Getting Minted

As stock market returns continue to underwhelm me, I have concentrated on the details of tax planning in the past few weeks.

Tax

Most of my portfolio is in tax protected accounts (ISA and SIPP). A smaller part of my portfolio is in a trading account that I am running down to zero. I am using it to top up my ISA each year and to fund our drawdown expenditure. When I sell from the trading account any capital gains could be subject to tax.

My plan for capital gains tax is to make use of the tax-free amounts each year to minimise the tax on my gains. That meant that I could have a gain of £12,300 in the year to 5 April 2023. This reduces to £6,000 next year, and to £3,000 for the year after. The tax rate for my situation is the basic rate of 10% because I am not a higher rate taxpayer and the assets being sold are equities. That 10% is not too onerous if I do have to pay it. I may even choose to pay it if I know or suspect that rates are to be increased in future to 20% or more. I would do that by selling and realising my gains more quickly. I will likely aim to sell out of these non-tax protected investments sooner rather than later because of the trend to higher taxes. Alternatively, if I am faced with a much higher tax rate, such as 40%, then I can choose to not sell and not realise the gains. I can keep my trading account holdings and continue to take the dividend income from them. I would need to top that income up by beginning to draw income from my ISA and I wouldn’t be able to top up my ISA.

April tax planning

I made no investment changes in March, except for dividends being re-invested in my tax-sheltered accounts and paid out in my trading account.

On 4 April I sold shares in the dealing account generating gains in the old tax year that will utilise my tax -free allowance. I expect to pay only a small amount of tax. On 6 April when the funds from the sale were available, I transferred sufficient cash into my ISA and re-bought the same shares in the new ISA year. The remaining cash I placed on deposit where it will cover three months of drawdown spending.

March results

Here’s a belated review of March.

A market review (J. P. Morgan) stated that “global growth has generally surprised positively during the first quarter of 2023” and “developed market stocks returned nearly 8% over the quarter.” They added that “UK equities underperformed global equities over the quarter but still delivered just over 3%.”

My benchmark, the FTSE All Share Total Return index fell by -2.84% in the month, and is up by +3.08% for the year to date. My investment return for the month was a loss of -2.69%. I suffered a loss of -0.34% for the year to date behind both the UK and global markets.

My individual holdings recorded an unweighted average share price movement of a loss of -1.77% for the year so far. They ranged from a loss of -9.35% on a property trust to a gain of +6.76% on a UK Equity Income trust.

Capital and income

Starting from an index value of 100.00 on 31 December 2013, my capital is now 133.02, as shown in the graph above. This is -5.66% down from its all-time peak in March 2022. Investment return for the year to date of a capital loss of -1.58% and dividend income of +1.24%, results in a loss of -0.34%. Draw down expenditure deducted -0.78% for the year to date. Therefore, capital was down -1.12% for the year to date.

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach another new peak of 7.14% at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.37%, i.e., 7.14 divided by 1.3302.

Cash and expenditure

My annual drawdown spending is now around 3.38% of my portfolio value, based on the last two years spending and the opening and closing values for that period. Cash holdings cover about two months of spending. Dividends being paid out in cash each year from my dealing account are sufficient to cover about three months of spending each year. I raised more cash on 4 April.

Draw down spending was 65.91% of my portfolio income in the last twelve months which is more than the figure of 62.29% for the previous twelve months. Portfolio income rose by only 0.78% as more dividend income was received. Expenditure rose by 6.64%. This is below both the CPI and RPI inflation measures.

Conclusion

I am pleased to have completed my tax planning for the tax year just ended and to have filled my ISA for the tax year just started. I’m choosing to remain fully invested and to be not too concerned with my capital losses. My glass is half full. I can wait for the market to refill it.

As stock market returns disappoint me, it is good to have portfolio income that is growing. It is also useful to have a margin of safety between income and expenditure when prices are rising.

February

One review of the month stated that “resilient economic data in February led to a move higher in bond yields and a decline in equity markets” and added that “developed market equities were 2.4% lower.” This reflected market falls in the US of -2.4% but results in other markets were mixed. Asia excluding Japan fell -6.8% whereas the UK, Europe and Japan rose by 1.5%, 1.3% and 0.9% respectively.

