What caught my eye this week.
A couple of weeks ago Nick Maggiulli of Dollars and Data fame conceded that lately he’d been writing for the Google’s search algorithm, rather than about what really interested him.
And doing so was destroying Nick’s passion for blogging:
I can’t keep doing this and preserve my creative sanity.
One of the reasons I’ve been able to blog consistently for nearly seven years is because I’ve always chosen what I write about.
I’ve been able to follow my curiosity wherever it has led me. Unfortunately, this year I strayed a bit from that path.
And while I don’t consider it a major mistake, I’m glad I realized what was going on before it was too late.
Happily this change of direction has immediately paid off with one of the best posts he’s ever written (and that’s saying something…)
Exploring why you should never look too far down roads you didn’t take – in life or investing – Nick argues:
I’m here to tell you that this kind of thinking is a mirage. It’s pure fantasy. Because the way you think things would’ve turned out is not the way they actually would’ve turned out.
How you imagine an experience is a theoretical exercise. It’s a mental simulation of your past. But, how you live through that experience in real-time tends to produce very different results.
Nick illustrates his point with a graph that shows why basketball star Magic Johnson’s alternatively lived experience where he chose sponsorship by Nike over Converse – thus supposedly ending up $5bn richer – would have at least felt very different over a long reality, and may never have happened at all.
Anyone who invests actively knows about these lost fantasies all too well.
I wrote about it with respect to my hugely costly Tesla sale a few years ago, for instance.
Others mourn the house they didn’t buy or the job they didn’t take – or outside of the financial realm, the person they didn’t marry or the musical instrument they gave up on despite some talent.
I wouldn’t say that thinking about these missed opportunities is entirely pointless, or even that they’re somehow not real decisions and outcomes.
In many cases they are all too real. Maybe we did make a mistake.
I should have held onto Tesla – and I should have bought my first flat in London in 1998, not 2018!
But it’s that the way we think about them is so often faulty. A lot of the time the motivation is to make ourselves feel bad, not really to learn anything.
In that case it’s better to look forward, not back.
Searching questions
As for writing for the search algorithm instead of for real readers, I see that temptation too.
At Monevator we lost about half our search traffic overnight in summer 2021, due to a capricious-seeming Google change that appears to have nothing to do with the quality of our content.
It’s been hugely frustrating.
There’s a balance to be struck, of course. Google needs to have guidelines, for the sake of a good searching experience.
But I can’t help thinking the tail is too often now having to wag the dog. And nobody starts blogging – or doing any other sort of creative endeavour – to please a robot. (At least not yet!)
I might also add that if you subscribe to get our articles as free emails, then you’re one fewer reader we have to try to recapture again via the harsh lottery of Internet search.
Anyway, do read Nick’s post – and have a great and balmy weekend.
A little-known fact is that most investment types are not protected by the Financial Services Compensation Scheme (FSCS). Yes, your broker is likely covered. But what happens if the firm that actually manages your investment funds blows up?
In that scenario, the only kind of vehicle you can expect to be protected is a UK domiciled Unit Trust or OEIC (Open-Ended Investment Company).
Offshore funds aren’t covered by FSCS compensation. Neither are ETFs or Investment Trusts.
In practice this means there’s no FSCS protection for a broad swathe of funds marketed to UK investors, because they’re either the wrong type or they’re domiciled in exotic, far-off lands like… Ireland.
Now you may be entirely comfortable with that, because your assets are lodged with a financial titan such as Vanguard or BlackRock. The chances of such a giant being wiped out – and so vaporising 100% of your assets in a hot mess of scandal and fraud – are exceedingly small.
But you can never rule out the possibility entirely. Which is why some Monevator readers prefer to invest in funds that should benefit from the FSCS scheme in a nightmare scenario.
- Here’s our guide to the FSCS investment protection rules if you’d like a refresher.
If having the FSCS scheme as a backstop helps you sleep at night, then read on for our pick of low-cost UK domiciled funds provided by FCA 1 authorised and regulated firms.
These funds should all be eligible for FSCS compensation (though it’s not an absolute certainty as we’ll explain in a sec), enabling you to build your passive investing strategy – as per our previous investment portfolio examples – with the knowledge that you couldn’t be any more protected.
Caveat Time!
