This is the third in my annual posts about my ISA (tax-free) portfolio. I’ve written before about how there is an outside (~10%) chance of my ISA portfolio reaching $100m, if I live for another 40+ years. Yet, as of my last post a year ago, the total FvL ISA pot was worth ‘only’ £355k (~$500k, back then!). So how am I feeling about multiplying my ISA 200x?
My $100m assessment was based on a scenario analysis over the next 40+ years. Making various assumptions (no withdrawals, regulation changes, etc), if I maintain contributions at £20k x2 per year, and achieve an ‘Above Average Risk’ level of return (>9% per year average, quite a high level of volatility), then in about 10% of predicted outcomes my total pot would reach $100m.
There are a couple of simple mental tricks that help me get my head around this growth. First of all, contributing £20k x 2 per year is quite a lot of money; over 30 years this is £1.2m. To make it easier to think about the growth of this annually-topped-up portfolio, let’s simplistically assume it isn’t annual top ups, but instead is a lump sum of £600k ($750k) in year 14.
Secondly, remember the rule of 70. Assuming I average returns of 7% then my portfolio doubles in 70/7=10 years. At an average return of 10% it takes about 7 years to double. So if I start with $0.5m, and averaged 10% return, after 35 years I have doubled 5 times, and I’m at $16m. But if I add (see previous paragraph) $750k in year 14, this $750k then doubles three times; this adds a further $6m. The two together get me to $22m in 35 years. Now assume I last a further 14 years , which takes me to the average life expectancy for UK males of my age, and I double my combined $22m pot 2 more times. $88m. Not quite $100m, but not far off.
Before you say that 10% per year is unrealistic, I am citing everything here in nominal ‘money of the day’ figures. This is before allowing for inflation. Historic returns for a diversified portfolio can easily achieve 5% per year on top of inflation. This works out as 7-8% per year in nominal figures. 10% is high, I will accept, but not absurdly so. If you have significant fees then you can forget it, but if you hold low-cost passive trackers this is not that unusual.
In the meantime, there I was a year ago with £355k. At today’s exchange rate this is barely $450k. How have I fared since then?
In my last post in this occasional series about my tribulations buying my Dream Home, I left my story at 9am on Friday 24 June – The Morning After – having just received an offer for £100k less than the ‘actual’ value of my old house. I asked for views on what I should have done next. And I got some wonderful comments with real wisdom – a real testament to the amazing insights in the UK’s FIRE community.
The first comment came from RIT, suggesting I should have taken the money and run:
“Looks like either a very illiquid market or the price was to high to me. From where I sit I would have had their arm off and pushed for an exchange very quickly.” Retirement Investment Today
My approach wasn’t what RIT advocated, even though I think it is a very sensible perspective. I had several people giving me the same advice at the time. In fairness to RIT, as LondonRob commented, the ‘right’ answer “partly depends on how much [I] really need the cash. It would also be good to know what the rental value could achieve.” LondonRob said he felt a 10% discount to the asking price was too much, and so provided cash wasn’t an immediate issue he recommended turning the offer down. This is indeed what I did.
What I hadn’t explained in my last blog is that yes I would like the cash from my old house, but no I am not desperate for it. I have emotional ties to the property and do not want to sell it ‘under duress’. I am pretty confident I will get a reasonable price for it at some point and can afford to wait. I also was wondering about its potential as a rental property, and felt pretty sure I could rent it out – albeit possibly at a low rental yield. Had the rest of the market tanked between January and June I may well have been feeling more desperate for cash. But in fact I had already made almost £1m in paper gains this year and this had boosted my resilience, so I was not in much of a mood to compromise.
Readers earlier in the year will be aware that I found myself buying my Dream Home, on something of a whim, at very short notice in January. My plan had been to put the old house on the market last Easter. Things haven’t gone entirely to plan, as I’ll recount.
First off the old house needed a bit of TLC. Nothing major, but not something I have to bother with on my other valuable assets. This took a few weeks, and prevented me selling the house at the start of the year.
Secondly, I got quite a significant shock when I got the house valued. This being London, the first and almost only step required to value a house in a given postcode is to measure its square footage. Measuring is a very slick process these days involving lasers. But I couldn’t believe my eyes when I got the plans back : they were 500 sq ft short. Shurely shome mishtake? Alas not. I’ve been labouring under a misapprehension for about fifteen years about the size of my old house.
500 sq ft in North London is worth over half a million squids so this was quite a blow. In many ways I’m glad I hadn’t realised this when I was looking at new houses, but I’m certainly relieved I didn’t stretch myself to buy a more expensive Dream Home. Certainly it is a good reminder of one of life’s most important lessons: Check Your Assumptions.
In any case I then had a few of the local agents visit to tell me how wonderful my house is, how exorbitant expensive it will be and how rapidly they can sell it for me. My original strategy was to deploy two agents who between them covered all three of the UK’s large property portals but in the end I ended up with a ‘pile it high’ agent and a ‘classy one man band’ agent both of whom were on the same two portals (Zoopla/PrimeLocation being the one that matters in my market).
The pricing of a house to sell is a fascinating process.