My benchmark, the FTSE All Share Total Return index rose by +1.52% in the month, and by +6.09% for the year to date. My investment return for the month was a loss of -0.39%, and a reduced gain of +2.41% for the year to date. I’m trailing the UK index again, at least partly because of my international exposure.

My individual holdings recorded an unweighted average share price movement of a gain of +1.58% for the year so far. They ranged from a loss of -4.15% on a high yield bond trust to a gain of +6.77% on a UK Equity Income trust. Overall, my UK holdings did better than my international holdings reflecting the markets they are invested in.

Capital

Starting from an index value of 100.00 on 31 December 2013, my capital is now 137.12, as shown in the graph above. This is -2.76% down from its all-time peak in March 2022. Investment return for the year to date of a capital gain of +1.33% and dividend income of +1.08%, results in a gain of +2.41%. Draw down expenditure deducted -0.49% for the year to date. Therefore, capital was up +1.92% for the year to date.

Income

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach another new peak of 7.09% at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.17%, i.e., 7.09 divided by 1.3712.

Investment changes

Portfolio income rose again in the month to reach another new high. The announcement of increased dividends to be paid, and the re-investment of dividends received, both contributed to this. During the month dividends received in my tax-sheltered accounts were re-invested and dividends received in my trading account were paid out. No other trades were done. This is a low turnover portfolio. I’m not a trader.

Cash

My annual drawdown spending is now around 3.36% of my portfolio value, based on the last two years spending and the opening and closing values for that period. Cash holdings cover about four months of spending. Dividends being paid out in cash each year from my dealing account are sufficient to cover about three months of spending each year. I expect to raise more cash again in the next few weeks. I need to review my capital gains tax position before the tax year end. I will sell sufficient from my dealing account to fund next year’s ISA. Depending on the tax position this sale could be in the old or new tax year. Alongside this I may sell a further slice of my dealing account to raise cash for spending.

Expenditure

Draw down spending was 64.41% of my portfolio income in the last twelve months which is more than the figure of 61.78% for the previous twelve months. Portfolio income rose by 2.00% as more dividend income was received. Expenditure rose by 6.35%.

This table compares the last two years to the end of February.

Year	Prior 12 mths	Last 12 mths	Change %
Income	100.00	102.00	2.00
Essential	24.17	27.00	11.71
Luxury	16.04	18.02	12.38
Discretionary	21.57	20.67	-4.15
Expenditure	61.78	65.70	6.35
Income – Expenditure	38.22	36.30	-5.02

as % of Prior year Income

Essential spending is now 11.71% higher mainly because the higher energy and grocery costs have now hit us. Year against year grocery costs are only up 11% so far but energy costs are up 79%. We have probably seen the worst of the energy price rises, but I expect the additional spend on groceries to continue. A large Council Tax rise is also expected.

Luxury spending is 12.38% higher mainly because we spent more on holidays.

Discretionary spending was 4.15% lower. This reflects choices we made on home improvements from year to year. This is expected to rise later this year.

Overall, our margin of safety, our surplus income, was reduced by -5.02%. That is not a crisis for us, but it is something to keep an eye on as we consider our future spending choices.

Conclusion

As I write developments in March look to have knocked about 4% off the capital value of my portfolio. This sort of turbulence is to be expected so I see no reason to change my plans at the moment. I have no direct holdings of bank shares and I am relying on the managers of the investment trusts I hold to manage any exposure they have to banks.

The continuing rise in portfolio income is some consolation for total returns being below the benchmark in recent months. The cumulative increase in portfolio income built up over the last nine years has ensured that we have a good surplus over our expenditure, leaving us reasonably placed in the face of rising prices.

January

It was reported in a monthly market review by J. P. Morgan that “January has shown that after a difficult 2022, and with inflation now falling, both equities and bonds can deliver positive returns for investors.” They added that in the UK ”core inflation remained steady at 6.3% year on year” and “business surveys continued to indicate that a recession is likely.” They noted that “despite the weak [UK] economic data, the FTSE All-Share rose.” I think the market might be anticipating better times ahead.

My benchmark, the FTSE All Share Total Return index rose by +4.50% in the first month of 2023. My investment return for the month was a gain of +2.81%. I’m ahead of last month but behind the index again.

