 40 years of work to support 30 retirement (4:3). "Old School" DB pensions worked on 8:1 or 9:1 (40/45 years of work, and dead by 70 after five years retirement) - the model broke when life expectency extended AND people wanted to retire at 60 or 55, moving swiftly from 8:1 ratios to 2:1 and then 1:1. I just don't see a 1:2 ratio (or 1:3 even!) ever working except for some very lucrative careers.

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Re: Fire accumulation getting harder

#448002

Postby James » October 5th, 2021, 11:41 am

JohnnyCyclops wrote:
onthemove wrote:
Upshot... I'm not convinced that FIRE in your 30's is at all possible for an average person in an average job.

Perhaps possible by very late 30's to early 40's for a couple who are both committed to the goal, and sharing accommodation, etc.

And perhaps it is asking a lot... if you only start working in your 20's which is probably average for most people, and then expecting to retire after spending only roughly 15% - 25% of your (average expected) life working, is perhaps expecting a lot, when most people expect to work for something like 60% of their life.


I'm not sure the maths works. Even assuming starting work at 18 (as I did) and hitting FIRE at 38 - that's 20 years of production, possibly early in career (not job) when earnings may be lower. To support perhaps 3x that duration - 60 years from 38 to 98 (or perhaps 2x for a 40 year run to 78).

I'm not sure 20 years of work can support 40 years of retirement (1:2). I'm probably looking at 40 years of work to support 30 retirement (4:3). "Old School" DB pensions worked on 8:1 or 9:1 (40/45 years of work, and dead by 70 after five years retirement) - the model broke when life expectency extended AND people wanted to retire at 60 or 55, moving swiftly from 8:1 ratios to 2:1 and then 1:1. I just don't see a 1:2 ratio (or 1:3 even!) ever working except for some very lucrative careers.


I'm pretty sure there are reasons for many of those 30-something FIRErs all running YouTube channels pitching their Patreon accounts, advertising supported blogs, etc. They're still working, just not in a job.


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