The FSCS bends over backwards (and you might wonder why) to point out that compensation is not guaranteed just because a firm is FCA authorised and regulated.
The most reassurance you’ll get on each fund provider’s Financial Services Register page is:
The FSCS may be able to provide compensation if this firm goes out of business owing you money.
Hmm. Doesn’t exactly sound cast iron, does it? Moreover, check out the following piece of advice plastered liberally across the FSCS website:
Ask your firm to confirm that the activity they are carrying out for you is a regulated activity and FSCS protected.
Given that’s the lie of the land, then the best your plucky DIY investor champ Monevator can do is to say the following funds are all UK-domiciled Unit Trusts / OEICs, offered by fund firms that were FCA-authorised at the time of writing.
In other words, please follow the FSCS’ advice above to maximise your chances of being eligible for compensation, should you ever need it.
Beware too that compensation tops out at £85,000 per firm.
If Vanguard went bust, for example, the most you could claim from the FSCS is £85,000 – no matter how much you had invested in different Vanguard funds.
That won’t be a problem for some people, but 100% protection could become pretty laborious to maintain for those investors with larger portfolios.
At the very least it may require some creative juggling between different fund providers. Hence our selection focuses on enabling you to diversify your choice as much as possible.
Incidentally, you could go even further by including active managers in your scope. But on Monevator we typically major on keenly-priced index trackers, so that’s our focus today.
Enough with the ambling pre-amble, let’s get into our list of FSCS-eligible funds.
Global / All-World equity (Developed world and emerging markets)
- HSBC FTSE All-World Index Fund C
- OCF 0.13%
- Fidelity Allocator World Fund W
- OCF 0.2%
- Vanguard FTSE Global All Cap Index Fund
- OCF 0.23%
Developed world equity
- L&G Global 100 Index Trust C Inc
- OCF 0.09%
- Fidelity Index World Fund P
- OCF 0.12%
- L&G Global Equity Index Fund
- OCF 0.13%
- Vanguard FTSE Dev World ex-UK Equity Index Fund
- OCF 0.14%
- Aviva Investors International Index Tracking Fund 2
- OCF 0.25% (ex-UK fund)
UK large cap equity
- HSBC FTSE All Share Index Fund Institutional
- OCF 0.02%
- iShares UK Equity Index Fund (UK) D
- OCF 0.05%
- Vanguard FTSE UK All Share Index Unit Trust
- OCF 0.06%
- Fidelity Index UK Fund P
- OCF 0.06%
Emerging markets equity
- Fidelity Index Emerging Markets P
- OCF 0.2%
- iShares Emerging Markets Equity Index Fund (UK) D
- OCF 0.21%
- L&G Global Emerging Markets Index I
- OCF 0.25%
Property – global
- iShares Environment & Low Carbon Tilt Real Estate Index Fund (UK)
- OCF 0.17%
- L&G Global Real Estate Dividend Index Fund I
- OCF 0.22%
UK government bonds
- Fidelity Index UK Gilt Fund P
- OCF 0.1%
- iShares UK Gilts All Stocks Index Fund
- OCF 0.11%
- HSBC UK Gilt Index C Acc
- OCF 0.13%
- Vanguard UK Long-Duration Gilt Index Fund
- OCF 0.12%
- abrdn Sterling Short Term Government Bond Fund
- OCF 0.25% (Active management)
Global government bonds hedged to £
- abrdn Global Government Bond Tracker B
- OCF 0.14%
Global inflation-linked bonds hedged to £
- abrdn Short Dated Global Inflation-Linked Bond Tracker Fund
- OCF 0.13%
- L&G Global Inflation Linked Bond Index Fund I
- OCF 0.23%
- Royal London Short Duration Global Index Linked Fund M
- OCF 0.27% (Active management)
Useful pointers
As always, make sure you do your research to ensure these funds are the right fit for your portfolio. Morningstar and the fund provider’s own factsheets are good starting points.
We’ve ranked our selection purely by cost (as measured by OCF). Check out other Monevator pieces for more on how to choose the best global tracker funds and the best bond funds.
You’ll often find more index funds available in each category if you need them. There’s a good slate of US tracker funds available too – but nothing doing for gold or commodities.
You can quickly tell if a fund is UK domiciled by checking its webpage or by looking out for the designation GB in its ISIN number.