My individual holdings recorded an unweighted average share price movement of a gain of +2.75% for the year so far. They ranged from a loss of -3.77% to a gain of +6.80%. My worst performer was a high yield bond fund. My Asia Pacific Income holdings were all strong performers whereas my UK Equity Income holdings mostly underperformed the UK index. A month is a short time to make this comparison and portfolio dividends are low in January, but this is a continuation of a trend of underperformance.

Capital

Starting from an index value of 100.00 on 31 December 2013, my capital is now 137.93, as shown in the graph above. This is -2.18% down from its all-time peak in March 2022. Investment return for the month of a capital gain of +2.59% and dividend income of +0.22%, results in a gain of +2.81%. Draw down expenditure deducted -0.28% this month. Therefore, capital was up 2.53% for the month.

Income

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach another new peak of 7.05% at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.11%, i.e., 7.05 divided by 1.3793.

Investment changes

Portfolio income rose slightly in the month even though I sold shares early in the month. The shares yielded around 5% from dividends received at the time of sale whereas the proceeds will earn interest of 2.5% in my bank deposit account. Fortunately, some dividend increases were announced, and some dividends received were re-invested. These both raised the current level of portfolio income. More than half of the dividends receivable this February have been increased since last February.

Also, during the month dividends received in my tax-sheltered accounts were re-invested and dividends received in my trading account were paid out.

Portfolio

The table below shows the composition of my portfolio at the end of the month.

	Yield %	Capital %	Income %
UK	3.83	33.77	25.30
Asia Pacific	5.28	26.04	26.90
Global	4.14	18.95	15.34
Property	7.67	12.37	18.55
Bonds	8.78	7.86	13.51
Cash	2.04	1.01	0.40
	5.11	100.00	100.00

I also analyse the portfolio by the income or growth category of each holding.

	Yield %	Sectors
High Income	above 6%	Property, Bonds, Asia Pacific
Income	4.5% to 6%	UK, Property
Income & Growth	3% to 4.5%	Global, Asia Pacific
Growth	below 3%	UK

	Yield %	Capital %	Income %
High Income	8.77	23.77	40.76
Income	4.71	26.76	24.66
Income & Growth	4.09	37.43	29.92
Growth	1.97	11.03	4.25
Cash	2.04	1.01	0.40
	5.11	100.00	100.00

Cash

My annual drawdown spending is now around 3.38% of my portfolio value, based on the last two years spending and the opening and closing values for that period. Cash holdings cover about four months of spending. Dividends being paid out in cash each year from my dealing account are sufficient to cover about three months of spending each year. I expect to raise more cash again in March or April. I’m very gradually selling down my dealing account shares whilst I leave my tax-sheltered accounts to continue to grow.

Expenditure

Draw down spending was 63.73% of my portfolio income in the last twelve months which is less than the figure of 64.08% for the previous twelve months. Portfolio income rose by 3.43% as more dividend income was received. Expenditure rose by 2.87%.

This table compares the last two years.

Year	12 mths to 31.01.22	12 mths to 31.01.23	Change %
Income	100.00	103.43	3.43
Essential	25.57	25.71	0.54
Luxury	16.32	18.70	14.60
Discretionary	22.19	21.51	-3.06
Expenditure	64.08	65.92	2.87
Income – Expenditure	35.92	37.51	4.43

Note: as % of 12 mths to 31.01.22 Income

Total essential spending is only 0.54% higher than last year because our MOT and car service were much reduced, and because council tax is lower as a result of timing differences arising from changing our payment method. These savings have mostly covered increased costs elsewhere. Year on year grocery spending is now about 8% higher. I think that could double by the autumn based on recent bills. The big rise in energy costs has not yet hit. Energy costs are only 5% up. I think that could rise to 70% up by the end of 2023.

Discretionary spending was 3.06% lower because of some choices we made. This spending is likely to rise this year as we are choosing to undertake some home improvements.

Luxury spending was 14.60% higher, mainly because we spent more on holidays, dining out and entertainment.

Conclusion

The first month of the new year has seen my portfolio capital recover to be only 2.18% below it’s all-time peak. Portfolio income reached another new peak. It was, however, disappointing to see my total return trailing the UK index yet again.