- Investigate more low-cost index fund and ETF options.
Market-leading index fund providers
To diversify your passive fund holdings as much as possible, check out these investment firms for your FSCS-eligible OEIC / Unit Trust needs:
- Vanguard AKA Vanguard Investments UK Limited, FRN 2 494699
- iShares AKA BlackRock Fund Managers Limited, FRN 119292
- Fidelity AKA FIL Investment Services (UK) Ltd, FRN 121939
- HSBC AKA HSBC Global Asset Management (UK) Ltd, FRN 122335
- L&G AKA Legal & General (Unit Trust Managers) Ltd, FRN 119273
- Abrdn AKA abrdn Fund Managers Limited, FRN 121803
- Royal London AKA Royal London Unit Trust Managers Ltd, FRN 144037
- Aviva AKA Aviva Investors UK Fund Services Limited, FRN 119310
You can investigate a firm’s FSCS particulars by typing its FRN into the Financial Services Register page.
Bear in mind that the FSCS scheme kicks in only if a firm fails and the value of your assets is otherwise irrecoverable. (And it only protects you up to the exciting £85,000 limit, of course).
The Financial Ombudsman holds sway in other scenarios.
Do you need to go to these lengths?
Personally, I don’t worry about whether my funds are FSCS protected. Insisting upon it would cause a level of stress (induced by excessive portfolio management) that isn’t worth it to me. At least versus the low probability of ever calling upon the scheme for a bail out.
But all that really matters is that you are comfortable with your investing choices.
If you’d like to create a ‘It helps me sleep at night’ portfolio then I hope the fund list above speeds you on your way to the Land of Nod.
Take it steady,
The Accumulator
What caught my eye this week.
Morning all. I’ve got to admit that after writing 5,788 words for this month’s member post for Moguls – trust me, I counted them – I’m out of puff for the week.
(While I do aim to go into depth with these reports, I agree that 5,788 words is not sustainable! Perhaps not even for busy members. Must cut harder…)
So before the links I’ll just point you to this chart that was highlighted to me by Monevator member Mark:
Source: Trustnet
The chart is taken from this year’s Credit Suisse Equity Yearbook. It was flagged up in the Trustnet article I’ve linked to by Martin Currie’s chief investment officer, who describes it as the most helpful guide to investing he’s come across in his career.
What does it tell us? Nothing more – but also nothing less – than that since 1900, equities have beaten bonds for returns in all economic environments except when lower growth coincides with lower inflation.
And even then, there’s only a whisker in it.
It’s simply a reminder that for all the good reasons we have for diversifying our portfolios, shares should be the engine. At least until you’re getting ready to start spending. Even then you should almost certainly keep a decent-sized wodge in them.
Not a revelation to many Monevator readers perhaps. But tell it to the millions with collectively £1.5 trillion sitting in cash savings accounts.
(Yes, having some cash is great. But cash won’t be a driver of wealth).
Eat up your house deposit
Oh, before I go here’s a menu entry shared by a Monevator reader holidaying in Amsterdam:
Very droll. If you’d like to pay homage to these personal finance ironists on your next visit, the restaurant is called Box Sociaal.
Have a great weekend!
So you want to be financially independent (FI)? I don’t blame you. And I know you can do it! I got there in under seven years on a mid-five figure salary. But first, you need a plan. I’ll walk you through how to create your own financial independence plan in the steps below.
I know this plan delivers – because it’s the one I used.
You only need to work out a few figures, and the only one that takes much time to fathom is your required annual income. That is, how much will you need to live on?
To set the stage, here’s a fast-forward preview of what’s to come:
- Annual income / withdrawal rate = FI target
- Take FI target
- + monthly saving figure
- + real return rate assumption
- Feed numbers into calculator
- = Years until you are FI
Okay, let’s get on with it. Freedom awaits!
Annual income required
1. How much do you live on now? The ideal way to laser this number is by tracking your current monthly expenses on a spreadsheet for a year or so. By that point you’ll have captured most of the annual expenses that parachute into our lives like enemy commandos behind the lines.
If that’s all too much of a drag – or a traumatising journey into your own heart of darkness – then try an online budget planner. You’ll rustle up a workable number in no time.
Now for the fun bit. Let’s imagine how that number might look once you no longer answer to The Man.
2. Subtract expenses that will no longer apply. For starters you can gleefully strike out all your work-related costs – commuting, work clothes, professional fees, expensive lunches, the lot.
Also eliminate expenses that won’t apply once you’re FI. Mortgage payments (hopefully), saving to be FI and the like can all go.
3. Add new lifestyle expenses. Most people find they live on much less once FI. But it’s worth considering a range of categories that begin with ‘H’: holidays, hobbies, heating, health, and helium (or is that just me?).
The number you’ll be left with is a rough gauge of the net income you’ll need. Obviously it’s not the real number – you’ll only know that once you arrive in the future – but it will do for now.
Also, don’t worry about inflation. Later we’ll use calculators that take inflation into account, so we can keep working in today’s figures. Praise be!
4. Don’t forget tax. As if you would. To turn net income into gross income, just dial up your favourite tax calculator. For sheer simplicity I like the UK Tax Calculator.
Pop in your net income figure as your salary (into the calculator) and you’ll see what you’re left with once your tax bill is chopped off. Play around with the salary figure until you can take home the net income you need. Et voila! The salary figure is the gross income you need to work with.
Remember to cancel out the effect of National Insurance Contributions. You won’t be paying any if you’re not employed.
Bear in mind that income drawn from an ISA is not subject to income tax, but you do pay tax on pension monies over and above your personal allowance.
This is our best post on the eternal SIPPs vs ISAs question. Most people should probably use both, so we wrote this series on how to maximise your tax shelters to achieve FI.
5. Deduct other sources of income. Expect to have money coming in from elsewhere? Then you won’t need to amass quite as big a mountain of assets to pay your bills with. Obviously these other income sources only count if they can be relied upon, and if they’re on stream by the time you achieve FI.
Common conduits of regular cash include:
- State pension
- Defined benefit pension
- State benefits
- Part-time work
- Other passive income – trust payments, royalties, and so on.
Still with us? Having dashed through those five steps you’ll have a good enough idea of the gross income you will need to live on from your investments. Once your assets can support that income then you can declare yourself FI.
Cut a ribbon, run a flag up a pole, fire AK-47s into the air – whatever floats your boat.
Your target asset pile
To generate your desired income from your investments, you’ll need to accumulate a large heap of capital.
How big should it be?
To find out, all you need do is divide your income by your sustainable withdrawal rate (SWR).
Your withdrawal rate is the set percentage that you cream off from your hoard as income.
- If your required annual income = £20,000
- And your withdrawal rate = 4%
- Then your target to achieve FI = £20,000/0.04 = £500,000
You’ll need to accumulate £500,000 to earn an annual income of £20,000 at a 4% withdrawal rate in this scenario.
£500,000 = Financial independence in this scenario
A few things to know:
- The withdrawal rate is the amount you take in year one of your financial independence. You adjust your income in line with inflation every year after that.
- The 4% rule assumes you have a judiciously diversified portfolio of assets, as discussed elsewhere. Shares, bonds, and so on. It doesn’t work with cash in the bank!
- If you withdraw too much then you’ll shrink your hoard faster than it can replenish itself with interest, dividends, and capital gains. Live like a Roman emperor for a few years and you’ll be running on empty with bills to pay.
- 4% is a commonly used sustainable withdrawal rate. According to widely accepted practice, you can set your withdrawal rate at 4% a year and have very little chance of running down your entire hoard to zero.
- What’s less well known is that the 4% rule was derived from a specific set of assumptions that applied largely to the US, and to retirements lasting 30 years or fewer. It shouldn’t be used blindly by UK investors. We’ve previously explained why.
- A 3% SWR is a far safer yet still achievable withdrawal rate, although research is ongoing. But you might be able to increase your withdrawal rate with a few smart investing techniques.
Savings rate
Hitting your target comes down to how much you can save and the returns you earn on your investments.
Your savings rate is absolutely critical. This is the master string that makes the rest of your financial puppet dance.
It doesn’t matter how big your salary is or how much you live on, your savings rate dictates how long you will spend working. The following table – sampled from Mr Money Mustache’s excellent post that underlines this point in red pen – shows you how quickly you can go from zero to ‘cheerio’ 1:
| Savings rate | Years to FI |
| 85% | 4 |
| 75% | 7 |
| 50% | 17 |
| 20% | 37 |
| 10% | 51 |
It’s a beautiful relationship. If you can save more now, then you have proved you can live on less. Which in turn means your income target is smaller and you will reach it sooner.
So what’s your savings rate?
For the purposes of our calculation, we’re interested in the actual amount you can tuck away monthly.
You probably know this number already, but just to make sure you’re getting as full a figure as possible:
- Take your annual net income.
- Subtract your annual expenses.
- Add all your other income streams including rentals and bank interest.
- Add pension contributions and employer matches if pensions are a factor in your plan. Gross them up to account for tax relief.
- Don’t add investment income and gains. These are accounted for in the return assumptions that follow.
The number you’re left with is how much you should be saving a year. Now take your total savings and perform the following calculation as provided by UK early retirement blogger The Firestarter:
Total Savings 2 / ( Total Savings + Expenses ) x 100 = Your savings rate
Once you know your savings rate you know how long it will be until you retire.
Ratchet up the rate if you want out quicker.
Picking an investment return rate
This is the final piece of the puzzle – the return that swells your investments into your own financial life support system.
However you calculate it, this number will be wrong. If I (or anybody else) knew what the market will deliver over the next couple of decades then I wouldn’t be writing this post. I’d be flicking through What Tropical Island? magazine.
You could just use whatever rate is inserted by default into an online calculator, but be aware that these numbers are usually pretty generous. Companies know you’re more likely to use their products if they deliver good news.
A 4% real rate of return 3 is a common gambit. That comes from a 5% historical real rate of return for UK equities and 2% for government bonds. It also assumes you’ll plump for a 60:40 equity-bonds portfolio.
A more sophisticated approach (although not necessarily more accurate) is to use an expected return calculation.
Again, even Brian Blessed couldn’t over-emphasise what a shot in the dark these numbers are. You also need to dilute to taste. If your portfolio is more like 40:60 equities-bonds then your expected returns rate will be lower. But you can nudge the rate up to historical norms if your time horizon lengthens and your tilt towards equities becomes more daring.
Your best bet is to run a few different scenarios using nightmare and conservative assumptions, especially if your timescale is fewer than 20 years.
I personally wouldn’t run a dream scenario for fear that I’d anchor myself to an unrealistic number. If the future turns out to be a garden of roses then I’ll enjoy that when the time comes.
Don’t get your nominal and real returns mixed up. If your calculator includes an assumption for inflation, then feed in a nominal return which incorporates that inflation number along with your expected real return. For example, the calculator assumes inflation will be 3% and your expected real return is 4%, so your nominal expected return would be 7%. If you feed in a real return without adding something for inflation and the calculator also backs out inflation, then your future will effectively be whacked by inflation twice! (And the calculator will tell you that you’ll never be able to retire…)
It’s a numbers game
Right, let’s spin the wheel of fortune and see when you’re gonna be FI.
- Feed all your numbers into an investment calculator like this one.
- The annual charge is the total cost of your portfolio, with platform fees. 4
- Strip out the inflation figure from the calculator if you’re feeding in a real expected return. If you want an inflation guesstimate then 3% p.a. is around the UK long-term average.
- The lump sum figure is money you already have. It can include the value of any rental property (minus attached mortgage debt), pension assets, savings accounts, and current investments.
- Don’t include your home, wine cellar, fleet of Vauxhall Corsas and so on.
- Check out this post for our ultimate, belt-and-braces financial independence calculation. This one includes how to factor in a boost for the State Pension or any defined benefit pensions that begin long after you FIRE.
The result of all this number-crunching is your answer, in years, to the question:
When will I be financially independent?
Now you’ll know!
Take it steady,
The Accumulator
Note: This article on creating your own financial independence plan was rewritten in August 2023. Comments below might refer to the 2013 incarnation, so double-check the dates if confused!
- See Mr Money Mustache’s post for the assumptions.[↩]
- Include all grossed up savings into pension funds along with employer matches[↩]
- The real return is the return you’ll get after stripping out inflation.[↩]
- If you don’t know that number then you can safely plump for 0.5% if you’ve got a nicely diversified portfolio of index trackers.[↩]
